January 31, 2017

Is Coverage For An Additional Insured Equal to Coverage For A Named Insured?

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As an executive at an organization that relies on contractors and vendors, there can be an overwhelming amount of terminology and lingo to keep track of. And on top of that, legislation and rulings can vary from state to state and seemingly small nuances can turn upside down into big legal messes. It’s important that you and your compliance team are always on top of changes so you know how to protect your organization and your workers—whatever their role.

We’ve discussed the topic of additional insured many times in the past, but as a refresher, let’s first review the difference between being an additional insured and a named insured:

  • Additional Insured: The main contractor is named as an “additional insured” on the certificate of insurance and is actually given coverage, and has rights under the subcontractor’s or vendor’s, the “named insured” policy in the event of a future claim. Some carriers will charge the subcontractor or vendor a premium for this privilege because they are actually conferring coverage.
  • Named Insured: A “named insured”, according to IRMI, is a person, firm, or organization, or any of its members specifically designated by name as an insured(s) in an insurance policy, as distinguished from others that, although unnamed, fall within the policy definition of an “insured.”

Is There a Coverage Gap Between Additional Insured and Named Insured?

Thanks to a couple of recent lawsuits which we’ll share excerpts from below, we have more insight now than we’ve had in the past on how the Courts view the gap in coverage between an additional insured and a named insured.

Let’s take a look at the case and its outcome which was originally published on mondaq’s site by author J. Gregory Cahill:

The Arizona Court of Appeals recently ruled that the “Your Work Exclusion” in a Commercial General Liability (“CGL”) insurance policy bars coverage for an additional insured when the only claimed damage was to the named insured’s own work.

This exclusion is standard in most CGL policies. The theory behind the exclusion is that the purpose of a CGL policy is to compensate for property damage, not to warrant the quality of an insured’s work. For example, if a roofing subcontractor defectively installs a roof and the only damage is to the roof itself, the exclusion bars coverage. However, if damage occurs to other property as well, then coverage to repair the “other” damage will typically exist. Thus, if the roofer’s defective work also leads to water intrusion which damages the interior of a building (e.g., drywall or framing damage), the exclusion will not bar coverage for the interior property damage.

The article continues: This exclusion is typically coupled with a “Subcontractor Exception,” which provides that the exclusion does not apply if the damage to Your Work . . . “arises from work performed on Your behalf by a subcontractor.” The term “Your” is typically defined as the named insured. Until recently it was unclear whether the exception would permit coverage for an additional insured (general contractor) even though the only damage was to a named insured’s (subcontractor) work.

Example:

In examining the case, Double AA Builders, Inc. v. Preferred Contractors Insurance Company, LLC.1, mondaq’s article explains:

In 2007, Harkins Theaters hired Double AA to serve as a general contractor for the construction of a theater complex. Double AA, in turn, hired Anchor Roofing to install the roof. Double AA’s subcontract with Anchor required Anchor to have Double AA named as an additional insured under any CGL policies that would apply to the work. Anchor obtained a CGL policy from Preferred Contractors Insurance Company in which Anchor was the named insured and Double AA an additional insured.

Shortly after the project was completed the roof began to leak. At Harkin’s request Double AA replaced the roof. Double AA then sued Anchor, Preferred, and its own insurance carrier. Notably, the only damage claimed by Double AA was the cost to replace the roof.

Double AA settled with its carrier and obtained a default judgment against Anchor. Preferred answered the complaint and it and Double AA filed cross-motions on whether the “Your Work” exclusion barred coverage for the cost to replace the roof. The trial court ruled in favor of Double AA and Preferred appealed.

In reversing the trial court’s ruling the Court of Appeals held that, under an additional insured endorsement, the coverage afforded an additional insured can be no greater than the coverage afforded a named insured. The Court explained that, since the term “Your” was defined as the named insured, the Subcontractor Exception only applied if the damage was to the work of Anchor’s subcontractor. The fact that Anchor was Double AA’s subcontractor was irrelevant. The court found that if an additional insured was allowed to take advantage of the “Subcontractor Exception” where the named insured could not, the carrier’s risk would be increased without a corresponding increase in premiums. The Court directed the trial court to enter judgment in favor of Preferred.

The article concludes that the Court’s opinion did clarify an important point. “It made clear that its holding was dictated by the nature of the claimed damages, that is, Double AA only sought recovery of the cost to replace Anchor’s defective work. Had Double AA sought recovery for damage to other property, the result would likely have been different.”

The Importance of Collecting And Reviewing COIs

As you can see, the difference is absolutely critical to the coverage you and your organization carry—and the consequences of not having the adequate coverage in place can be financially severe. For example, “While an additional insured (the general contractor) has the benefit of insurance protection from another policy (the subcontractor), they may forfeit control of the defense of the claim.”

Make Sure Your Organization Is In The Know

There are tools that companies can leverage in order to keep track of certificates of insurance as well as policies of all kinds to ensure that your organization and employees are always protected—no matter what.

myCOI 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 is an easy-to-use, cloud-based solution developed and supported by a team of insurance professionals and is built on a foundation of insurance industry logic to automate the certificate of insurance communication process and ensure you remain protected.

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