Many businesses integrate additional insured coverage as an element of their risk management or risk transfer programs. In some cases, companies offer to protect other parties as an “additional insured” under their liability policies. In other cases, businesses are the “additional insured” receiving the protections of another company’s insurance coverage. Whether your business “gives” or “receives” this protection, significant changes initiated by the insurance industry beginning last year make it imperative that you perform a proactive review of your additional insured program. New changes mean your contracts may not line up with the forms now being circulated for use.
Last year, the Insurance Services Organization (ISO®) issued a new series of additional insured forms for use with commercial general liability (CGL) insurance policies. The ISO® now lists 35 different types of additional insured endorsements issued in 2013 – adding to the slew of older ISO® forms and non-standardized forms also in use in the industry. Industry-specific forms now exist, such as for liquor liability or golf cars, as well as more generalized forms. Many of the new forms contain significant changes from the assumptions and framework previously used for additional insured coverage.
Perhaps the most important change coming about as new forms are used are the requirements they establish for the contracts that create the obligation to obtain or maintain additional insured coverage. Many additional insured endorsements are written to extend coverage to those the insured is required by contract to insure. Some of the new forms issued in 2013 broaden who may be an additional insured but others, however, are much more restrictive about the types of contracts to which additional insured coverage will extend. No business today should assume the contracts that may have triggered AI coverage in the past will continue to be sufficient to trigger AI coverage under the new ISO® forms.
Newer ISO® forms require that a party have a written – not verbal – contract with the insured for coverage to extend. The new forms also limit the scope of AI coverage to no broader “than that which you are required by the contract to provide for such additional insured.” This limitation could limit an AI’s coverage based on restrictive contract language even if the policy otherwise would have provided broader indemnity. Consider, for instance, what the result might be if a policy covered pollution liability but the underlying contract itself did not require the extension of pollution liability to the AI? How this limitation will be applied is not yet known, but contracting parties should plan to include broad AI coverage requirements to ensure that the full panoply of insurance coverage is available.
The new forms also limit coverage under an AI endorsement to the limits “required by the contract or those proscribed [by the policy], whichever is less.” Through this language, an additional insured could be barred from seeking indemnity in the full amount of a policy’s limits. Contracting parties now must be careful not to unwittingly jeopardize the possibility of insurance coverage for a risk through limitations of liability clause that is substantially below policy limits. Other missteps could occur by limiting insurance coverage to amounts that would only trigger primary, rather than primary and excess, coverage.
The ISO® forms also require more clarity in the underlying contracts regarding which policy is intended to be primary insurance. A business with additional insured protection typically intends for the AI coverage to pay before its own insurance could be tapped to pay a claim. This “primary and non-contributory” set-up, however, now requires an optional endorsement. This endorsement makes the AI coverage primary only if (among other things) the underlying contract states in writing that the AI insurance “would be primary” and “would not seek contribution from any other insurance available to the additional insured.” As a result, this magic language will need to be added to all contracts if an AI wants the AI coverage to be primary ahead of its own coverage.
Adding to the confusion, the type of additional insurance protection required by a contract or sought by a party now may require more than one endorsement. For example, additional insured status for both ongoing operations plus completed operations requires the use of two endorsements from the most recent ISO® form set – Additional Insured – Owners, Lessees Or Contractors – Automatic Status When Required In Construction Agreement With You (CG 20 33 04 13) and Additional Insured – Owners, Lessees Or Contractors – Completed Operations (CG 20 37 04 13). Additional types of endorsements exist for situations in which additional insured status is to be extended to a party with whom the named insured does not have a contract (such as an owner seeking such protection under a downstream subcontractor’s policy).
Because of the new ISO® forms now in circulation, parties using the additional insured option to transfer and manage risk must be very careful about matching up the underlying contract and the language of the endorsement by which AI coverage will be extended. Contract language and assumptions on which business was done in the past quite possibly will not lead to the same results in the future. The significant changes to the ISO® forms – only a few of which are noted here – make it imperative that businesses work with their brokers and lawyers to confirm that their risk management program will accomplish the goals it is intended to meet.