TRENDS IN ADDITIONAL INSURED COVERAGE

Workshop W7 Wednesday, November 14 1:30 3:30 p.m. TRENDS IN ADDITIONAL INSURED COVERAGE Presented by Craig F. Stanovich Principal Consultant Austin & Stanovich Risk Managers LLC The scope of coverage provided to an additional insured under a contractor s liability insurance policy is constantly evolving. Changes in standard and nonstandard endorsements, as well as limitations on coverage as determined by courts and by statute, have slowly eroded the broad coverage these endorsements once provided. This workshop will outline pending changes in the standard ISO additional insured endorsements, examine trends in nonstandard endorsements, identify problematic additional insured requirements, and offer recommendations for ensuring proper coverage is obtained. An update on statutory limitations on additional insured coverage will also be provided. Workshop W7 Copyright 2012 International Risk Management Institute, Inc. 1 www.irmi.com

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Craig Stanovich, CPCU, CIC, CRM, AU Principal Consultant Austin & Stanovich Risk Managers, LLC Mr. Stanovich is presenting Workshop W7, Trends in Additional Insured Coverage, on Wednesday afternoon. Mr. Stanovich is cofounder and principal consultant of Austin & Stanovich Risk Managers, LLC, a risk management and insurance advisory consulting firm that does not sell insurance. With over 30 years of experience in the risk and insurance industry, including 5 years as an underwriter for a national insurer and 15 years as an executive for a regional insurance broker, Mr. Stanovich specializes in most aspects of commercial insurance. He has practical, in-depth experience in several areas, including construction, transportation, and petroleum marketers risk management and insurance. Mr. Stanovich is a regular contributor to various international, national, and local publications. He has served as an Expert Commentator for IRMI for General Liability since 2002. Mr. Stanovich has served as president of the Central Massachusetts Chapter, CPCU Society, and is past Chairman of the Board of Governors of the Society of Certified Insurance Counselors in Austin, Texas. He is also a National Faculty member of the Society of Insurance Counselors. Mr. Stanovich graduated from Bridgewater State College with a B.S. in Education and holds the Associate in Underwriting (AU), CPCU, CIC, and CRM professional designations. Workshop W7 3

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Trends in Additional Insured Coverage (W7) Presented by: Craig F. Stanovich, CPCU, CIC, CRM, AU Principal Consultant Austin & Stanovich Risk Managers LLC Where We Have Been Last Major Changes to ISO AI 2004 Arising out of was removed from AI endorsements in 2004 The central issue in much of the litigation is whether the endorsements provided coverage only for the additional insured s vicarious liability arising out of the named insured s negligent acts, or did coverage extend to the additional insured s sole negligence. Some courts have ruled that, in the absence of specific language limiting coverage, the current additional insured endorsements do respond to injury or damage arising from the additional insured s sole negligence. This is contrary to the original intent of the additional insured endorsements. ISO Circular LI-GL-2004-147 March, 2004 2 Workshop W7 5

Where We Have Been Last Major Changes to ISO AI 2004 Coverage applies only if the BI, PD or PI & AI is caused in whole or in part by the acts or omissions of the named insured or those working on behalf of the named insured (i.e., employees or subcontractors). Coverage is expressly excluded for BI or PD arising out of the products-completed operations hazard. A separate AI endorsement (CG 20 37) is introduced for completed operations. 3 4 What is meant by acts or omissions must the named insured be (or alleged to be) negligent? The endorsement limits coverage to situations in which the injury or damage is caused by the acts or omissions of you or your subcontractor in performance of your work to which the written contract requiring insurance applies. But contrary to Travelers argument, the policy does not limit coverage to injury or damage caused by negligent acts or omissions. We decline Travelers invitation to read the word negligent into the policy. Engineering & Construction Innovations, Inc. v. L.H. Bolduc Co., Inc. & Travelers Indemn. Co., 803 N.W.2d 916 (2011) Minn. App. Ct. Where We Have Been Last Major Changes to ISO AI 2004 4 5 6

