Additional Insured Coverage

Additional Insured Coverage

One of the more common requests by a client to an insurance broker is to name a person or entity as an additional insured (AI)..  Such a request almost always stems from a contractual requirement to do so such as a lease or a construction contract, and the subject contract typically details the scope of AI coverage that is required.  The coverage that is issued, on occasion, does not mirror the contractual requirement which could result in (i) a breach of contract lawsuit between a named insured and the intended additional insured; (ii) insurance coverage litigation against the insurance company that issued the AI endorsement; and/or, for purposes of this discussion, (iii) an E&O claim against an insurance broker for failing to obtain the requested AI coverage.  (Some commercial policies contain blanket AI endorsements where a separate request for AI coverage is not required so long as the named insured enters into a contract where it is required to obtain AI coverage.)  A couple of recent California appellate decisions highlight disputes that can arise between contracting parties, insurance intermediaries and carriers.

Last month, in McMillin Management Services, L.P. v. Financial Pacific Insurance Company, a California Court of Appeals (4th District) addressed an endorsement naming a developer as an AI at the request of a subcontractor but the industry standard ISO endorsement limited such coverage to “liability arising out of ongoing operations”.  (The Court decision did not mention what the AI contractual requirement was.)  A lower court agreed with the insurance company’s argument that it did not owe defense or indemnity coverage to the AI developer on the basis that the subcontractor had completed its work and did not have “ongoing operations” for homeowners several years later when a construction defect lawsuit was commenced.  The California Appellate Court disagreed finding “arising out of” to be broadly construed, and concluding that the insurer failed to disprove that the homeowners’ later-claimed damage might have started while the subcontractors’ work was “ongoing” at the project.

A couple of months earlier, the same California Appellate Court also addressed the “ongoing operations” language in a manuscript AI endorsement in Pulte Home Corp. v. American Safety Indemnity Company.  In this case, the insurance company similarly argued that it did not owe defense or indemnity coverage because the loss occurred after the construction was completed.   Notably, the contract at issue required that completed operation coverage be provided, and the policy and AI endorsement did not provide such completed operations coverage.  The 4th District Court of Appeals, however, found the manuscript “your work” language to be ambiguous, and concluded that such language “could reasonably be read to provide coverage for the insured’s completed operations, if property damage ensued from those completed operations.”

Why did I bring these recent decisions up when the courts found in favor of the AI coverage that was supposed to be provided?  The answer is that the courts could and in other situations have found otherwise (and, in fact, the lower courts in these cases held in favor of the insurers denying coverage).  My experience in representing agents and brokers in E&O situations for almost 25 years is that, if AI coverage is denied, the purported additional insured points the finger at the contracting party that was to provide the coverage.  In turn, one or both then lay blame at the insurer and/or the insurance broker or agent by way of an E&O claim.  As you can tell from these decisions, the issues are often far from crystal clear with the language of the controlling contract and the insurance policy often requiring a legal if not judicial interpretation.

Therefore, what should a reasonable and prudent insurance professional do when requested to add a person or entity as an AI.  My recommendations are two-fold.  First, ask the client to provide a copy of the contract that requires the AI coverage, and provide the contract to the insurer with the request for AI coverage to comply with contractual requirement.  (I recognize the argument that such a request could create a higher duty of care on the agent beyond that found at common law.  While I am sensitive to this argument, I believe the AI request in and of itself creates a different duty and could create a greater exposure.  To avoid this contention and minimize a higher duty of care argument, advising the client that the request for the contract is being made for the limited purpose of passing it onto the insurer would seem to make sense.) Second, forward the AI endorsement (blanket or individual) to the client asking to confirm that the obtained AI language complies with the request (and suggest the client forward the endorsement to the requesting party to confirm that it meets his, her or its contractual needs).  Admittedly, this will not prevent claims as parties tend to get adversarial if not litigious when claims for bodily injury or property damage are made.  It should nonetheless provide a good risk management tool and provide documentation to defend an E&O claim.

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