New risks associated with recent revisions to the standard ISO Additional Insured endorsements language have not been addressed by many in the construction industry. Although these revisions occurred in April of 2013, many participants in the construction industry have failed to take adequate measures to protect themselves from the risks associated with these revisions.
In general, an additional insured endorsement is a way for an insured party to give direct coverage rights to an additionally insured party. This basic concept is limited by several factors, the most universal of which is the specific language of the policy and the additional insured endorsement. By far the most common forms utilized in the insurance industry for additionally insured endorsements are the forms generated by the Insurance Services Office (ISO). In April of 2013, the ISO made several revisions to its standard forms, three of which significantly affect additional insureds in the construction industry.
No Broader than Required
The ISO added a provision to the additional insured endorsement which makes the construction contract an integral part of the additional insured endorsement. The effect of this revision may be a reduction in coverage for the additional insured. Generally, contracts within the construction industry require a “downstream party” to add an “upstream party” as additionally insured. For example, a subcontractor is generally required to add the contractor as additionally insured under the subcontract agreement. The new ISO April 2013 language provides as follows: “the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.” Thus the subcontract requirement to add the contractor as an additional insured, not the subcontractor’s insurance policy, determines the scope of coverage.
As the new language suggests, the insurance industry will now look directly to the construction contract to determine the scope of coverage. This creates the risk that a party will inadvertently limit the additional insured coverage, preventing an occurrence from being covered when it otherwise would have been. For example, when a general contractor prepares a subcontract, typically the general contractor attaches an insurance exhibit listing the required insurance. Because the additional insured endorsement looks to the requirements of the contract to determine the scope of coverage, the insurance exhibit now defines the coverage provided by the endorsement. This despite the fact that the general contractor’s insurance exhibit was probably not created with the anticipation that it would become an integral part of an additional insured endorsement.
To protect themselves from unforeseen risks, upstream parties should draft the insurance requirements in their contracts with the knowledge that the contract will determine the scope of coverage provided by an additional insured endorsement. When drafting the requirements, the provision must be clear and concise and include an exhaustive list of all insurance necessary for the project. If the insurance requirements in the contract are anything less, the additional insured is opening the door for the insurance company to deny coverage.
Whichever Is Less
Similar to the scope limitations, the ISO also added language which may limit coverage amounts. Within the construction industry, contracts often stipulate the amounts of coverage required. Prior to the April 2013 ISO revisions, if the contract required certain policy limits, these limits did not serve to restrict coverage. For example, if a contract between ABC Contractor and XYZ Subcontractor required that XYZ Subcontractor maintain $1,000,000 of general liability but XYZ Subcontractor actually maintained $2,000,000, ABC Contractor would have access to the full $2,000,000 of additional insured coverage. Because this situation creates the possibility of a windfall for the additionally insured party who gets more coverage than bargained for, the April 2013 ISO revisions restrict the insurance requirements to only those required in the contract:
If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance: (1) required by the contract or agreement; or (2) available under the applicable Limits of Insurance shown in the Declarations, whichever is less.
The new ISO language creates the risk that an upstream party leaves some insurance money on the table. In the above example, the new ISO language would limit ABC Contractor’s insurance coverage to $1,000,000 as required in the contract, despite the fact that XYZ Subcontractor actually maintains $2,000,000 in general liability coverage. Essentially, ABC Contractor has left $1,000,000 of insurance coverage on the table.
The new ISO language also creates the risk of a lapse in coverage between per occurrence liability and aggregate liability. For example, assume XYZ Subcontractor was required to maintain $1,000,000 in per occurrence liability coverage and $5,000,000 in aggregate liability coverage. However, XYZ Subcontractor actually maintains $2,000,000 in per occurrence and $5,000,000 in aggregate liability coverage. Under the new ISO language, XYZ Subcontractor’s per occurrence liability is now capped at $1,000,000, however, XYZ Subcontractor’s aggregate liability would not be triggered until after their $2,000,000 in per occurrence liability. Thus, the new language has created a gap in coverage from $1,000,000 in per occurrence until $2,000,000 when the aggregate liability is triggered.
To protect themselves from these risks, upstream parties must accurately forecast the required project insurance and modify contractual language to address the new ISO language. If the contract contains specific policy limits, the upstream party must ensure that the limits fit the particular needs of the project and ensure that the downstream party strictly complies with these limits. In addition, rather than placing specific insurance coverage amounts, the upstream party should consider requiring coverage amounts which do not delineate between per occurrence and aggregate liability amounts. For example, a contractor could require a subcontractor to maintain a minimum of $5,000,000 in combined per occurrence and aggregate liability coverage.
Only to the Extent Permitted by Law
The last revision superficially appears more innocuous than its counterparts: “The insurance afforded to such additional insured only applies to the extent permitted by law.” However, this revision ties the additionally insured endorsements to many states’ anti-indemnity laws, which could render the additional insured requirement void.
The vast majority of states have enacted some form of anti-indemnity law. These statutes invalidate contractual provisions requiring indemnification of certain acts. If the indemnification provision violates the statute, the entire indemnification provision may be rendered void. Before the ISO 2013 revisions, the effect that voiding an indemnification provision had on a requirement to provide additional insured coverage was uncertain. However, the ISO’s revisions appear to directly link the additional insured endorsement to the anti-indemnification provisions. Thus, there is an increased risk that if the indemnity provision is found void, so too will the additionally insured endorsement.
Contracting parties can use two methods to protect themselves from this risk. First, the upstream party can clearly delineate between the indemnity provisions and the requirement for an additional insured endorsement. The goal is to strengthen the important distinction that an additional insured endorsement is a separate contractual requirement and independent from any indemnification requirements. Second, the upstream party can ensure that any indemnification provision complies with the antiindemnity law where the project is located. It is essential that the contracting parties do not use “form contracts” across state lines without tailoring the contract’s additional insured requirements to each state’s laws. Doing so may render the indemnity requirement and additionally insured requirement void.
The 2013 ISO additional insured endorsement revisions create additional risks that need to be recognized within the construction industry. The simplest way to be protected from the new revisions is to insist that an additional insured endorsement be on a pre-2013 version of the ISO form. However, some insurance companies no longer use pre-2013 forms and, even if they do, they may charge an increased premium. Whatever the reason may be, if the ISO 2013 form is used, the importance of clear and concise contract drafting of the additional insured endorsements clause and the indemnity clause cannot be overstated.