A trend, and now common practice, in the construction industry is for an owner or contractor to require contractors and subcontractors to name it as an additional insured (“AI”) on their commercial general liability (“CGL”) insurance policies. The goal is to shift risk to those performing the work by having a subcontractor’s insurance policy, rather than a contractor’s own policy, pay for defense costs and satisfy a claim in the event of a loss. The process typically occurs through a contractual requirement that a subcontractor name a contractor as an AI and produce a certificate of insurance showing it was named as an AI on the policy before permitting the subcontractor to begin work.
Contractors all too often assume that because they have a certificate of insurance listing them as an AI, some of the project risk shifted to subcontractors, but the devil is in the details. Construction lawyers defending claims through the use of AI status regularly see carriers use technicalities to deny coverage to contractors who thought they were additional insureds. The denial of AI coverage harms a contractor in relation to a particular claim, but it also means the contractor paid the subcontractor for the cost of AI status and does not get the benefit of what it paid for. Based on experience wrangling with insurers over AI coverage, the following tips are designed to help contractors ensure the effort and money expended to have subcontractors name them as an AI actually results in AI coverage when claims arise.
- Document Retention or: “Keep Every Document!”
An overarching rule for disputes arising from construction projects is that the party with the documents usually comes out ahead. For AI status, the same rule applies and takes on greater importance.
There are two ways to be added as an AI on a CGL policy. The first is a policy endorsement known as a blanket AI endorsement which does not specifically name any party as an AI and instead “automatically” provides coverage for a particular category of entities, typically those entities the policyholder is required in a written agreement to name as an AI. The second method is an endorsement that specifically lists a contractor as an AI. Subcontractors routinely use blanket endorsements due to the ease of having one endorsement, and insurers too prefer blanket endorsements because if a contractor does not retain the contract requiring it be named as an AI, the insurer can deny AI coverage on the basis that there is no proof of an agreement requiring the contractor be named as an AI.
In addition to retaining contracts and endorsements, contractors need to retain subcontractors’ certificates of insurance so the contractor’s lawyers know which insurers to demand coverage from when a claim arises. Contractors also need to retain purchase orders and payment records so the insurer cannot deny coverage on the basis that there is no proof the subcontractor worked on the project or that its scope of work included the work at issue. Finally, contractors should have a policy of retaining these documents indefinitely or at least as long as the law allows claims to be made because claims often arise many years after project completion. Electronic retention of these documents is sufficient, and with the recent decline in electronic storage costs, this should alleviate storage concerns.
- Require AI Status in Contracts with Subcontractors
A contractor’s contracts should clearly require its subcontractors to name it as an AI on CGL policies. The requirement should be in the body of the contract, not set out in communications or orally, to meet the requirement for coverage under a blanket endorsement. While contractors can use an addendum incorporated into a contract, addendums can easily be lost or an employee can forget to prepare one and attach it to the contract. The best practice is to include the AI requirement in the body of the contract. Contractors use addendums to allow for varying the insurance requirements for different types of subcontractors, but a more effective way to accommodate variation is to put default insurance requirements language in the contract, include alternate provisions with check boxes to indicate when one is selected, and provide that the default requirements apply unless the contractor selected one of the other provisions.
- Require Ongoing Operations and Completed Operations Coverage
CGL insurance policies generally provide two types of coverage—“ongoing operations” and “products-completed operations” coverage—and a contractor should ensure it gets both by requiring subcontractors to make it an AI for both. Ongoing operations coverage generally insures against claims occurring while the insured is still performing work at the site. An example of ongoing operations coverage as an AI would be where a subcontractor’s employee drops a hammer which falls and injures a passerby and the passerby sues the contractor. Products-completed operations coverage generally insures against claims occurring after the insured completes work at the site. An example of products-completed operations coverage as an AI would be where a subcontractor’s fails to secure a railing, a person leans against the railing two years after completion of construction, the railing collapses, the person is injured, and the person sues the contractor.
A failure to obtain one of the two types of coverage renders the contractor’s status as an AI worthless for a whole class of potential claims. If a contractor is going to require its subcontractors to provide it coverage as an AI, the contractor should take the small additional step of requiring both types of CGL coverage by having its contracts specifically require subcontractors to name it as an AI for both ongoing operations and products-completed operations coverage.
- Require Specific Policy Endorsements
Insurers generally use standard AI endorsements drafted by the Insurance Services Office (“ISO”), the body that drafts form policy language for insurers. However, there are different ISO endorsements with subtle, but legally significant differences that can drastically change the amount of available coverage. In addition, some insurers use their own atypical endorsements that can create problems for contractors. To ensure contractors get complete AI coverage, contracts should require a specific AI endorsement. Generally, the 1985 AI endorsement, form CG 20 10 11 85, is the preferred form because it covers any claim “arising out of” the subcontractor’s work, and courts have construed that language as covering claims resulting solely from the contractor’s negligence in addition to claims resulting from the subcontractor’s negligence. More recent AI endorsement forms contain more restrictive language.
One option is to require a subcontractor to provide AI coverage through a CG 20 10 11 85 AI endorsement. However, because insurers may resist using that older form, alternatives are to use contract language requiring the CG 20 10 11 85 form or an equivalent form or to use contract language requiring AI coverage for any claim “arising out of” the subcontractor’s work.
