A contractual additional insured provision is an important tool in managing risks. Historically seen in construction contracts, additional insured provisions now appear in many other types of contracts, including those involving services and products. As an additional insured, you can gain access to your counter-party’s insurance, including in the case of some commercial general liability (“CGL”) policies with uncapped defense costs that do not erode indemnity limits. Furthermore, additional insured status prevents subrogation because insurance companies, generally, cannot pursue subrogation from their own policyholder, including any party covered as an additional insured under the policy.
Additional insureds can be specified by name in the insurance policy or through endorsements or amendments. For example, typical policy language may state:
WHO IS AN INSURED is amended to include as an insured any person or organization for whom you have agreed under contract or agreement to provide insurance.
Depending on the governing law and the terms of the policy’s additional insured provisions, the insurance provided usually will not exceed the scope of coverage and/or limits required by said contract or agreement.
Given that additional insured status is such a powerful risk management tool, it is important for companies to carefully document their agreements, such that their intent is achieved. This means paying attention to both contract wording and policy wording. Failing to consider both can result in disaster.
The recent case, Cincinnati Insurance Company v. Vita Food Products, Inc., No. 13 C 05181 (E.D. Ill. January 30, 2015), illustrates the pitfalls of the failure to focus on these important issues.
In Vita Food, Cincinnati Insurance sought a declaration that it was not obligated to defend or indemnify Vita Food in a third-party suit filed by Nardo Ovando, a third-party contractor (Painters USA, Inc.) employee who slipped and fell while working at a Vita Food store. Vita Food and Painters had entered an oral agreement for Painters to paint the Vita Food store. Vita Food informed Painters that it could not go forward with the project unless Painters added Vita Food as an additional insured under Painters’ policy. Painters agreed but there was no written contract specifying the additional insured agreement.
It is also apparent that Vita Food had no idea that Painters’ insurance policy had a trap door in it. The policy stated:
- Any person or organization … whom you [Painters] are required to add as an additional insured under this Coverage Part by reason of:
- A written contract or agreement; or
- An oral agreement or contract where a certificate of insurance showing that person or organization as an additional insured has been issued, is an insured, provided:
- The written or oral contract or agreement is:
- Currently in effect or becomes effective during the policy period; and
- Executed prior to an “occurrence” or offense to which this insurance would apply.
- The written or oral contract or agreement is:
Within hours of Ovando’s June 30, 2011, accident, Painters contacted its broker urgently seeking a certificate of insurance naming Vista Food as an additional insured. The next day, Painters received a certificate of insurance dated July 1, 2011, naming Vita Food.
Cincinnati argued that Vita Food did not qualify under the policy because it requested and received a certificate of insurance only after Ovando’s accident. The court agreed and held that Vita Food failed to meet the policy’s requirement that “a certificate of insurance showing that person or organization as an additional insured has been issued.” The court reasoned that the policy’s “use of the past perfect tense (‘has been issued’) made clear that the certificate’s issuance needed to happen before the additional party could be considered an insured.” The court noted that the record showed “that the certificate of insurance was issued on July 1, 2011, meaning that Vita Food was not an additionally insured party before that date, including on June 30 when Ovando was injured.” Additionally, the court interpreted the terms “executed prior to an occurrence” to mean that in order for the oral agreement to be “executed,” the certificate of insurance had to be issued prior to Ovando’s accident. Accordingly, Cincinnati owed Vita Food no coverage in the underlying litigation.
Although this case is somewhat of an outlier because of the execution of the certificate of insurance requirement, it illustrates the problems that arise when no one pays attention to a critical element of the parties’ agreement. Indeed, neither Vita Food nor Painters likely was aware of this policy requirement.
More importantly, this outcome could have been avoided had Vita Food taken the basic steps to verify proof of insurance. At a minimum, Vita Food should have requested a certificate of insurance to document its status, even though policies rarely require and courts rarely rely on the terms of certificates of insurance in determining the existence and extent of additional insured coverage provided; rather, courts and parties typically will rely on policy terms. Furthermore, any company seeking additional insured status should explicitly make those requests in writing to avoid any future misunderstanding.
Insurance procurement provisions should specifically state the types and amounts of insurance required. For example:
Company A shall obtain and maintain in full force during the performance of this Contract and six months thereafter: Commercial General Liability Insurance endorsed to include products/completed operations, independent contractors, contractual liability, broad form property damage and fire liability coverage with a combined single limit of $2,000,000 per occurrence and $5,000,000 in the aggregate. All such policies shall name Company B and its agents as additional insureds. Company A shall furnish a Certificate of Insurance and copies of relevant policies evidencing such coverage.
In addition, Company B should include language requiring that the insurance provided be both primary and non-contributory. This helps Company B avoid ancillary disputes concerning whose insurance pays first.
While having a strong contractual agreement on insurance is an absolute must, it is not the last step to secure coverage. Company B must follow up to ensure that Company A has complied with the contract. At a minimum, Company B should:
- Require copies of all insurance policies
- Require “Certificate of Insurance” for all required types of coverage (this should be an explicit contractual requirement)
- Verify the policy has been issued, terms of coverage and additional insured coverage effective
- Check for compliance
- Named insured correctly identified
- Dates cover entire period required by contract
- Policy types and limits appropriate
- Policy number identified
- Auto covers “any auto”
- Description and location of operations correct
- CGL on “occurrence” or “per project” or “per accident” basis
- Sub-contractor insurance is primary
- Check rating of insurer (A.M. Best or S&P)