RISKVUE ARCHIVE | FEATURE STORIES

The Perils Of Additional Insured Status

By Robert D. Chesler, Esq.

Additional insured status is crucial for many companies. While the construction industry springs to mind, other examples are numerous: for example, landlords are additional insureds on tenants’ policies (or vice versa), and distributors and retailers are additional insureds on manufacturers’ policies. Surprisingly, the exact meaning of “additional insured” is very uncertain, and court decisions differ dramatically when spelling out the rights conferred by additional insured status. The insurance industry now intends to try to resolve this confusion — at the expense of the insured.

The major issue that divides insurers and insureds is the scope of the protection awarded by additional insured status. The current additional insured form that is most widely used states:

Section II — Who Is An Insured is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured. (emphasis added)

Take the example of the contractor insured under the subcontractor’s policy. The insurance industry position is that this language only narrowly protects the contractor if it is vicariously liable for the negligence of the subcontractor. The contractor will argue that the provision applies much more broadly, to any liability arising at the job site. More often than not, courts have agreed with the contractor.

Further, many different forms of additional insured endorsements exist, and a seemingly minor difference in wording can have a dispositive impact. Also, insurance companies and brokers can devise individual wording for an insured or project if necessary. The result of the variety of forms and different court decisions is confusion on what it means to be an additional insured.

As a result, the insurance industry has prepared a new endorsement that states:

Section II — Who Is An Insured is amended to include as an additional insured the person or organization shown in the Schedule, 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 at the location designated above.

The explicit purpose of this endorsement is to limit the insurer’s responsibility to the additional insured to its vicarious liability based, in whole or in part, on the named insured’s acts or omissions. This has an immediate impact on the party that believed it had protection for any liability arising at the project because it was an additional insured. For example, if a subcontractor’s employee is injured, that employee’s right against the subcontractor is limited to worker’s compensation. However, the employee can sue the contractor directly by alleging that the injury was caused by the contractor’s negligent maintenance of the site. That contractor may now find itself uninsured. Alternatively, if it has its own coverage that will step in, the result will undoubtedly be a premium increase.

You can take action — tell your insurance broker or consultant to fight like hell. The insurance industry often floats proposed coverage restrictions, only to withdraw them in the face of opposition from the insurance community. Every company that expects protection because of its additional insured status must have its broker or attorney review each additional insured endorsement and advise as to the scope of the protection that it provides. 

ABOUT THE AUTHOR

Robert D. Chesler, Esq. is Chair of the Insurance Law Practice Group of Lowenstein Sandler PC in Roseland, NJ. If you need additional information or have any questions about this article, please contact the author at 973-597-2328 or at rchesler@lowenstein.com, or contact Steven E. Brawer, Chair of the Construction Law Practice Group, at 973-597-2412 or at sbrawer@lowenstein.com. This article originally appeared in the June 2004 issue of Lowenstein Sandler PC’s Insurance and Construction Alert.

riskVue | The webzine for risk management professionals
August 2004