The 2004 ISO Additional Insured Endorsement Revisions Jack P. Gibson, CPCU, CLU, ARM 1 W. Jeffrey Woodward, CPCU 2 In filings announced in December 2003, Insurance Services Office, Inc. (ISO) introduced revised versions of the most widely written standard additional insured endorsements, including the CG 20 10 endorsement used to add an additional insured to contractor s commercial general liability (CGL) policies. The December 2003 filings: (1) eliminated from several standard endorsements the reference to liability arising out of operations performed for the additional insured by the named insured; (2) specified instead that coverage applied only to injury or damage caused in whole or in part by acts or omissions of the named insured; and (3) specifically excluded injury or damage arising out of the sole negligence of the additional insured. ISO subsequently withdrew those original December 2003 filings and re-filed the revised endorsements in almost identical form, but with one substantive change. In the new March 2004 filing, the specific sole negligence exclusionary language was deleted from the newest version of the endorsements. The revised endorsements went into use in July of 2004. The previous versions of the CGL endorsements affected by the ISO filing 3 applied coverage to liability of the additional insured that arises out of the named insured s operations. That arising out of language has been consistently interpreted by the courts as extending even to the additional insured s liability for its own sole negligence as long as the injury or damage is causally connected in some way to the business relationship between the named and the additional insured (for instance, the named insured contractor s work for the additional insured, or the named insured s use under a lease of the additional insured s equipment). 4 In its filing, ISO contended that this majority view of the courts is contrary to the intended purpose of the endorsements. It therefore eliminated the phrase arising out of, and substituted the phrase caused, in whole or in part, by in the affected CGL endorsements. The new language created by this change is shown in Figure 1, with the current language of CG 20 10 and the revised language side by side. 1
Figure 1 Arising Out Of versus Caused By CG 20 10, Current Language but only with respect to liability arising out of your ongoing operations performed for that insured. CG 20 10, New Language but only with respect to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by: 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above. Effect of These Changes The first question raised by the ISO revision is the practical difference between liability arising out of certain operations, on the one hand, and liability for injury or damage that is caused by acts or omissions in the performance of certain operations, on the other. There is no consensus within the insurance industry, or among the nation s courts, as to the difference between loss that arises out of a particular set of circumstances and loss that is caused by the same circumstances. Arising out of, as has already been noted, is customarily given a broad interpretation by the courts when it is used in standard additional insured endorsements. But any language used to provide coverage as opposed to excluding it must be given the broadest possible meaning in an insurance policy. Under that rule, caused by in the revised endorsements will have to be interpreted to include as wide a range of causal connections as the words can reasonably be understood to convey, just as the phrase arising out of has been broadly interpreted in the current endorsements. The First Circuit has asserted that arising out of is much broader than caused by ; the former phrase is considered synonymous with originate or come into being. 5 On the other hand, one Massachusetts appeals court decision ruled that an indemnity agreement requiring a subcontractor to indemnify the general contractor for all claims arising out of or in consequence of the performance of the subcontractor s work did not violate the state s anti-indemnity law. 6 That law permits an indemnitor to hold an indemnitee harmless only with respect to harm caused by the indemnitor. The court found that there is no meaningful distinction between the phrases caused by and arising out of or in consequence of. Id. at 637. It is arguable, therefore, whether a simple substitution of caused by for arising out of in standard additional insured endorsements would narrow the scope of the endorsement s coverage significantly. But the ISO revision goes beyond that simple substitution. Injury or damage under the revised endorsement must be 2
