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The construction and real estate industry continue to grow and so do the risk exposures from a fundamental inconsistency between a contract’s commercial intent and insurance policy language. “Additional Insured” is a very common requirement in a real estate or construction contract and many times there is a distinct lack of specificity with what is, actually, being required and why the provision is appropriate. Additional Insured status provides vicarious liability coverage to an outside entity, usually, an owner or general contractor, under the subcontractor’s policy. It is often a requirement in construction contracts, and it can be the source of insurance disputes if not handled correctly given the changes in the regulatory framework of today’s insurance policies.
The key risk provisions in the contracts through which an entity seeks protection from the upstream lenders as well as downstream contractors and subcontractors are the insurance and indemnification provisions. The whole concept behind this arrangement is that the entity seeking protection would be defended by the other entity through being named as “Additional Insured” on the counterparties insurance policy and as required by a written contract or agreement. Often, unless there is a contractual requirement for additional insured status, the endorsement will not trigger, the counterparties insurer will not accept the “claims tender” and the counterparty will be left defending themselves and looking to the indemnity provision in the contract for recourse. Not ideal…
The other key area to observe is that the Named Insured in the certificate/evidence of insurance is the exact named counterparty in your agreement.
Evidence of Additional Insured status, these days, is more often being provided by way of a “blanket” Additional Insured endorsement under the policy, rather than on a “scheduled” basis. There are two principal endorsement for this purpose CG 2033 and CG 2038. The preferred one is the latter as there is no direct contract requirement for the endorsement to apply.
The purpose of the CG 2038 endorsement is to include not only those persons or organizations the downstream party has directly contracted with as an Additional Insured but also any other person or organization the downstream party is required to add as an Additional Insured by the terms of any direct agreement with an upstream party. Thus, if a subcontractor is required in the general contractor/subcontractor agreement to add the project owner as an Additional Insured, CG 20 38 would include the project owner even though the subcontractor has no direct contractual relationship with the project owner. However it is to be noted that even with this endorsement, the Named Insured must be performing operations for the Additional Insured. For example, if the subcontractor is required to add the lender as an Additional Insured, the CG 2038 would likely not be adequate as the subcontractor is performing operations for the owner and general contractor but not performing operations for the lender.
On a related note it is interesting to see how courts have interpreted coverage for Additional Insureds under the policy. As we have been discussing, most Additional Insured endorsements use the wording “direct written contract or agreement”. The courts have often given the benefit of doubt to the Additional Insured and have provided their verdicts wherein they consider an “agreement” to have a much more expansive interpretation than “contract”. Courts now even consider an email or facsimile based on which a contract is entered into as “agreement”. This goes to say that even if a formal written contract does not specify the Additional Insured requirement, a simple document like an email with insurance requirements (not actually forming part of the formal contract) would be sufficient to enforce the Additional Insured requirement under the policy.
Courts have even gone a step further to say that contracts need not be written and even an oral agreement to name the other entity as Additional Insured. Insurers in most cases do deny coverage on the basis of “written” contract/agreement requirement – that is when the certificate of insurance (COI) comes into play. Though COIs are for informational purpose only, the very fact that the insurance company has issued a certificate naming the other party as Additional Insured is sufficient for courts to establish their intent in providing Additional Insured status to the other entity.
While the court cases reflect varying interpretations of the policy and underlying contract, it is always recommended that the entity seeking Additional Insured status enters into a written contract with the other entity providing Additional Insured status. Capturing the commercial intent within the contract or agreement can leave little or no room for any denial of coverage based on the interpretation of the courts.
At The ALS Group, we specialize in contract vetting and drafting robust indemnification and insurance provisions so the transfer of risk is done in a seamless fashion. We navigate the commercial intent of the contract and align the related insurance and indemnification provisions with that intent. Using specific Additional Insured endorsement requirements within the contract language is one more way to clarify the commercial intent. We also review the Additional Insured endorsements, in addition to the other endorsements, to ensure that they capture under the policy the intent of the contractual obligations into which our clients enter and through these tactics, and more, assist our client’s with risk mitigation strategies.