Many commercial contracts contain risk-transfer provisions, including indemnification and insurance requirements. They should not be treated as boilerplate provisions and should be carefully reviewed to ensure that the language in the contract is clear, concise and does not contradict the language in the insurance policies.
One of the key insurance policy provisions that is often included in commercial contracts to transfer risk is the requirement that one contracting party make the other contracting party an additional insured on their insurance policy. There are many additional insured forms attached as endorsements to insurance policies. In 2013, the Insurance Services Office (“ISO”) dramatically revised the standard additional insured endorsement form. These revisions are more restrictive in the amount of coverage available under CGL policies for additional insureds. The three significant changes are:
- Insurance provided to an additional insured will apply only to the extent permitted by law
- If additional insured coverage is required in a contract or agreement, the additional insured will not be provided coverage that is any broader than required in that contract or agreement with the named insured
- The limits available to an additional insured will be the lesser of the limits required by contract or available under the policy
The following discusses each of the changes to the standard additional insured endorsement.
Apply Only to the Extent Permitted by Law
Several states have anti-indemnification statutes. These statutes prohibit the transfer, through contractual indemnification provisions, of liability for damages caused by an indemnitee’s sole or concurrent negligence. For instance, California, Arizona, Colorado, Kansas, Montana, Missouri, New Mexico, Oregon and Texas all have anti-indemnification statutes. The ISO additional insured endorsement addresses the statutes in these states and requires a coverage determination and a review of applicable law. This could result in uncertainty and disputes over resolution of which state’s law will apply. Options for choice-of-law consideration include where the named insured is located, where the work is performed, where the additional insured is located, or where the accident occurred. A careful review of all choice-of-law options should be undertaken as part of the contract review process. One solution is to include language in the contract that states: “In the event that any insurance policy which is referenced in this contract states that the insurance afforded to an additional insured will not be broader than that required by contract, the Parties agree that nothing in this contract is intended to restrict or limit the breadth of such insurance.”
Limit Coverage to What is Required in the Contract
The coverage available for an additional insured is the issue being litigated in the Deepwater Horizon case, currently before the Texas Supreme Court. This is the case which arose from the 2010 oil spill in the Gulf. There, the policyholder only agreed to provide additional insured coverage for BP for above water contamination, but BP argues that the coverage under the policy is broader and provides coverage for both above and below water contamination. The new ISO endorsement seems to address the coverage issue being litigated in Deepwater Horizon, and limits coverage to what is required in the contract. For instance, if a contract only requires additional insured coverage for ongoing operations, there is no coverage for the additional insured for a completed operations claim. To obtain broader coverage, the additional insured may request language in the contract that states: “coverage for the additional insured shall be at least as broad as that afforded the named insured.” It is important that the contract language be clear so that no ambiguity arises.
Limits of Coverage Available
With regard to the limits provision in the endorsement, the limits of coverage available to an additional insured will be no more than the lesser of: (1) the amount of insurance required for the additional insured in the contract; or (2) the policy’s applicable limit of insurance. This language allows an insurance company to apply the limits set forth in the contract to the additional insured even when the named insured has higher limits available in its insurance policies. For example, if the named insured has $10 million in limits, but the contract with the additional insured only requires $1 million in limits, the additional insured will only receive $1 million in limits. To get around this endorsement language, the additional insured may request language in the contract that states: “the limits of insurance provided to the additional insured shall be the greater of that set forth in the contract, or the full per occurrence limit set forth in the policy.” If this language is added to the contract, it will be important to make sure that any certificate of insurance references the entire limits of the insurance policies.
In addition to the changes made to the standard additional insured endorsement, ISO also recently changed the Other Insurance condition. That language reads:
Primary and Noncontributory Insurance
This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that:
(1) The additional insured is a Named Insured under such other insurance; and You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured.
A way to resolve this in the contract is to include language that states: “Each policy, including primary, umbrella and excess policies, shall state that the insurance provided to the additional insureds is primary and non-contributory to any other insurance (primary, umbrella, excess, self-insurance, or any other basis) available to the additional insureds.” A way to resolve this in the policy is to add an endorsement to umbrella and excess liability policies that sets forth the priority of coverage.
Significant challenges can result if the above issues are not addressed when the commercial contracts are negotiated. Companies should request the additional insured endorsement(s) on the policies to make sure they match with the contract language, as well as with the certificates of insurance. In a November 2010 Legal Alert from the McGuireWoods law firm titled Certificates of Insurance: A Risky Business for Additional Insureds the firm cautioned companies by stating: "Watch out for how your contract requirements will interact with the insurance policies. As Bill Wilson, from a November 2009 article, highlights: “One of the most common requests made when additional insured status is requested on a GCL policy is that the certificate of insurance includes a statement from the agent that such coverage is provided on a ‘primary and noncontributory’ basis. The problem with complying with this request is that it is the additional insured’s CGL policy that governs whether insurance is primary and noncontributory. Therefore, the downstream party’s agent cannot make such a statement without knowing what the additional insured’s CGL policy says . . . which is almost never the case.” Furthermore, do not use outdated insurance terminology in your contracts addressing insurance requirements between the parties. As Wilson further notes, “Current ISO additional insured endorsements don’t cover sole negligence of the additional insured, yet contracts are still being used that demand this, even in states where prohibited by anti-indemnity laws.”