All Additional Insureds Aren’t the Same

For at least the past couple of decades, it seems that in just about every contract, the upstream party wants to be an additional insured (AI) on the downstream party’s insurance. Most commonly, the request is for AI status under that entity’s commercial general liability (CGL) policy, though status on auto, umbrella and even (believe it or not) workers’ compensation insurance is often requested.

In the case of CGL coverage, additional insured status is most often granted via endorsement, though sometimes automatic coverage is included in policies, especially businessowners forms, if certain conditions are met. In the more typical case of granting AI status by endorsement on a CGL policy, Insurance Services Office (ISO) offers over two dozen AI endorsements, many differing by the status of the business relationship between the parties such as contractor, vendor, etc.

Agents and underwriters must be careful to use the proper AI endorsement for the specific business relationship in question and one that complies as best as possible with contractual requirements. Over the years, I’ve seen many examples of the wrong ISO AI endorsement being used or a particular AI endorsement used where a different one would be better in the context of the insurance requirements calling for AI status.

But even greater care must be used when a non-ISO additional insured endorsement is being provided by the insurer. The last time I checked, the International Risk Management Institute (IRMI) had copies on file of over 300 non-ISO AI endorsements. Many of these endorsements are poorly written and likely do not accomplish what the drafter(s) intended.

For example, most AI endorsements today, including ISO forms, attempt to restrict the amount of coverage available to the AI to that specified in the insurance requirements of a contract if less than the limit available to the AI under the policy. Consider the language in the following two non-ISO endorsements that appear to invoke this limitation:

Insurer X: “The limits of insurance applicable to the additional insured are those specified in the written contract or agreement or in the Declarations of this policy, whichever are less.”

Insurer Y: “The insurance provided will not exceed the lesser of the coverage and/or limits of this policy or the coverage and/or limits required by said contract or agreement.”

Insurer X’s form language is similar to that in ISO’s AI endorsements. By using the “applicable to the additional insured” language, this form clearly intends to limit the amount of coverage only to the additional insured … the full policy limit remains available to the named insured regardless of the insurance requirements in the contract between the parties.

Insurer Y’s form language, on the other hand, does not apply the “lesser” qualification only to the additional insured. It says that “The insurance provided” when there is a claim involving the AI is limited to that required by the contract if less than the policy limit. That limitation is not expressly applicable only to the AI and could arguably be said to apply to all insured entities.

Also note that the reference in Insurer X’s form to the limits of insurance “specified” in the contract is more precise than Insurer Y’s limits “required” by the contract. Contracts usually have very broad and unlimited hold harmless provisions. The insurance limit specifications are typically minimums and not “required” amounts per se.

In addition, note that the “lesser than” requirement in Insurer X’s form applies only to written contracts, whereas Insurer Y’s requirement applies to any contract, written or not.

Another common contractual provision is that the downstream party’s general liability coverage must be primary and noncontributory to the upstream party’s coverage. The entire “primary and noncontributory” issue could merit an entire column, but lets just focus on one aspect. Consider the language in the following two non-ISO AI endorsements that appear to invoke this requirement:

Insurer A: “This insurance shall apply as primary and not contributing with any insurance carried by such Additional Insured.”

Insurer B: “Insurance provided under this policy shall apply on a primary basis and shall not seek contribution from any other insurance available to an additional insured added to this policy.”

Insurer A’s form language is similar to that in ISO’s CG 20 01 — Primary and Noncontributory — Other Insurance endorsement in that the “carried by such Additional Insured” language attempts to express that the downstream party’s coverage is primary only to the insurance of the AI and not to any other parties.

Insurer B’s form language, on the other hand, says that the downstream party’s coverage is primary to any other insurance “available to an additional insured.” Consider a large construction site where the general contractor is an AI on dozens of subcontractor policies. Insurer B’s form effectively says that it is primary to any insurance available to the AI and that would include not only the AI’s own policy, but also that of any other sub involved in a claim in which the general contractor is an AI. It’s highly unlikely that the drafter(s) intended that their insured’s policy potentially be primary to every other policy on the job site, but that’s how the language might be construed.

These are two examples of the potential differences between AI endorsements when the language in the form is parsed. One of my favorite seminars/webinars that I’ve presented over the years is called “The Additional Insured Illusion…And Other Feats of Contractual Risk Transfer Magic Even David Copperfield Couldn’t Pull Off.” In this program I give dozens of examples of pitfalls when risk is attempted to be transferred contractually or via insurance.

When a customer is being contractually required to extend AI status to a business partner, it is critical to review the contract terms and match them with the proper AI endorsement. It is equally critical for drafters of these forms to carefully draft the language they are using to ensure that the form accomplishes what was intended by the carrier.