caused by not just the named insured s ongoing operations (as in the current endorsements), but by the named insured s acts or omissions in the performance of those operations. Absent any fault of the named insured, in other words, there will be no coverage for the additional insured. The new ISO language is equivalent in this respect to nonstandard additional insured language which was the subject of litigation in Consolidation Coal Co. v. Liberty Mutual Insurance Co., 406 F.Supp. 1292 (W.D.Pa. 1976). In that case, an employee of a trucking company hired to haul coal for a coal company was injured when his truck was hit by a train operated by the coal company. As an additional insured under the trucking company s liability policy, the coal company sought defense of the resulting suit brought against it by the injured truck driver. The additional insured endorsement in question provided coverage to the coal company but only with respect to acts or omissions of the named insured in connection with the named insured s operations on [the additional insured s] premises. Id. at 1294. The additional insured coal company maintained that its additional insured status extended to its own negligence, as a body of case law interpreting standard additional insured endorsements had held. The district court disagreed: To interpret the endorsement in the manner proposed by [the additional insured] would require the court to ignore the but only phrase and treat the endorsement as falling within the arising out of language of the cases cited by [the additional insured]. This would be an inappropriate construction. The most likely meaning of the subject phrase is that it attempts to limit coverage to those instances where the acts or omissions the negligence of [the named insured] leads to [the additional insured s] liability. Id. at 1300 The language of the additional insured endorsement in Consolidation Coal has been cited by other courts including the First Circuit in the Merchants Insurance decision cited above as an example of restrictive language that an insurance company could use if it intended to eliminate coverage for the additional insured s sole negligence. As an example, take the following hypothetical claim from the analysis of endorsement CG 20 10 in one of IRMI s reference manuals, Commercial Liability Insurance: Owncorp contracts with D. Pendable Contractors, a paving company, to resurface the parking lot of Owncorp s office building and manufacturing plant. While part of the lot is closed off for the resurfacing work, Owncorp security guards are assigned to redirect visitors and employees to park in a vacant lot adjacent to Owncorp s premises. The guards, inexperienced in directing traffic, negligently contribute to several minor collisions, and the drivers involved sue Owncorp. While the operations of D. Pendable were not connected in any direct causal way with the collision damage to the vehicles, it nonetheless can be argued that the damage (and Owncorp s resulting liability) arose out of D. Pendable s operations, if only in the sense that the collisions would not have occurred if D. Pendable s resurfacing work had not made the regular parking lot inaccessible. 7 3
Under an additional insured endorsement like the older versions of CG 20 10 that applies to liability arising out of [the named insured contractor s] ongoing operations, Owncorp would have coverage for the claims described above. But under an additional insured endorsement that applies only when injury or damage is caused, in whole or in part, by [the named insured contractor s] act or omission, there would arguably be no coverage for the claims against Owncorp. An area of concern to many risk management professionals is how insurers will apply the new endorsement to third party over actions. These involve actions by injured employees of named insureds, such as subcontractors, against additional insureds, such as general contractors and owners. These actions are quite common in many states, often alleging failure to maintain a safe workplace, and a general contractor with additional insured status in the subcontractor s CGL policy has historically been covered for these claims. Since the employee is barred by the worker s compensation statute from bringing a suit against his own employer, these suits will generally not mention the employer, alleging only negligence against the general contractor additional insured. The concern is that, since the suit does not allege any degree of fault against the named insured employer, CGL insurers will take the position that the employee s injuries were not caused, in whole or in part, by the subcontractor (named insured). Of course, the subcontractor will usually have been partially at fault even though the suit does not contain allegations against it. State laws vary in the obligation they place on insurers to look beyond the allegations of a suit in determining whether a duty to defend exists. The only allegations that would fall clearly outside the coverage provisions of the new additional insured endorsements, however, would be explicit allegations of the additional insured s sole fault. In most instances, insurers should look beyond the lawsuit to determine if their insured s acts or omissions may have contributed to the bodily injury and whether they should defend and indemnify on behalf of the