Where We Have Been Last Major Changes to ISO AI 2004 What is meant by acts or omissions must the named insured be (or alleged to be) negligent? The Court finds that the use of the words act or omission in the Additional Insured Endorsement does not require negligence on the part of the named insured. The plain and ordinary meaning of act or omission requires only that the named insured do or fail to do something. Maryland Casualty Company v. Regis Insurance Company and Ran Holding Corporation ((1997) No. 96 CV 1790), U.S. District Court for the Eastern District of Pennsylvania 5 6 Proprietary AI Endorsements Some insurers did not wait for or follow ISO s 2004 additional insured endorsement changes. Instead, these insurers promulgated and/or filed their own proprietary additional insured (AI) endorsement forms. These proprietary AI endorsements vary greatly as to the scope or breadth of coverage provided to the additional insured. Many of the proprietary AI endorsements add exclusions or change CGL policy conditions or otherwise greatly limit coverage for the AI and in some cases the named insured. 6 7 Workshop W7 7

Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI EXTREMELY LIMITED COVERAGE APPROACH AI endorsement is intended only for liability imposed on the additional insured solely for the negligent acts of the named insured No coverage for any acts or failure to act of the additional insured Vicarious liability often NOT imposed on independent contractors and may provide no coverage to AI 7 8 Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI SOME ACTUAL WORDING IN AI ENDORSEMENTS: Vicarious Liability as used in this endorsement means liability that is imposed on the additional insured solely by virtue of the relationship with you and not due to any act or omission of the additional insured. 8 9 8

Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI SOME ACTUAL WORDING IN AI ENDORSEMENTS: Who is an Insured is amended to include as an insured the person or organization shown in the schedule, but only with respect to your liability which may be imputed to that person or organization. 9 10 Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI SOME ACTUAL WORDING IN AI ENDORSEMENTS: We have no duty to defend or indemnity an additional insured under this endorsement: a. For any liability due to the negligence attributable to any person or entity other than the Named Insured, the Named Insured s employees or subcontractors. Workshop W7 10 11 9

Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI SOME ACTUAL WORDING IN AI ENDORSEMENTS: That person or organization is an additional insured solely for liability due to your negligence specifically resulting from your work for the additional insured which is the subject of the written contract or written agreement. 12 11 Proprietary AI Endorsements VICARIOUS LIABILITY COVERAGE ONLY FOR AI PERCENTAGE INDEMNITY OR REIMBURSEMENT ONLY: We shall indemnify the Additional Insured for all covered damages proximately caused by the negligently completed work of the Named Insured. We shall further reimburse the Additional Insured for reasonable attorney s fees and necessary litigation costs. 12 13 10

Proprietary AI Endorsements VICARIOUS LIABILITY COVERAGE ONLY FOR AI PERCENTAGE INDEMNITY OR REIMBURSEMENT ONLY: Our duty to indemnify and to reimburse attorney s fees and litigation costs shall not exceed the product derived by multiplying the total dollar amount of liability for covered damages or attorney s fees by that percentage of legal liability attributable to the Named Insured for covered damages as determined by a trier-of-fact in an arbitration or trial. 14 13 Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI COURT S COMMENTARY: Travelers contends that, because the policy specifically excludes coverage for liability arising from independent acts or omissions of the additional insured, the language of the "Who is an Insured" paragraph effectively limits coverage to coverage for vicarious liability, i.e., liability imposed upon the general contractor as a result of the subcontractor's acts and not as a result of the general contractor's own acts or failure to act. in any event, vicarious liability of general contractors is not recognized in North Carolina. St. Paul Fire & Marine Ins. Co. v. Hanover Ins. Co., 187 F. Supp. 2d 584 (E.D.N.C. 2000) 14 15 Workshop W7 11

Proprietary AI Endorsements: VICARIOUS LIABILITY COVERAGE ONLY FOR AI COURT S COMMENTARY: Where the additional insured is held no more than vicariously liable for the acts of the named insured, the additional insured would have an action for indemnity against the primary wrongdoer. Thus, an endorsement that provides coverage only for the additional insured's vicarious liability may be illusory and provide no coverage at all. In this light, it is obvious that additional insureds expect more from an endorsement clause than mere protection from vicarious liability. Marathon Ashland Oil Pipe Line LLC v. Md. Cas. Co., 243 F.3d 1232 (10 th Cir. 2001) (applying Wyoming law) 15 16 Proprietary AI Endorsements: VICARIOUS LIABILITY BUT WITH COVERAGE FOR GENERAL SUPERVISION OF AI However, such person or organization is not an insured with respect to any: Bodily Injury or property damage that does not arise out of your negligence, other than any act or omission of that person or organization in connection with that person or organization s general supervision of Your Work. Similar to OCP coverage 16 17 12

