Owners commonly require that contractors and subcontractors provide them "additional insured" status under the contractor's and subcontractor's with general liability policies. Contractors, in turn, require their subcontractors to provide them with additional insured coverage. The additional insured status is intended to provide extra coverage to the owner or to the general contractor in the event of an insurance claim. This status is provided by an endorsement or written amendment to the underlying policy.
Just like a primary insurance policy, additional insured coverage provides both a defense and indemnity to the additional insured. Insurance companies, however, have been steadily revising their additional insured endorsements to limit their coverage obligations. Most importantly, additional insured endorsements now typically cover only claims arising during construction of the project and do not cover claims that arise later. This change drastically limits protection from most construction defect claims, which usually become apparent only after completion of the project.
The terms of an additional insured endorsement must be reviewed in order to determine exactly what coverage is provided. An insurance industry trade organization, the Insurance Services Office (ISO), has developed a series of standard form endorsements for additional insured coverage. These forms are identified by a form number and a date. The additional insured form is known as the ISO 20 10 form. To this identification is added the date of the form, such as "20 10 11 85." This is the "20 10" form that was issued in November 1985. Referring to endorsements by this ISO terminology is cumbersome. However, identification of the specific form allows a ready determination of the actual coverage provided.
A Certificate of Insurance sometimes is provided instead of an endorsement. A Certificate of Insurance is not itself a valid endorsement to a policy, and some courts have held that certificates alone do not provide coverage to additional insureds. Moreover, a Certificate of Insurance usually will not provide the specifics of what is covered. The additional insured should request a copy of the actual endorsement.
Additional insured coverage is different than "additional named insured" coverage, and the two should not be confused. An "additional named insured" usually is an affiliate of the primary insured. An additional named insured may be liable for premium payments, and some exclusions from coverage apply to an additional named insured but not to an additional insured.
Does Your "Additional Insured" Endorsement Cover "Completed Operations?"
The owner or contractor who seeks an additional insured endorsement generally anticipates it will receive coverage for claims that arise during the project and for construction defect claims that arise after substantial completion. Not all endorsements provide both types of coverage.
The ISO 20 10 11 85 endorsement form provides coverage for liability "arising out of" the insured's work. This endorsement provides broad coverage to the additional insured. It covers claims because of the additional insured's activities or the insured's activities.
Most importantly, this endorsement form provides "completed operations" coverage. Completed operations coverage is critical in most construction defect cases. It provides coverage for claims that arise after the work has been completed so long as the claim arises during the policy period.
A common misconception is that completed operations coverage provides coverage for completed work after the policy period and acts a "tail" to the policy period. This is incorrect. Completed operations coverage provides coverage after completion of the work but only during the policy period.
If the damage occurs after that policy period, there still may be coverage under a later policy that also has completed operations coverage.
Largely because of exposure to completed operations coverage, the ISO 20 10 endorsement form was revised in October 1993. The ISO 20 10 10 93 endorsement form provides additional insured coverage "arising out of [the insured's] ongoing operations." The ISO 20 10 form was further revised in March 1997. The ISO 20 10 03 97 form continued the "arising out of [the insured's] ongoing operations." Despite the insurance industry's intent, the difference in the plain meaning between the 1985 and the 1993/1997 forms was less than clear. Accordingly, some courts have found the 1993/1997 language to be ambiguous.
In October 2001, the ISO released a new and significantly revised version of the 20 10 form. The ISO 20 10 10 01 endorsement form provides coverage for "ongoing operations" but now includes a lengthy exclusion for "bodily injury" or "property damages" that arise after (1) "All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed; or (2) That portion of "your work" out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project." This exclusion would seem to totally eliminate completed operations coverage from this additional insured endorsement. The 20 10 10 01 endorsement now essentially provides coverage only for claims that arise during the actual construction process.
In addition to the ISO forms, some insurance companies use their own additional insured forms. Although these forms may be modeled on ISO forms, they must be carefully scrutinized to determine the coverage they offer.
The ISO also has developed an endorsement that automatically provides additional insured status to any party when such status is required by contract. This form, ISO 20 33, first was issued in March 1997 and was revised in July 1998 and in October 2001. The 1997 and 1998 forms provide coverage for liability arising out of "ongoing operations." As noted above, the intent of this phase is to exclude "completed operations" coverage. The 2001 form more clearly excludes completed operations from additional insured coverage.
The ISO also offers form "20 09" for "additional insured" coverage. The 20 09 form also has been repeatedly revised in an attempt to exclude "completed operations" coverage. The 20 09 form has an additional disadvantage. This form excludes contractual liability coverage, which is essential when the additional insured assumes liability under an indemnity agreement that is commonly used in construction contracts.
Importance of Understanding Coverage
Insurance companies sometimes require that contractors and subcontractors impose the same additional insured and indemnity requirements downstream on their subcontractors as they are required to provide upstream to owners or contractors. Failure to do so can provide a basis for the insurer to deny coverage under the contractor's or subcontractor's own policy.
Completed operations coverage in an insured's own policy and in additional insured endorsements is an essential protection against construction defect claims. It is critical that each insured be aware of what coverage is available under its own policy. Further, owners and contractors should ensure that additional insured coverage obtained from others includes completed operations coverage. Downstream contracts should specify that additional insured coverage must be provided on an ISO 20 10 11 85 or equivalent endorsement. This form of coverage still is available although it may require payment of an additional premium. Further, the ISO has developed the 20 37 10 01 endorsement, which adds completed operations coverage to the 20 10 10 01 additional insured endorsement. The endorsements provided by contractors and subcontractors then should be carefully reviewed to ensure that the required completed operations coverage is provided.
Does Your Additional Insured Endorsement Cover Your Direct Liability?
Additional insured status clearly provides coverage when the additional insured has a claim made against it because of the activities of the named insured. This is so-called "vicarious" coverage. It is less clear whether "additional insured" status provides coverage for liability directly caused by the "additional insured."
Under ISO 20 10, there is coverage for claims arising from either the named insured's "work" or "ongoing operations." These terms are sufficiently broad that coverage should be available for direct liability of the additional insured with any connection to the project under construction. Other endorsement forms such as the "20 09" attempt to restrict liability to the "general supervision" of the "additional insured." This phrase, while potentially more restrictive, still is broad enough to cover many claims based on direct liability. Some endorsements, however, specifically exclude coverage of the sole negligence of the "additional insured."
In at least one state, a construction contract clause that requires an additional insured endorsement to protect a party from its own negligence is not valid. An Oregon appellate court found that Oregon Revised Statutes §30.140 prevented a general contractor from requiring a subcontractor to provide an additional insured endorsement that would indemnify the general contractor for its own negligence. Walsh Construction Co. v. Mutual of Enumclaw, 189 Ore.App. 400, 76 P.3d 164 (2003). California has a statute (Civil Code §2782) similar to the Oregon statute. However, the California statute expressly limits its reach to indemnity and excludes insurance.
Does Your "Additional Insured" Endorsement Provide Primary or Excess Coverage?
When a party is covered by its own insurance and is an additional insured under another party's insurance, which insurance applies first when there is a claim? The question of which policy is primary and which is excess sometimes may be determined by the "other insurance" clauses of the policies. Absent clear direction in the insurance policies and the endorsement, the party with the additional insured endorsement may argue that the insurance provided by the endorsement should apply first because the endorsement represents negotiated additional insurance to provide new protection to the additional insured. As a practical matter, the insured's own insurer and the insurers that have provided additional insured endorsements often defend and indemnify on a pro rata basis.
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