additional insured. A hard line approach on this by insurers will likely result in a new line of coverage cases in which additional insureds are attempting to prove some degree of culpability against their subcontractors to obtain coverage under the subcontractors CGL policies. Withdrawal of CG 20 09 The ISO filing also withdrew from use endorsement CG 20 09, Additional Insured Owners, Lessees or Contractors Scheduled Person or Organization (For Use When Contractual Liability Coverage Is Not Provided to You in This Policy). This endorsement has had a confusing history. It was intended solely for use in the absence of contractual liability insurance as a limited alternative to an insured indemnity agreement between the named insured contractor (or subcontractor) and a project owner (or general contractor). But it was sometimes used instead as an alternative to CG 20 10, in the mistaken belief that its coverage was actually broader than the other endorsement. Since the circumstances prescribed for use of CG 20 09 a contractor s CGL policy that does not provide contractual liability insurance are virtually nonexistent, ISO withdrew it from the active forms portfolio. 4
Limited Contractual Liability Coverage Option Regardless of new restrictions on the scope of liability that is insurable under an additional insured endorsement, the other major form of insurable risk transfer the indemnity agreement remains the subject of very broad CGL coverage. As long as the risk is assumed in an insured contract and involves injury or damage of a kind covered by the CGL policy, the insured has coverage for that contractually assumed liability even if it is liability attributable to the sole negligence of the indemnitee. Thus, while the counterpart of broad form indemnity protection will no longer be provided by additional insured status under the new endorsements, an additional insured will still have the benefit of the named insured s contractual liability coverage, which applies to broad form indemnification just as readily as it does to intermediate or limited form indemnity agreements. 8 Under another change introduced with the recent ISO filings, however, the broad contractual liability coverage of the CGL policy itself will be subject to significant limitation at the insurer s option. A new endorsement, CG 24 26 Amendment of Insured Contract Definition, imposes a new restriction on the most important category of insured contracts. Category (f) of the insured contract definition provides contractual liability coverage with respect to hold harmless agreements in contracts pertaining to the named insured s business (e.g., construction contracts) in which the named insured assume[s] the tort liability of another party to pay for bodily injury or property damage to a third person or organization. Significant in this definition is the absence of any reference to the scope of liability being transferred. It is that absence that makes the CGL policy s contractual liability coverage so broad broad enough to apply even to indemnity agreements in which the insured assumes liability for the sole negligence of the indemnitee. New endorsement CG 24 26 introduces into the insured contract definition a sole negligence exclusion equivalent to the one added to the standard additional insured endorsements discussed above. The revised definition refers to hold harmless agreements in contracts pertaining to the named insured s business, in which the named insured assume[s] the tort liability of another party to pay for bodily injury or property damage to a third person or organization, provided the bodily injury or property damage is caused, in whole or in part, by you or by those acting on your behalf. (Emphasis added.) The italicized words in the quoted excerpt are new. They are intended to eliminate coverage for a CGL insured s assumption, in an indemnity agreement, of liability arising out of the other party s sole negligence. When it filed the new endorsement, ISO explained that it wants to make it possible for insurers to create parity between the scope of risk transfer possible in (1) a hold harmless agreement, and (2) additional insured status under the indemnitor s CGL policy. In states 5
that permit broad form indemnification, an indemnitee even though it will no longer have coverage as an additional insured under the indemnitor s policy could still enforce the indemnity agreement and have damages awarded for its sole negligence paid by the indemnitor s CGL insurer. In such states, ISO offers CG 24 26 as an underwriting tool to close this gap. Questions about Limited Contractual Liability Coverage Endorsement CG 24 26 raises at least two significant questions: (1) Under what circumstances will the endorsement be attached to CGL policies? (2) How will the endorsement affect enforceability of broad form indemnity agreements when the claim against the indemnitee alleges only contributory negligence? Use of the Endorsement ISO links CG 24 26 to the newly filed additional insured endorsements