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Additional-insured endorsements

Introduction

Contract drafters can sometimes get confused about the nature and purpose of additional-insured endorsements. These endorsements commonly arise when a party negotiating a contract is concerned that it might be sued by a third party for acts or omissions by the other party.

For example, a customer hiring a contractor to perform services might be concerned that it could be sued by by one of its own employees who is physically injured by the contractor’s negligence.

Or, the customer might fear being sued by a contractor employee who is injured by negligence of just about anyone — the contractor, a subcontractor, the customer, etc. [p2p type=”id” value=”2668″ text=”{Casenote}”]

Consequently, the customer might negotiate a contract requirement that contractor defend and indemnify the customer against such third-party claims.

But what if the contractor doesn’t have the money to make good on this obligation? That’s where negotiating for an additional-insured endorsement clause comes in: The customer requires the contractor to name the customer as an additional insured on the contractor’s own relevant policies. That way, the odds are greater that at least some money will be available to defend and indemnify the customer from a third-party claim.

Mechanics

An additional-insured endorsement might take the form of a specific line item on the certificate of insurance, or it might take the form of a separate document; both types are shown in this document.

Whose insurance coverage is primary?

Some insurance clauses require additional-insurance endorsements to contain primary-insurance language. This is something that a customer will usually press for: The customer wants to spend the contractor’s insurance coverage first, so that its claims history with its own carrier, and thus its premium expenses, will be less likely to take a hit from such a claim.

Customers may want the primary-insurance statement to be included in the endorsement document provided by the insurance carrier, not just in the contract clause between the parties. Otherwise, a court might not enforce it; the general but not unanimous rule has been that, even though a contract might state which insurance carrier has primary responsibility, such a statement isn’t binding on the carrier without the carrier’s agreement. See generally Joseph P. Postel, How Does an Extrinsic Contract Impact Additional Insured Coverage? (2003) (reviews several court cases in which primary- versus excess coverage was disputed; accessed Apr. 14, 2007); Can an Indemnity Agreement Determine Who’s Primary and Who’s Excess? (2002) (accessed Apr. 14, 2007).

This problem can be handled — and the risk of expensive satellite litigation over insurance coverage reduced — by expressly requiring the primary-insurance language to be included in the additional-insurance endorsement, as in the University of California example certificate (scroll down to the bottom of page 2).

Additional-insured endorsements and E&O policies: Not a good fit?

Some parties might seek additional-insured coverage under the named insured’s professional liability / E&O policy. Their reasoning might be that, if the named insured is negligent in performing services, the additional insureds want to be able to make a claim directly to the carrier, instead of having to go to court.

An E&O claim by an additional insured against a primary insured, however, might well be blocked by the "insured versus insured" exclusion found in many such policies. See generally Tennant Risk Services, Who is an Insured – Professional Liability (2000) (accessed Apr. 14, 2007).

Moreover, there seems to be some opinion in the insurance bar that it’s inappropriate and even dangerous for an E&O policy to name customers or other professionals as additional insureds. See generally J. Kent Holland, Jr., Why Project Owners Aren’t Made Additional Insureds Under a Design Professional’s Errors and Omissions Policy, ConstructionRisk.com Report, March 2007 (accessed Aug. 24, 2007).

Exclusion of completed operations?

An additional-insured endorsement might not cover the insured’s completed operations, for example, a contractor’s work on a completed project. See generally Thelen Reid Brown Raysman & Steiner LLP, Your Additional Insured Endorsements: How Coverage May Be Narrowing (2005) (accessed Apr. 14, 2007) (scroll down to "Ongoing Operations").

Exclusion of additional insured’s own negligence?

It’s possible that a customer’s own negligence might not be covered by an additional-insured endorsement. In 2004, an Oregon court held in 2004 that under that state’s statutes, an additional-insured endorsement in an insurance policy did not cover the additional insured’s alleged negligence. The court upheld a summary judgment that the insurance company did not have a duty to defend the additional insured. See John W. Ralls, Oregon Court Voids Subcontract’s Insurance Provision Because It Would Cover General Contractor’s Own Negligence (2004) (accessed Apr. 14, 2007).

(See also the the express-negligence rule applicable in some jurisdictions, under which a contractual indemnity will not extend to the indemnified party’s own negligence unless the indemnity language is explicit on that point (and it may need to be conspicuous as well). See generally, e.g., Statement on Legal Opinions Regarding Indemnification and Exculpation Provisions Under Texas Law, Legal Opinions Committee of the Business Law Section of the State Bar of Texas (2006) (accessed Apr. 14, 2007).)

Subrogation waiver

"A waiver of subrogation clause is placed in the … contract to minimize lawsuits and claims among the parties. The result is that the risk of loss is agreed among the parties to lie with the insurers, and the cost of the insurance coverage is contractually allocated among the parties as they may agree. The risk, once assigned to the insurers by the parties, is determined to stop there, without allowing the insurer to seek redress from the party ‘at fault.’" Kenneth A. Slavens, What is Subrogation . . . and Why Is My Contract Waiving It? (2000; accessed Aug. 22, 2007) (emphasis added); see also the Wikipedia article on Subrogation.

Further reading

• Thelen Reid Brown Raysman & Steiner LLP, Your Additional Insured Endorsements: How Coverage May Be Narrowing, (2005) (accessed Apr. 14, 2007) (scroll down to "What the Endorsement Accomplishes" for a general introduction to additional-insured endorsements).

• Joseph P. Postel, How Will Courts Construe ISO’s New Additional Insured Endorsements? (2004) (accessed Apr. 14, 2007).

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