Are Certificates Listing a Construction Company as an Additional Insured Worth the Paper They’re Written On?
Owners and contractors often shift risk by requiring contractors and subcontractors to name them as additional insureds (AI) on commercial general liability (CGL) policies.
The goal is to shift to a subcontractor’s insurance, rather than a contractor’s, the costs of defending and satisfying claims. The process typically occurs through a contractual requirement that a subcontractor name a contractor as an AI. From experience wrangling over AI coverage, the following tips are designed to help contractors effectively obtain and use AI coverage to shift risk.
KEEP EVERY DOCUMENT
One way to be added as an AI on a CGL policy is through a blanket AI endorsement which “automatically” provides coverage for a category of entities, typically those a written agreement requires the policyholder to name. The second method is an endorsement that specifically lists a contractor as an AI. Subcontractors routinely use blanket endorsements, and if a contractor does not retain the contract requiring it be named as an AI, the insurer can deny coverage based on the lack of written agreement.
REQUIRE AI STATUS IN CONTRACTS
A contractor should require in the body of contracts that subcontractors name it as an AI. While contractors can use a contract addendum, addenda are easily forgotten or lost. The best practice is to include the AI provision in the body of the contract. Contractors may want to use addenda to allow for varying the insurance requirements by types of subcontractors, but a more effective method is to put default AI language in the contract, include alternate provisions and provide that the default requirements apply unless another provision was selected.
REQUIRE ONGOING AND COMPLETED OPERATIONS COVERAGE
CGL policies generally provide two types of coverage – “ongoing operations” and “products-completed operations” coverage – and a contractor needs to be an AI for both. Ongoing operations coverage generally covers claims occurring while work is underway, whereas products-completed operations coverage generally covers claims occurring after completion. A failure to obtain one of the types renders the AI status worthless for a whole class of potential claims. Contracts should therefore explicitly require subcontractors to provide AI coverage for both ongoing and products-completed operations coverage.
REQUIRE SPECIFIC ENDORSEMENTS
Insurers generally use standard Insurance Services Office endorsements, but there are significant differences between versions of those endorsements. Also, some insurers use atypical “manuscript” endorsements. As a result, contracts should require a specific AI endorsement. Generally, the CG 20 10 11 85 endorsement is preferred because it covers any claim “arising out of” the subcontractor’s work, which courts have construed as covering claims resulting solely from the contractor’s negligence in addition to claims resulting from the subcontractor’s negligence. More recent AI endorsements are more restrictive. Because insurers may resist using the older CG 20 10 11 85 AI endorsement, alternatives are to require the CG 20 10 11 85 or an equivalent form or to require AI coverage for any claim “arising out of” the subcontractor’s work.
BEWARE OF EXCLUSIONS
An exclusion is a policy provision excluding a type of claim from the policy’s coverage. For example, there are exclusions for claims resulting from soil subsidence, multi-family residential construction or mold. Contractors should avoid being impacted by exclusions through contractual requirements that a subcontractor’s policy not contain any problematic exclusions.
REQUIRE FULL POLICY LIMITS COVERAGE
Newer endorsements limit AI coverage to the lesser of the amount the contract requires or the policy limit. To get the maximum coverage, contractors should require subcontractors to obtain a minimum amount of coverage and name the contractor as an AI entitled to coverage in the full amount of the policy limits.
REQUIRE PRIMARY AI COVERAGE
Because contractors often have personal policies and AI coverage on subcontractors’ policies, AI insurers often contest which policy provides primary coverage. The best outcome is having subcontractors’ policies provide primary coverage and only use the contractor’s policy if AI coverage is exhausted. To ensure primary AI coverage, contracts should require primary AI coverage with the contractor’s policies as secondary, excess coverage.
REQUIRE COVERAGE AFTER COMPLETION
CGL policies typically have a one year period, and the insured renews or obtains a new policy every year. However, projects last more than one year, and claims occur years after project completion. Problems arise if a subcontractor provides AI coverage for one year but fails to continue to do so and a claim arises later. Contracts should require a subcontractor to provide AI coverage for every policy year it performs work and as many years after completion as the law allows claims.
DO NOT RELY ON CERTIFICATES
Too many contractors obtain a certificate stating they are an AI on a policy and assume the certificate means they have AI coverage. Certificates almost always state they only provide information, and with some exceptions, as a result certificates do not establish coverage. Even if reliable, a certificate does not indicate whether a policy provides the contractually required coverage – ongoing and completed operations coverage, a specific endorsement, full policy limits coverage, etc.
The only way to ensure AI coverage meets contractual requirements is to obtain and review the policy. Additionally, if the contract requires AI coverage for multiple years or for years after project completion, require a copy of each new policy for the duration of that period.
TASK A RISK MANAGER WITH ENSURING COMPLIANCE
A contractor can have a strong AI program on paper, but unless enforced, the program is nothing more than words on paper. To effectively shift risk, contractors must task an employee with ensuring subcontractor compliance. While seemingly a significant investment, contractors should keep in mind that ensuring effective AI coverage can save significant amounts in the event of litigation.