not just by filing them together but by explaining them as components of a single overall revision of the CGL policy s response to contractual risk transfer. For example, ISO characterizes CG 24 26 as an endorsement that will amend the definition of an insured contract in the CGL to remove coverage for an additional insured s sole negligence. That is true, but only because the endorsement will remove coverage for any indemnitee s sole negligence whether the indemnitee is an additional insured under the policy or not. ISO has filed a new Commercial Lines Manual rule governing the use of CG 24 26 Rule 36.C.22. The rule does not limit use of the endorsement to policies under which the named insured s indemnitee also has additional insured status. It merely states that the endorsement may be attached in conjunction with an additional insured endorsement, when applicable wording which suggests that CG 24 26 is intended for use at the insurer s discretion, independent of any additional insured endorsements that may also be attached to the policy. The prospect of CGL policies that will not respond to the insured s obligation under a broad form indemnity agreement is a troubling one. Except for construction contracts in most states, where anti-indemnity statutes prohibit the transfer of sole-negligence liability, broad form indemnification is enforceable under a variety of circumstances, usually subject to certain conditions regarding the way in which the agreement is worded. This represents a significant exposure for many businesses, one that general liability policies have traditionally addressed, and have been specifically drafted to insure. Under the 1973 CGL program, blanket contractual liability coverage could be added to the policy in either of two forms: (1) limited, with a specific exclusion of the liability of the indemnitee resulting from his sole negligence; or (2) broad, with no such exclusion. When the equivalent of broad form contractual liability coverage based on liability assumed in insured contracts was written into the current CGL coverage form, the 6
language used was as inclusive as that of the old blanket contractual broad form option. The insurance industry demonstrably knows how to cover and how to exclude coverage of sole-negligence indemnity obligations. Additional insured endorsements may, as ISO asserts, never have been intended to cover another party s sole negligence. But the same cannot be said of CGL contractual liability coverage. CG 24 26 will eliminate an important and firmly established component of the protection that has always been available to CGL insureds. Broad Form Indemnity as an Insured Contract The new limitation imposed by CG 24 26 on what qualifies as an insured contract applies in an unusual way. A wide range of business contract indemnity agreements remain insured contracts as long as the injury or damage for which indemnity is actually sought was caused at least in part by the named insured. In other words, an indemnity agreement s status as an insured contract under the endorsement depends on the circumstances of the liability being alleged against the indemnitee. The new definition does not eliminate broad form indemnity agreements as insured contracts except when no act or omission of the named insured has been at least a partial cause of the injury or damage for which the indemnitee is allegedly liable. To illustrate this point, assume that Smith Corporation enters into a contract with Jones Corporation to provide a service to Jones and agrees to hold Jones harmless for any liability in connection with the contracted service even when the liability arises out of Jones s sole negligence. A bodily injury claim is subsequently brought against Jones, under circumstances that would trigger the indemnity agreement with Smith, and Jones is found to have been solely negligent in causing the bodily injury. Smith s CGL policy has endorsement CG 24 26 attached. Given this particular set of facts, the indemnity agreement between Smith and Jones is not an insured contract. Smith has assumed the tort liability of another party to pay for bodily injury or property damage to a third person or organization, as required by the insured contract definition. But the bodily injury for which Smith has assumed this obligation was not caused, in whole or in part, by [Smith] a further requirement of CG 24 26. Smith s obligation to Jones will not be covered by Smith s endorsed CGL. Now assume that, some time later, Jones again incurs liability for bodily injury in connection with the service being provided under the contract with Smith. This time, the bodily injury was the result of Smith s and Jones s joint negligence. The hold harmless agreement that did not qualify as an insured contract in the previous example does qualify given the particular set of facts in this second example, since the indemnity obligation this time has been triggered by an injury caused at least in part by the named insured s act or omission. Endorsement CG 24 26 thus does not eliminate broad form indemnity agreements from insured contract status altogether. It only does so when those agreements are called upon to provide the full extent of their indemnification, that is, to respond to claims involving the indemnitee s own sole negligence. CGL insureds will not be compelled by 7
