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Well-established contractual risk transfer provisions used by construction contractors are being challenged by changes in state laws and additional insured endorsements contained in commercial general liability policies.
Where an accidental loss is connected to the work of a subcontractor, the “belt and suspenders” of indemnity and insurance generally are designed to transfer the risk to a subcontractor, including the defense and indemnification of upstream contractors that may be drawn into a resulting claim or lawsuit.
Though the majority of states have anti-indemnity laws that limit the extent of risk transfer allowed through contractual indemnity provisions contained in construction contracts, upstream contractors in most states still have been able to transfer their risk by being named as additional insureds on their subcontractors' CGL policies.
However, at least three states—California, Louisiana and Texas—recently enacted legislation expanding their anti-indemnity statutes to restrict risk transfer via additional insured coverage. At the same time, the insurance industry has been narrowing additional insured coverage, construction liability experts say.
“Contractual risk transfer is breaking,” said Michael Campo, senior vp and construction team leader at Lockton Cos. L.L.C. in Kansas City, Mo. “There is no longer a fail-safe way of passing on the risk of a job to those who may be responsible.”
“There are a lot of risks out there that people don't know they're taking,” said Joanie Schneider, managing director and national construction placement leader at Marsh USA Inc. in Cleveland.
“I think we're going to see more of this trend to extend the anti-indemnity laws” to encompass additional insured endorsements, said Frank Armstrong, Tampa, Fla.-based senior vp and national director of construction claims at Willis North America.
For example, “the owner contracts with the general contractor and requires that the general contractor name it as an additional insured (on its CGL policy). Then the general contractor passes it through to the subcontractors, requiring them to name the owner and the general contractor as additional insureds” on their CGL policies, Mr. Armstrong said.
However, some insurers use additional insured endorsements that contain terms that may not comply with contract requirements.
For example, the additional insured coverage may apply only to those parties with which a subcontractor has entered into a direct contract, which may not include the project owner or other parties for whom this added coverage was intended.
“It's something you have to pay attention to. You have to look closely at the wording of these additional insured endorsements,” Mr. Armstrong said.
The additional insured endorsement that was adopted by the Insurance Services Office Inc. in 1985 provided broad coverage, granting an additional insured protection for property damage claims resulting from construction defects and third-party-over actions, such as when a subcontractor's employee who is injured on the job sues the general contractor for damages beyond what normally would be provided under workers compensation statutes.
Because workers compensation serves as the exclusive remedy for workers injured on the job, they cannot, by law, sue their employers. However, if they become injured on a job site owned by another party, they can sue that party and try to obtain additional damages beyond what are paid under workers comp.
However, later versions of the form are much narrower, eliminating coverage for completed operations and, in turn, construction defects.
For example, the 1997 version of the ISO additional insured form limits coverage to “ongoing operations,” while the 2001 version states that coverage does not apply to events that occur after the named insured has completed its work, or the relevant portion of the project has been put to its intended use.
In 2004, in an effort to limit coverage for third-party-over actions, ISO further revised the standard form to provide an additional insured with coverage “only with respect to property damage or personal injury that the named insured also causes,” said Randy J. Maniloff, a partner at White & Williams L.L.P. in Philadelphia, who represents insurers in coverage litigation.
Because of these changes, general contractors and subcontractors should carefully review their CGL policies' additional insured endorsements to make sure they match what is required under their construction contracts, said Marsh's Ms. Schneider.
Unfortunately, “most of the time the party getting the additional insured coverage doesn't bother to check what the endorsement actually says,” said Mr. Maniloff. “It may be a very limited coverage, more limited than they thought they were getting. You want to say, ‘Name me as an additional insured with this kind of coverage,' and then make sure that the subcontractor actually got you that coverage.”
“Where the terms of the additional insured coverage are not in compliance with the contract, it creates the risk of breach of contract, which isn't good for either party,” said Mr. Armstrong. “In the past, upstream contractors would frequently be satisfied with a certificate of insurance from the subcontractor that says the general contractor is an additional insured. People were comfortable with that until the claim happened, when they learned there were restrictions in the coverage.”
“Today, where nonstandard additional insured endorsements are to be used, more upstream parties recognize the risk management practice of securing a copy of the additional insured endorsement, and perhaps other key endorsements, along with the certificate of insurance,” he said.
Contractor-controlled insurance programs, also known as “wrap-ups,” can ensure that all companies involved in a construction project have adequate liability protection, even in states with anti-indemnity laws, insurance experts say.