July 28, 2016

Ensuring You Have a Contract in Place is a Start… But Does it Reflect Adequate Language?

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As the contract manager of a company that works with other subcontractors or vendors, the insurance verification process can be incredibly daunting – especially when one minor mistake or an overlooked item can mean serious repercussions.

In the following post, we’ll explore the following 3 key considerations:

  1. Importance of a signed contract
  2. Additional insured endorsements
  3. Adequate contract language is stated

The Importance of a Signed Contract

As we discussed in a prior post, a signed contract denotes ownership on leases, establishes liability on doctor forms, and validates checks. Your signature is arguably the most important part of any contract or written agreement. Without it, documents are difficult – if not impossible – to dispute and enforce. And when it comes to certificates of insurance (COIs), an unsigned contract means no relationship has been defined, and the COI simply becomes a piece of paper.

The contract must require the vendor or contractor to name the upstream company as an additional insured to be granted the coverage. According to IRMI, “An additional insured policy endorsement is used to add coverage for additional insureds by name – for example, mortgage holders or lessors. There are a number of different forms intended to address various situations, some of which afford very restrictive coverage to additional insureds.” For application, in the construction industry, an additional insured endorsement designated for a lessor will not cover a construction agreement.

Additional Insured Endorsements

In a recent post, we explored the definition of additional insured and the difference between additional insured and certificate holder. Below, we’ll explore the 2 groups of endorsements that are applicable to the additional insured, including scheduled endorsements and blanket endorsements:

  • Scheduled Endorsements – A scheduled endorsement is when an individual needs to be added as an additional insured. In order to facilitate this, the subcontractor or vendor will speak with their insurance agent who will then work with the insurance carrier to ensure that the individual’s name is added. The vendor typically pays a fee to have the name added as an additional insured.
  • Blanket Endorsements – A blanket endorsement is very different from a scheduled endorsement. A blanket endorsement will state “where required by contract or written agreement that additional insured will apply”; in that situation when a claim comes up, the upstream company needs the written contract with the vendor and if it’s not in place, then there’s no coverage.

Because of the potential risks – many of which are severe in nature – it’s strongly advised that you, as an owner or executive, always discuss contract language with your attorney or insurance agent directly. In addition, it’s imperative that you follow best practices and make sure to always have a written agreement in place before anyone does work for you – ever. Often times organizations are trying to fill a need quickly, so they hire individuals and have them start immediately, even though that individual may not have a written agreement in place, or may be using the vendor’s agreement which doesn’t include adequate language.

Adequate Language Statements

The importance of a signed contract for protection is also highlighted when a vendor has a blanket endorsement which provides coverage for “where required by contract”. The nuance of the specific wording is incredibly important in this scenario, as you can see from the following example given in a recent Construction Executive article, as summarized below:

“A recent case from the Illinois Appellate Court—Old Republic Insurance Company v. Gilbane Building Company (2014 IL App [1st] 123430-U ) has held that, under the circumstances of that case, the upstream parties were not additional insureds on the subcontractors’ insurance policies and therefore were not entitled to coverage.”

“In the Old Republic case, the contract between the subcontractor (Air Comfort) and the general contractor (Gilbane) only required that Air Comfort list Gilbane as an additional insured on its certificate of insurance, which Air Comfort did. The court pointed out that the contract did not require that Air Comfort add Gilbane as an additional insured to Air Comfort’s policy itself. As the court also pointed out, the certificate of insurance in question (which showed Gilbane as an additional insured) contained certain critical provisions; namely, that:

  • the certificate is informational only and ‘confers no rights upon the certificate holder;’
  • the certificate ‘does not amend, extend or alter the coverage afforded by the policies’ listed on the certificate; and
  • that if the certificate holder is an additional insured, the policy ‘must be endorsed.’”
    As you can see from the example above, insurance language for a contract is extremely important, hence the need for a lawyer or insurance agent to always review to ensure the wording is adequately stated.

Is Your Company Prepared?

myCOI is a cloud-based software solution and exists for one reason: to help you handle the everyday tasks of managing certificates of insurance and protecting your company against underinsured claims, costly litigation and failed audits. The software and certificate tracking services are combined into an easy-to-use solution developed and supported by a team of insurance professionals and is built on a foundation of insurance industry logic to automate the COI communication process and ensure you remain protected.

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