Proprietary AI Endorsements: CONCURRENT NEGLIGENCE OF AI AND NI that such person(s) or organization(s) be added as an additional insured only with respect to bodily injury or property damage caused at least in part, by your negligence 18 17 Proprietary AI Endorsements: CONCURRENT NEGLIGENCE OF AI AND NI Can subcontractor s negligence be determined? Example: Employee of subcontractor (named insured) is injured at job site and brings complaint against general contractor (additional insured). Workshop W7 18 19 13

Proprietary AI Endorsements CONCURRENT NEGLIGENCE OF AI AND NI Can subcontractor s negligence be determined? Example: In many states, neither employee nor general contractor can bring tort claim against subcontractor prevented by WC exclusive remedy. 19 20 Proprietary AI Endorsements CONCURRENT NEGLIGENCE OF AI AND NI Can subcontractor s negligence be determined? Example: If named insured subcontractor cannot have its negligence judicially determined, does the AI have any coverage? 21 20 14

Proprietary AI Endorsements EMPLOYEE EXCLUSION ADDED BY AI ENDORSEMENT: No coverage is provided to an additional insured for damages because of bodily injury to an employee of the named insured 21 22 Proprietary AI Endorsements EMPLOYEE EXCLUSION ADDED BY AI ENDORSEMENT: This insurance does not apply to any bodily injury to: a. An employee of any insured Workshop W7 22 23 15

Proprietary AI Endorsements EMPLOYEE EXCLUSION ADDED BY AI ENDORSEMENT: A prime reason for requiring AI status is protection against suits by subcontractor s employees for employee s injuries on job site. Such exclusions may eviscerate AI coverage. Rarely disclosed or checked. 2423 Proprietary AI Endorsements: SELF-INSURED RETENTION HOW DOES AI APPLY? If this policy includes a self-insured retention, such endorsement will apply individually and separately to each person or entity who qualifies as an insured. 24 25 16

Proprietary AI Endorsements: SELF-INSURED RETENTION HOW DOES SIR APPLY TO AI? Our obligation under this Endorsement applies only to the payment of damages, defense fees and costs and all other Supplementary Payments in excess of any selfinsured retention. which self-insured retention shall be paid solely by each insured seeking coverage hereunder 25 26 Proprietary AI Endorsements: SIR SATISIFIED ONLY IF PAID BY NAMED INSURED $2,500 SIR. it is a condition precedent to our liability that you make actual payment of all damages and 'defense costs' for each 'occurrence' or offense, until you have paid 'self-insured retention' amounts and 'defense costs' equal to the [p]er [o]ccurence amount shown in the Schedule, subject to the provisions of A. 3. below, if applicable. 27 26 Workshop W7 17

Proprietary AI Endorsements SIR SATISIFIED ONLY IF PAID BY NAMED INSURED $2,500 SIR. Payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention. 27 28 Proprietary AI Endorsements A self-insured retention (SIR) provision in subcontractors' general liability insurance policies was not ambiguous. It plainly provided that the named insured had to pay the SIR. The insurer was not required to further clarify that only the named insured could pay. The reasonable expectations of developers who were additional insureds were irrelevant because the SIR endorsement was not ambiguous. Consequently, the insurer was not required to defend the developers in construction defect suits that did not name the subcontractors as defendants. Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4th 1466; 105 Cal. Rptr. 3d 200 (2010) 2829 18

Proprietary AI Endorsements: OTHER INSURANCE OFTEN CHANGED BY AI This insurance afforded hereby is excess over any other valid and collectible insurance. Where the Additional Insured has valid and collectible insurance in excess of a self-insured retention, this insurance is excess over the combined limits of such insurance and self-insured retention. NO option for primary or primary and noncontributory. 29 30 Proprietary AI Endorsements: OTHER INSURANCE OFTEN CHANGED BY AI This insurance is excess over any other insurance naming the additional insured as an insured whether, primary, excess or contingent or on any other basis unless a written agreement specifically requires this insurance be either primary or primary and non-contributory Then what? Will the AI have primary and noncontributory coverage? States only insurer will not be it does NOT state how it will apply if primary and noncontributory required!! 30 31 Workshop W7 19

