By Jeff Forbes, ECBM, LP
Certain provisions in contracts are so standard they’re practically boilerplate, despite their importance. The frequency with which these provisions are seen can lead people to be blind to the consequences of their agreement. Its always useful to take some time, review contractual provisions, and make sure they make sense for the unique positions of the parties to the contract.
One provision that finds its way into the insurance requirements of almost every agreement involves additional insured status. These provisions generally require that the contractor list the customer as an additional insured on their insurance policies and that subcontractors list the general contractor as an additional insured on their insurance policies. These provisions are so common that many commercial insurance policies grant blanket additional insured status whenever a contract requires it. But what is an additional insured? And what sort of problems can it create?
Granting an entity additional insured status under an insurance policy allows that entity to make a claim on the policy in the same way as if they were the purchaser of the policy. Where the parties have reached an agreement to indemnify each other against certain types of losses, additional insured status acts as a guarantee of that promise to indemnify.
This status is greatly beneficial to the party being granted additional insured status as it helps keep certain losses and the defense of those losses off their own loss history and helps lower their premiums. It can work to the disadvantage of the named insured as claims made by additional insureds lower the limits that remain available for the named insured and increase the loss history of the named insured. So while there may be no specific charge for the endorsement the bang comes after the loss in the way of increased premiums.
Due to the frequency with which control system integrators are faced with the requirement to add their customers or contractors as additional insured, the CSIA insurance program features general liability and automobile liability policies that provide blanket additional insured endorsements. These endorsements grant additional insured status to any entity the insured is required to add as an additional insured in a written contract.
In the past contracts often required additional insured status even where the loss was cause by the sole negligence of the contractor or owner. Many states have passed legislation that puts these provisions in violation of the law. Today, the additional insured provision will respond only to negligence of the named insured or joint negligence. There are still situations where the customer or contractor may be responsible for 80% of the negligence, but they are able to tender the claim under their additional insured status.
As owners and contractors force their liability onto the insurance of their providers, insurance companies have pushed back by changing the language in their additional insured endorsements, narrowing coverage. The program continues to feature the older edition of the forms. While this means that the additional insured is granted a broader form of coverage, customers and contractors are often requiring the older editions. Many insurance companies have compliance issues that do not allow them to provide the older forms.
Some policies contain insured vs. insured provisions.This is a potential wrench in the proceedings in that they may exclude coverage of claims made between insured parties. To work around this problem, many general contractors now require a severability of interests provisions in insurance policies to go along with their additional insured status. The severability of interest provision states that the policy applies separately to each insured as if each insured had its own policy. The practical effect of this provision is to override any cross liabilty issues. The severability of interest provisions is standard in the CSIA commercial general liability and business automobile insurance policies.
For more information on the benefits of the CSIA Insurance Program contact Paul Barnard at paulbarnard@csia-insurance.com or Jeffrey Forbes at jforbes@ecbm.com.