Avoiding problems with additional insureds
by Stephen M. Phillips
As a roofing contractor, you frequently will come across contracts that require you to designate a general contractor, architect or building owner as an additional insured. This practice has become commonplace, and insurance carriers typically offer blanket additional-insured endorsement forms, as well as agree to name others as additional insureds, without increasing premiums. However, contractors frequently misunderstand the significance of naming others as additional insureds.
What it means
If you agree to name another person as an additional insured, claims made against that person will be covered by your insurance policy as if the additional insured had purchased the insurance and paid the premium.
If you designate someone as an additional insured, your insurance carrier becomes liable for claims against the additional insured according to the terms of the additional-insured endorsement. Depending on an endorsement's language, an additional insured could turn to your insurance carrier for coverage even if you did not cause a claim or loss sustained by the additional insured. (This could apply even if a loss were caused by the additional insured.) In addition, naming another person as an additional insured can negate a carefully prescribed or negotiated contractual indemnification clause that limits a claim or loss to your negligence.
Claims made by additional insureds become part of your claim history and are considered when your insurance company determines your premiums. Any payments resulting from an additional insured's claims are deducted from the aggregate insurance limits otherwise available to you.
Because of the ramifications of naming others as additional insureds, whenever you are asked to sign a contract, try to eliminate the additional-insured provision. Instead, provide a Certificate of Insurance, which proves you have the insurance coverage required by a contract, and name a general contractor or building owner as a certificate holder.
Note that The American Institute of Architects' (AIA's) standard construction contract documents, including AIA Document A201, "General Conditions of the Contract for Construction," and AIA Document A401, "Standard Form of Agreement Between Contractor and Subcontractor," do not require you to name others as additional insureds. In fact, AIA Document A201's 1997 edition explicitly states that "the Owner shall not require the Contractor to include the Owner, Architect or other persons or entities as additional insureds on the Contractor's liability insurance coverage."
But there undoubtedly will be times when a building owner or general contractor will insist you name him as an additional insured. In these situations, try to limit the potential effects of a contract's additional-insured provision by reviewing and modifying the contract's language. For example, clarify or revise the contract's provision to state that naming an additional insured is intended to apply only to your negligent acts or omissions that cause claims to be asserted or losses to be sustained by the additional insured.
If contract language is limited in this manner, your insurance carrier should prepare an additional-insured endorsement with similar language, and you should place the endorsement in the job file. Also, make sure the contract's indemnification provision is limited in the same manner so your obligation to indemnify others is limited to claims caused by your negligence.
By restricting claims that an additional insured can make to those that arise from your negligent acts or omissions, you limit and control your insurance company's potential liability and protect an additional insured against claims caused by you. Many general contractors and owners have indicated that this is their intent when they request to be named as additional insureds.
Historically, two additional-insured endorsement forms have been adopted by the Insurance Services Office, which drafts standard insurance forms for the insurance industry. The forms, Form A and Form B, are used or modified by most insurance carriers though some insurance carriers develop their own. Examine and become familiar with the additional-insured endorsement form used by your insurance carrier.
If your insurance carrier uses Form A, there will be several provisions limiting the applicability of your insurance to a claim against an additional insured. Form A denies coverage to an additional insured if bodily injury or property damage arises from an act or omission of the additional insured (other than that which arises from general supervision of work you perform for the additional insured).
Form A also excludes property damage to your work (which is not covered by liability insurance) and property owned or used by an additional insured. Form A only provides coverage if a claim arises from your work for an additional insured at a designated location or from an act or omission of the additional insured related to his general supervision of your work at a designated location. This form is not limited to claims caused by you, but it excludes claims caused by an additional insured.
Unlike Form A, Form B simply states that an additional insured will be covered under your insurance policy with respect to any liability arising from your work. Under Form B, if a claim is caused by an additional insured, your insurance carrier will be liable to defend and pay the claim even if there was no fault on your part as long as the claim arose from your work.
Sometimes, a specific additional-insured endorsement may not be issued. For example, there may be a blanket additional-insured endorsement that applies to all situations when others are named as additional insureds. The terms stated in a blanket additional-insured endorsement govern the extent of coverage as if individual endorsements had been issued.
If there is no additional-insured endorsement, an additional insured may argue he was entitled to the same coverage as you. The absence of specific endorsement language makes an additional-insured provision in a contract at least as broad and unrestricted as Form B. If a construction contract requires that certain people be named as additional insureds and you do not have additional-insured coverage, you may face a breach-of-contract claim and resulting damages.
To address the potential consequences of naming others as additional insureds, consider the following:
By following these guidelines and being aware of different endorsement forms, you will be much less likely to find that your insurance carrier is responsible for claims caused by additional insureds.
- Try to eliminate the additional-insured provision in a contract, agree to furnish a Certificate of Insurance and name other parties as certificate holders. If AIA standard construction contract documents are used, you are not required to name additional insureds.
- Become familiar with the additional-insured endorsement form used by your insurance carrier.
- If a contract's additional-insured provision cannot be eliminated, try to limit the provision to claims caused by you and use the same limiting language in your insurance carrier's additional-insured endorsement, which should be placed in the job file.
- If an additional-insured endorsement cannot be limited to claims caused by you, use a standard industry endorsement similar to Form A and place it in the job file. Do not use Form B.
- Ascertain that your additional-insured coverage satisfies contract requirements. If there is a discrepancy, modify the contract so you will not violate it.
Stephen M. Phillips is a partner with the law firm Hendrick, Phillips, Schemm & Salzman, Atlanta.