Editor's Note: Insurance Matters is an ongoing series of articles examining every type of insurance coverage a contractor needs.
One of the most commonly found clauses in any construction contract is one party's requirement to name another party as an additional insured. This typically will be found in agreements between a general contractor and subcontractor.
The insurance industry uses dozens of endorsements to meet the additional insured requirements of construction contracts. Standard ISO (Insurance Service Office) endorsements will adequately fulfill these requirements. But many proprietary endorsements drafted by insurance company attorneys will restrict coverage for the additional insured instead of expanding it.
In today's construction insurance environment, these endorsements are attached to certificates daily to meet construction firms' contractual obligations. Unless carefully analyzed and monitored, they could be a contractor's worst nightmare.
I recently performed multiple site audits for a large general contractor client who operates in the Southwest. The docket listed four locations within three states, and I reviewed more than two hundred subcontractor certificates and endorsements. Many certificates and endorsements followed the general contractor's contractual requirements, but an equal number did not. Those that failed the compliance review had hidden issues that could cause claim problems.
During my review, I gathered the most repetitive problems that arose. Use this list as a guide when conducting your own in-house audit.
Ongoing Operations
Basic additional insured protocols must be met, and the endorsement must provide coverage for ongoing operations. For example, a general contractor seeking additional insured benefits from a subcontractor will feel comfortable having coverage when the subcontractor delivers the work.
Be aware that recent contractual audits have discovered language within these endorsements that refine ongoing operations even further. The language establishes that coverage will end at the moment any part of the work has been completed, despite other work continued by the subcontractor. This is a logistical claim nightmare for the general contractor and subcontractor.
Action Items:
1. Check your contract insurance requirements for ISO language that specifies the ongoing operations endorsements, such as CG 20 10 07 04.
2. Ask contract administrators to review certificates and applicable additional insured endorsements (particularly those of a proprietary nature) for any language that may restrict coverage once any part of the work has been finished.
Completed Operations
The certificate should have a specific reference to completed operations coverage, and those endorsements must be attached. Many endorsements automatically provide ongoing operations coverage for the additional insured but exclude any coverage for completed operations.
Action Items:
1. Check your contract insurance requirements for ISO language that specifies the completed operations endorsements, such as CG 20 37 07 04.
2. Carefully review any restrictions on the definition of completed operations within the additional insured endorsement. Some will restrict this to a time limit specified within the contract or in two years (whichever happens first).
Liability Limits
In almost every proprietary endorsement I reviewed, I noticed language related to the liability limits required within the subcontract. The endorsement restricts any general contractor benefits to only those limits required by the contract. Again, this is a logistical claim problem even in the best conditions.
Action Item:
1. Review subcontractor insurance requirements (limits) annually in conjunction with the type of sublet work, the statutory venue where work is performed and the market conditions.
Many contractors have raised limits for critical subcontractors, such as concrete, drywall, roofing, steel erection, HVAC and electrical. The limits required of those subcontractors will be higher than limits of other contractors performing work at the site.
Sole Negligence
Many endorsements will exclude coverage for the additional insured's sole negligence. In this case, the benefit to the additional insured is limited to the liability assigned only by the contractor's ethical conduct.
My audit results showed that several endorsements will exclude additional insured benefits except for vicarious liability only.
Action Item:
1. Be careful about accepting any language that removes additional insured status except for claims involving vicarious liability, which is a tort doctrine that imposes liability to a third party for failure of another party when there is a special relationship between both parties, such as general contractor and subcontractor. In essence, this will mean that the GC must not have any negligence in the claim for additional insured benefits to be applied.
Residential Restrictions
Several endorsements have restrictions for additional insured benefits related to the type of work undertaken. This applies typically to residential work. The word residential is rarely defined in the endorsement but will attempt to restrict coverage for work unrelated to residential or habitational properties, such as apartments, senior living, dormitories, prisons, etc.
Action item:
1. If the work remotely connects to residential construction, it would be wise to address these insurance requirements contractually, even if the work is not the typical condo, single-family dwelling or townhouse.
Require each subcontractor to provide notification if their contractors general liability policy has any residential work restrictions (including the additional insured endorsement attached to their certificates).
Supervision and Inspection
Almost every proprietary endorsement reviewed in my audit contained some form of professional liability exclusion. This endorsement language eliminates additional insured coverage for typical professional acts, such as preparation or approval of maps, plans, specifications, drawings, etc.
However, the exclusion also restricts coverage for supervision and inspection--a typical duty of the general contractor. It is common in litigation for subcontractors to allege “lack of supervision, scheduling, inspection or planning the work” in an attempt to assign liability to a general contractor. While this may not be the drafters' intent, I am not convinced since a few endorsements with professional liability exclusions also contain means and methods exceptions to clarify the intent.
Employ the following steps when obtaining and reviewing certificates and endorsements:
Update all subcontracts and purchase orders to reflect these changes in additional insured endorsements. Many endorsements follow the subcontract requirements. Additional insured coverage will mirror the contract. Be specific about the requirements--both ongoing and completed operations should be required specifically by the endorsement name/number (for instance, CG 20 10 and CG 20 37).
Modify the subcontract's indemnity clause to survive the term of the contract itself, and include a time limit for completed operations.
Conduct training sessions with the contract staff. Be sure they understand that many endorsements will be confusing and may or may not be in compliance. Determining the available coverage pursuant to the contract can be a daunting process.
Use your broker or agent to assist in reviewing these certificates and endorsements on an annual basis.
Conduct an annual contract compliance seminar for all contract administrators.
