Court cases start showing impacts of seven-year-old insurance endorsement revisions
Let’s start with a quick quiz. A subcontractor causes a loss for which the general contractor is sued. As an additional insured on the subcontractor’s policy, which of these is more important for triggering the insurer’s duty to defend the general contractor? A) The work contract or B) the subcontractor’s insurance policy?
If you aren’t quite sure, don’t worry. This is a trick question. The answer depends on how the insurance endorsement was written. If the insurance uses language prior to a 2013 Insurance Services Office (ISO) revision, the policy likely dictates coverage. After 2013, the specific contract language between work parties can play a significant role as well. Knowing the difference means having additional insured coverage that does its job or being vulnerable to costly losses and litigation on your dime.
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The History of Additional Insured Endorsements Before 2013
The 1985 CG 20 10 represented the broadest definition of an additional insured endorsement. The language stated that the liability must arise out of the named insured’s work. The lack of limitations created litigation years after projects ended. ISO worked to correct this problem in 1993 by distinguishing between ongoing and completed operations. The new standard language intended to restrict additional insured coverage to ongoing operations only. However, since the revision did not explicitly address completed operations, ISO made another revision in 2001. The Office added language excluding coverage for bodily injury and property damage from completed work.
Another major change came in 2004 rejecting coverage for losses caused solely by an additional insured’s acts or omissions. With this update, a named insured had to contribute to a liability to trigger its policy.
2013 Revision Limitations on Additional Insured Coverage
The most recent revision happened in April 2013 adding three important caveats:
Insurance for additional insureds only applies to the extent permitted by law.
Contractual indemnity transfers risk from one party to another. Indemnity can create an imbalance in negotiating power between upstream and downstream parties. For this reason, 45 states have some type of anti-indemnity statute. The 2013 ISO revision addresses this issue by requiring that a coverage determination include a review of applicable law rather than just policy language.
When coverage is contractually required, the insurance afforded to the additional insured cannot be broader than what the contract demands.
With this revision, the contract’s wording becomes important. If the additional insured endorsement provides broader coverage than the contract requires, the additional insured does not benefit from extra coverage. The insurer must only afford the protections specified in the contract.
Payment on behalf of an additional insured will be the lesser of the amount contractually required or the Limits of Insurance outlined in the policy’s Declarations.
The final update also gives priority to the contractual agreement for determining financial thresholds. The maximum amount available through the named insured’s policy for an additional insured’s loss is the lesser of the contractual amount required or the limit of the insurance policy.
The Court’s Interpretation: Charter Oak Fire Insurance Company v. Zurich American
While the 2013 changes to the standard additional insured endorsement have been around for years, only now are they being tested in the courts. One of the first verdicts arrived in late April 2020.
In the Charter Oak case, an apartment building owner hired a contractor for elevator repairs. As required by the agreement, the contractor added the apartment owner to its policy as an additional insured. The endorsement used the 2013 revised language. The contractor’s employee became injured and sued the building owner. The owner’s insurer, Charter Oak Fire Insurance Company, notified the contractor’s insurer, Zurich American, to trigger its duty to defend. Zurich rejected the claim because of agreement language stating: “claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations …”
Zurich argued the contract negated its duty to defend because the incident did not meet the “negligent” requirement. Charter Oak argued the nonnegligent standard of the additional insured endorsement required coverage.
The US Court for the Southern District of New York sided with Charter Oak. In its analysis, the court interpreted negligent acts or omissions as bringing about or effecting any lawsuit against the additional insured. The court further supported its analysis because workers’ compensation immunity often prevents employees from bringing a suit against their employer. The court believed that any other interpretation of coverage applicability would render additional insured endorsements void.
Implications of the Verdict
While the 2013 ISO revisions sought to narrow and clarify coverage, they still have room for interpretation. This means the precision of the contract is important. Pillsbury Law suggests upstream parties include the following language in their contracts: “coverage for the additional insured shall be at least as broad as that afforded the first named insured.”
While insurance companies, lawyers and courts continue to interpret the changes, one thing is not up for debate—every contractual word now matters when considering a claim. Use your words wisely.
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