Proprietary AI Endorsements: AI VERSUS CONTRACTUAL INDEMNIFICATION Contractual Risk Transfer A requirement to purchase additional insured coverage is NOT a transfer of risk but rather a transfer of the obligation to purchase insurance. Insurance remains the risk transfer mechanism. Contractual indemnification is a non-insurance risk transfer mechanism indemnitor assumes liability of the indemnitee. Tort liability is actually shifted. 31 32 Proprietary AI Endorsements: AI VERSUS CONTRACTUAL INDEMNIFICATION Contractual indemnity and additional insured are often confused they are not the same. Having the benefit of a hold harmless or indemnity agreement does NOT confer AI status on indemnitee. AI status does not protect AI against demand for contractual indemnification. Two separate and distinct remedies. 32 33 20

Proprietary AI Endorsements AI VERSUS CONTRACTUAL INDEMNIFICATION Too often insurers for general contractors or owners make the following demand when served with a complaint: demand contractual indemnification as an additional insured Consider: demand contractual indemnification pursuant to indemnity clause xx and also demand defense and indemnity as an additional insured 33 34 Proprietary AI Endorsements: AI VERSUS CONTRACTUAL INDEMNIFICATION Confusion extends to AI coverage: any person, organization, trust or estate that has obligated you by an insured contract to provide insurance that is afforded by this policy Workshop W7 34 35 21

Proprietary AI Endorsements: AI VERSUS CONTRACTUAL INDEMNIFICATION Insured Contract cannot impose an obligation to purchase insurance. f. That part of any other contract or agreement under which you have assumed the tort liability of another party to pay for bodily injury or property damage to a third person or organization. Assuming tort liability of another is not the equivalent of the obligation to purchase insurance for an AI. 36 35 Effect of Anti-Indemnity Statutes In 2003, construction anti-indemnity statutes changed in Montana (Montana Code Annotated 28-2-2111) and New Mexico (New Mexico Statutes Annotated 56-7-1.E) to extend to AI: A construction contract provision that requires one party to the contract to indemnify, hold harmless, insure caused by the negligence, recklessness or intentional misconduct of the other party is void as against the public policy of this state. (Montana) New Mexico has similar wording. 36 37 22

Effect of Anti-Indemnity Statutes Oregon: In sum, the text of ORS 30.140, and its historic evolution, strongly suggests that the statute prohibits not only 'direct' indemnity arrangements between parties to construction agreements but also 'additional insurance' arrangements by which one party is obligated to procure insurance for losses arising in whole or in part from the other's fault. Walsh Constr. Co. v. Mutual of Enumclaw, 104 P.3d 1146 (2005) 37 40 Effect of Anti-Indemnity Statutes Colorado (Colorado Rev. Statutes 13-21- 111.5) July 1, 2007 It is in the best interests of this state and its citizens and consumers that every construction business in the state is financially responsible under the tort liability system for losses that a business causes. Workshop W7 38 42 23

Effect of Anti-Indemnity Statutes California AI (January 1, 2009): 1. If an additional insured(s) is a builder, general contractor or contractor and 2. You have entered into a residential construction contract subject to the requirements of California Civil Code Section 2782(c); 39 45 Effect of Anti-Indemnity Statutes California AI (January 1, 2009): Then such builder or contractor is an additional insured but only to the extent the liability for the bodily injury or property damage is assumed in a residential construction contract with that part. Current California law renders unenforceable indemnity of builder or contractor for indemnitee s negligence in claims of construction defects. AI is limited to breadth of indemnity. See also SB 474. 40 46 24

Effect of Anti-Indemnity Statutes Texas HB 2093 (January 1, 2012): House Bill 2093 revises Texas anti-indemnity law. Agreements in construction contracts executed after January 1, 2012, are void and unenforceable to the extent that the agreement requires an indemnitor to indemnify an indemnitee for a claim caused by the negligence or fault of the indemnitee or any party under the control of the indemnitee. The bill contains an exception permitting an indemnitor to indemnify an indemnitee against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier. 41 47 Effect of Anti-Indemnity Statutes Texas HB 2093 (January 1, 2012): The bill also prohibits provisions in construction contracts which require the purchase of additional insured coverage to the extent that it provides coverage that is void under the bill. In addition, this bill requires consolidated insurance programs that provide general liability coverage to have completed operations coverage for a minimum of three (3) years. 42 48 Workshop W7 25