the use of CG 24 26 to renegotiate existing broad form indemnity agreements simply in order to have any contractual liability coverage at all, as they would if broad form indemnity were categorically removed from the insured contract definition. Obviously, however, these insureds will have to be aware that their policies no longer respond to sole-negligence indemnity obligations and take whatever risk management steps seem appropriate. Conclusion The revised CG 20 10 additional insured endorsement and new contractual liability coverage limitation endorsement will have a substantial impact on risk transfer in connection with construction contracts. There will likely be substantial pushback from risk transferors seeking to obtain the broadest scope of protections from their contractors. There is a history of this in the construction industry where risk transferors continued to require the 1985 version of CG 20 10 after it was replaced with versions that excluded completed operations coverage. Many insurers succumbed to demands for the 1985 endorsement up until the hard market hit in 2001, but it is not commonly used today. It will be interesting to see how well-accepted this new approach will be. Lastly, it is important to note that the revision does not affect many additional insured endorsements. There are thirty-two additional insured endorsements in the ISO forms portfolio, and some of them still contain the arising out of language. The most notable of these is used quite frequently to comply with additional insured requirements in leases: Managers or Lessors of Premises (CG 20 11). Sources of More Information on Additional Insured Status from IRMI www.irmi.com The Additional Insured Book The fifth edition of this best-selling book was published in the summer of 2004. Contractual Risk Transfer A two-volume reference set covering holdharmless and indemnity provisions, contractual liability insurance, additional insured endorsements, and much more. Commercial Liability Insurance A three-volume reference set covering all aspects of CGL and umbrella insurance. Joe Postel s Additional Insured column on The IRMI web site provides free access to IRMI.com more than 600 articles. Look for this column in the Insurance Law division of the Expert Commentary section. 8
1 Jack Gibson is president of International Risk Management Institute, Inc. IRMI is the premier publisher of risk management and property-casualty insurance reference publications, and he is the co-author of 11 of the titles in the IRMI library. Included among these works are The Additional Insured Book, Contractual Risk Transfer, and Construction Risk Management. In addition to his management duties, he currently serves as editor of The Risk Report and editor-in-chief of IRMI.com. 2 Jeff Woodward is a senior research analyst with IRMI. He is the principal research analyst for Commercial Liability Insurance and Pollution Coverage Issues and serves as co-editor and coauthor of Contractual Risk Transfer. He is also the editor of the fourth edition and soon to be released fifth edition of The Additional Insured Book. Mr. Woodward contributes articles on liability risk and insurance to the IRMI Insights section of IRMI.com. 3 The revised endorsements included CG 20 07 (design professionals), CG 20 10 (owners, lessees, contractors as scheduled), CG 20 26 (miscellaneous scheduled persons or organizations), CG 20 28 (equipment lessors), CG 20 32 (design professionals hired by others), CG 20 33 and G 20 34 (automatic coverage for owners, lessees, contractors, equipment lessors as required in contracts), CG 20 37 (completed operations) 4 See, e.g., Continental Heller Corp. v. St. Paul Fire & Marine Ins. Co., 54 Cal. Rptr. 2d 621 (Cal. 1996); Merchants Ins. Co. of New Hampshire v. USF& G, 143 F.3d 5 (1st Cir. 1998); McIntosh v. Scottsdale Ins. Co., 992 F.2d 251 (10th Cir. 1993), Casualty Ins. Co. v. Northbrook Property & Casualty Ins. Co., 501 N.E.2d 812 (Ill. 1986); and Dayton Beach Park No. 1 Corp. v. National Union Fire Ins. Co., 586 N.E.2d 62 (N.Y. 1991). 5 Merchants Ins. Co. of New Hampshire v. USF&F, 143 F.3d 5 (1 st Cir. 1998) (quoting, New England Mut. Life Ins. Co. v. Liberty Mut. Ins. Co., 667 N.E.2d 295, 298 (Mass.App.Ct. 1996)). 6 M. DeMatteo Constr. Co. v. A.C. Dellovade, Inc., 652 N.E.2d 635, 636-37 (Mass.App.Ct. 1995). 7 Commercial Liability Insurance, p. VI.H.13, International Risk Management Institute, Inc., www.irmi.com, Dallas, TX. 8 In practical terms, insurable indemnity transfers are limited not by any language of the CGL policy, but rather by state anti-indemnity statutes and by case law defining the conditions under which an indemnitee may legally transfer its own negligence to the indemnitor. 9