- Beware of Exclusions
Contractors’ efforts to obtain protection through AI coverage can also be hampered by exclusions in the subcontractor’s policy. An exclusion is a provision in a policy excluding a type of claim from the policy’s coverage. Exclusions can either be specific to and set out in an AI endorsement or contained within the main CGL policy. While lawyers can argue that exclusions in the policy do not apply to an AI, the best policy is to avoid being impacted by exclusions through contractual language providing that the subcontractor’s policy cannot contain any of the more common, problematic exclusions.
For example, some policies contain an exclusion for claims resulting from soil subsidence. To ensure the strongest chance of AI coverage, a contractor should require that subcontractors’ policies, especially policies for subcontractors responsible for site preparation or a foundation, do not have such an exclusion in their policies. Another example is the exclusion for multi-family residential construction. If a contractor builds condominiums, it should ensure its subcontractors’ policies do not contain that exclusion. Other potentially problematic exclusions address mold and mildew, professional services, and work performed by a subcontractor’s subcontractors, among others.
- Require A Subcontractor to Provide Coverage in the Full Amount of the Policy Limits
The newest 2013 AI endorsements limit the coverage the insurer will provide to an AI to the lesser of the amount of coverage the contract requires the subcontractor to provide or the policy limit. The result is that if a contract requires the subcontractor to provide $2 million in AI coverage, the subcontractor obtains $5 million in coverage, and a claim occurs, the insurer could assert the contractor is not entitled to any more than $2 million in coverage as an AI despite the fact that there is an additional $3 million in coverage available.
To get the maximum possible AI coverage, contractors should use contractual language to prevent AI insurers from limiting the contractor’s AI coverage in this way. An example might be requiring a subcontractor to obtain a policy with a minimum of $5 million in coverage and name the contractor as an AI on the policy entitled to coverage in the full amount of the policy limits.
- Require Primary AI Coverage with Contractor’s Insurance as Excess Coverage
Because contractors sometimes procure their own insurance policies on which they are named insureds and then obtain additional coverage by being named as an AI on subcontractors’ policies, AI insurers often contest which policy has to cover a loss first, i.e., which policy provides primary coverage and which is excess. For example, a contractor could procure its own policy with a $5 million policy limit and be named as an AI on a subcontractor’s policy with a $5 million limit. If a $1 million claim arises and the contractor’s policy is primary, the contractor’s policy must cover the entire loss, and the AI policy does not contribute. However, if a $1 million claim arises and the contractor’s policy is excess, the AI policy covers the entire loss, and the contractor’s policy remains untouched.
The best outcome for a contractor is to have subcontractors’ policies provide primary coverage and only have to seek coverage from the contractor’s personal policy if the AI coverage is exhausted. The benefits to a contractor are that its personal policy limits are preserved for potential future claims. To ensure AI coverage is primary, contractors should include contractual language requiring a subcontractor to provide AI coverage that is primary and specifying that the contractor’s insurance is secondary and excess coverage.
- Require Subcontractors to Provide Coverage for A Period of Years After Project Completion
CGL insurance generally exists through a policy with a one year coverage period and the insured renews the policy or obtains a new policy every year. However, construction projects can last for more than one year, and claims from a project can occur many years after project completion. A problem arises if a subcontractor provides AI coverage for the first year of the project but fails to continue to do so after that year and a claim occurs in the second year of the project. Contracts should include specific language requiring a subcontractor to name the contractor as an AI for every policy year it performs work for the contractor and ideally for as many years after project completion as the law allows claims to be made.
- Do Not Rely on Certificates of Insurance and Require a Complete Copy of the Subcontractor’s Policy with All Endorsements
Too many contractors obtain a certificate of insurance from a subcontractor stating the contractor is an AI on a policy and assume the certificate means they are an AI However, contractors cannot rely on certificates of insurance.
Certificates of insurance almost always state they do not confer coverage on any party and only provide information. With some exceptions, the common result is that certificates of insurance do not establish AI coverage. Even if reliable, a certificate of insurance does not indicate whether a policy provides AI coverage in the form required by the contract between the contractor and subcontractor—ongoing and completed operations coverage, a specific policy endorsement, coverage in the amount of the full policy limits, etc.
The only way to ensure a subcontractor named a contractor as an AI on a policy meeting the contractual requirements for AI coverage is to obtain a copy of the policy and endorsements and review them to ensure compliance. Additionally, if the contract requires AI coverage for multiple years or for years after project completion, require the subcontractor to provide a copy of each new policy for the duration of that period.
- Have a Risk Manager Tasked with Ensuring Compliance with the AI Program
If a contractor follows all of the tips provided thus far, the contractor would have a strong AI coverage program on paper, but unless the contractor enforces its requirements in practice, the program is nothing more than words on paper. To create a strong program that effectively shifts risk, contractors must task an employee or employees with understanding the details of its AI coverage program, ensuring subcontractors comply with the program, and correcting any instances of noncompliance. While it may seem like a significant investment, contractors should keep in mind that ensuring effective AI coverage can save the contractor significant amounts in the event of litigation.