Clarification or Increased Confusion?

The Insurance Services Office’s (“ISO”) recent revisions to most of the standard additional insured endorsement forms have dramatically changed the landscape. These revisions have placed heightened emphasis on parties’ contractual language that, in many cases, will restrict a CGL insurer’s coverage obligations to additional insureds not to the scope of coverage as set forth in the applicable insurance contract, but rather to the specific terms of the named insured’s contracts with third parties.

In addition, the revised additional insured endorsements will narrow coverage to the scope permitted by state “anti-indemnity” statutes, requiring insurers and courts to embark on a complicated process that requires review of documents extrinsic to the insurance policy to make what was previously a relatively simple coverage determination. Indeed, these revisions will require a coverage analysis process that cuts against the recent trend of courts to rely on the insurance policy language to the exclusion of such extrinsic documents.

Depending on the language included in the underlying contract between the named insured and the additional insured (or in a contract between the named insured and a third party requiring that another party, usually an “upstream party,” be included as an additional insured), the 2013 ISO revisions can result in a significant narrowing of coverage for the additional insured. While the ISO revisions may provide the basis for increased insurer mischief in an area already fraught with litigation, careful drafting and scrutiny of contractual insurance requirements and indemnity provisions may significantly reduce the impact of the ISO changes on those whose commercial endeavors, and risk management protocols, rely on additional insured status under other entities’ commercial general liability insurance policies. This article discusses the three most significant changes to the most widely used ISO additional insured endorsements and, more importantly, provides suggestions for limiting the potential impact of these revisions when drafting or reviewing your commercial contracts in the future.

The Three Most Significant Changes

The ISO changes, effective as of April 2013, add further restrictions to the coverage provided by ISO’s standard additional insured endorsements. The apparent objective of these changes is to limit the scope of additional insureds’ coverage to that: (i) required by the underlying contract; and (ii) allowed by law, and nothing more. The three most important changes are inclusion of the following language in each endorsement:

• The insurance afforded to such additional insured only applies to the extent permitted by law;
• If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured;
• If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance: 1) Required by the contract or agreement; or 2) Available under the applicable Limits of Insurance shown in the Declarations; whichever is less.

Each of these revisions is discussed below, along with recommendations for limiting their impact on additional insured coverage under the CGL policies to which they are attached.

Additional Insured Coverage Is Provided Only “To the Extent Permitted by Law”

In recent years, a number of states have enacted “anti-indemnity” statutes, which are laws governing the scope of liability that one contracting party may legally transfer to another. These statutes frequently prohibit the transfer, through contractual indemnification clauses, of liability for damages caused by an indemnitee’s sole or concurrent negligence. More recently, some states have tightened these statutes so that they apply not only to contractual indemnity provisions, but also to contractual insurance requirements, including demands for additional insured status under the other contracting party’s insurance program.

By limiting coverage for an additional insured to the scope “permitted by law,” this 2013 ISO revision requires a coverage determination to be based in large part not on the policy language, but rather by review of applicable law. This creates significant uncertainty in the process, as many disputes over additional insured coverage will entail, as a first step, resolution of which state’s law will apply under the “permitted by law” language. Would it be the law of the state in which the named insured is located, the law of the state in which the work is performed, the law of the state in which the additional insured is located, or the law of the state in which the accident occurs? Such a determination, which focuses on extra- contractual language, will not assist in quick determinations of the rights an additional insured may have under a CGL policy.

This unclear language is bound to lead to disputes over its meaning, and will result in costly and time-consuming efforts to resolve additional insured coverage issues. This, in turn, will lead to more litigation, as more indemnitors will be faced with breach of contract claims from indemnitees who believed that they had negotiated and obtained additional insured coverage, only to find out after a claim has been made that such coverage was not afforded due to application of extra-contractual “anti-indemnity” statutes. Moreover, the broad language included in the ISO revisions is not limited to “anti-indemnity” statutes; consequently, it is conceivable that this limitation may also be applied to other legislative and public policy proscriptions.

In order to minimize the potential effect of this revision, parties are advised to carefully consider the scope of the indemnification provisions included in their contracts, making sure that they are no broader than that permitted under the law of each state whose law may potentially apply. While this has always been a prudent contract review endeavor, its importance has been greatly increased by the ISO revision limiting additional insured coverage to that “permitted by law.”

Coverage for the Additional Insured Will Be No Broader Than Required Under the Contract

The second ISO revision of significant import states that coverage for an additional insured will be no broader “than that which you are required by the contract or agreement to provide for such additional insured.” Thus, despite the actual wording of the additional insured endorsement, coverage provided to an additional insured will be no broader than that required in the underlying contract. For instance, if the underlying contract requires that a party be named as additional insured only with respect to the named insured’s negligence, but the express endorsement language would provide additional insured coverage under broader circumstances, the insurer will be entitled to rely on the underlying contract language to limit the additional insured coverage in a fashion greater than would be permitted if the policy language governed the determination. This requirement of reliance on documents outside of the four corners of the insurance policy to determine the scope of additional insured coverage will, no doubt, lead to significant disputes and further litigation of additional insured issues.

Fortunately, insertion of a key phrase in the underlying contracts and agreements will curtail unexpected ramifications of this revision. When reviewing contracts, make sure that language stating that “coverage for the additional insured shall be at least as broad as that afforded the first named insured” is included in the additional insured requirements section. Inclusion of this language will go a long way towards ensuring that there are no surprises in the scope of additional insured coverage once an accident occurs or a claim is made against the additional insured entity.

Limits of Additional Insured Coverage Will Be Limited to the Amounts Required by the Underlying Contract

The 2013 ISO additional insured endorsement revisions have created a third limitation on coverage. When such coverage is provided in compliance with a contractual insurance requirement, the limits of coverage will now be no more than the lesser of: (i) the amount of insurance required for the additional insured in the contract, or (ii) the policy’s applicable limit of insurance. This language permits an insurer to apply the monetary limits of additional insured coverage as set forth in the underlying contract, rather than the limits under the insurance contract it has issued. Requirements of a dollar amount of additional insured coverage are uncommon in commercial contracts, other than the specification of a total amount of liability coverage to be maintained by the named insured, and additional insured status under that insurance. If a named insured maintains high excess limits of insurance, and if the named insured’s indemnitee technically has insured status under the language of the policies providing those high excess limits, the additional insured will still not have access as an insured to those limits above whatever dollar amount of insurance the additional insured has required of the named insured in the contract between them.

Just as in the “no broader than” language discussed above, there is a relatively simple mechanism for avoiding unexpected application of this provision. This requires inclusion of language stating that “the limits of insurance provided to the additional insured shall be the greater of that set forth in the contract, or the full per occurrence limit set forth in the policy.” This language will cure the shortcomings of the ISO revision, at least from the policyholder perspective.

Conclusion

Many parties to commercial contracts fail to pay proper attention to the indemnity and insurance requirements provisions in their contracts. In the past, this has not adversely affected the scope of additional insured coverage under a commercial general liability insurance policy, as the scope of coverage, and the limits available, have been determined by reviewing the insurance contract language, and not the parties’ underlying contract. As a result of the 2013 ISO revisions to the additional insured endorsement forms, this is no longer the case. While court decisions interpreting these revised endorsements will hopefully provide some clarity, commercial entities would be well-served by ensuring that their indemnity and insurance requirements clauses not only reflect their mutual intent, but also contain the “magic” language set forth above.

Download: Perspectives on Insurance Recovery Newsletter – Summer 2013