Effect of Anti-Indemnity Statutes Texas AI (January 1, 2012): However, if you have entered into a construction contract subject to Subchapter C of Chapter 151 of Subtitle C of Title 2 of the Texas Insurance Code with the additional insured, the insurance afforded to such person or organization only applies to the extent permitted by Subchapter C of Chapter 151 of Subtitle C of Title 2 of the Texas Insurance Code. In other words, AI is covered only as permitted by Texas law. 43 49 Effect of Anti-Indemnity Statutes California SB 474 (January 1, 2013): construction contracts that purport to insure or indemnify a general contractor, construction manager, or other subcontractor against liability are unenforceable to the extent the claims relate to the active negligence or willful misconduct of that general contractor, construction manager or other subcontractor To have substantial effect on all construction AI endorsements. 44 50 26

Effect of Anti-Indemnity Statutes Active Negligence Negligence resulting from an affirmative or positive act, such as driving through a barrier. (Black s Law Dictionary, 8 th edition) Passive Negligence Negligence resulting from a person s failure or omission in acting, such as failing to remove hazardous conditions from private property. (Black s Law Dictionary, 8 th edition) 45 51 On the Horizon ISO Proposed Changes April 2013 Three significant revisions to additional insured endorsements: 1. Insurance provided to additional insured only to the extent permitted by law applies to ALL ISO AI endorsements as of 4/1/2013. This is in response to states anti-indemnification statutes applicable to construction contracts that ALSO prohibit providing AI coverage for AI s own negligence. Workshop W7 46 52 27

On the Horizon ISO Proposed Changes April 2013 Three significant revisions to additional insured endorsements: 2. Insurance afforded to the additional insured will not be broader than that which the Named Insured is required by contract or agreement to provide applies to ALL ISO AI endorsements as of 4/1/2013. This change may increase uncertainty as to the coverage provided to the AI. Interpretation of required coverage is necessary. 47 54 On the Horizon ISO Proposed Changes April 2013 Three significant revisions to additional insured endorsements: 3. Limits available to AI will be lesser of policy limit or limit required by contract or agreement applies to ALL ISO AI endorsements as of 4/1/2013. This wording is common to many proprietary endorsements prevents AI from obtaining the benefit of greater limits than agreed upon. 48 56 28

On the Horizon ISO Proposed Changes April 2013 Other Insurance condition changed for AI: b. Excess Insurance removes by attachment of endorsement for Additional Insured s when AI is included on CGL of others so that AI s own policy is considered excess. If insurer provides AI coverage within the CGL policy (and not by endorsement) policy on which AI is named remains excess. No change in intent. 58 49 On the Horizon ISO Proposed Changes April 2013 ISO primary and noncontributory endorsement CG 20 01 04 13 now available. This ISO endorsement now allows contractor to obtain primary and noncontributory language, provided contract or agreement requires the insurance would be primary and would not seek any other insurance available to the additional insured. Does this actually resolve the issue? Presumes primary and noncontributory is equivalent of not seeking contribution. Terminology still not defined!! 50 60 Workshop W7 29

On the Horizon ISO Proposed Changes April 2013 New AI endorsement CG 20 38 04 12 Automatic or blanket AI coverage for those you are required to include as additional insured by written contract agreement; AND Does not require direct contract with upstream party as does CG 20 33 in order to provide AI status See Westfield Ins. Co. v. FCL Builders, Inc., 407 Ill. App.3d 730 (Ill. App. Ct. 1st Dist. 2011). 51 62 On the Horizon ISO Proposed Changes April 2013 Amendment of Insured Contract CG 24 26 04 13 No longer an insured contract to the extent assumption of tort liability is not permitted by law. Basic CGL definition of insured contract has NOT changed. This allows insurer to use anti-indemnity statute as a coverage defense as opposed to a liability defense!! 52 64 30

Closing Remarks 53 66 Workshop W7 31

Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 32