Contracts requiring one or more of the parties to indemnify the other and to provide insurance to support the indemnity obligation are ubiquitous. They can be found in construction contracts, supply chain agreements, master service agreements, work orders, IADC daywork drilling contracts, other upstream E&P agreements, equipment leases, real estate leases and many other agreements.
Analysis often is convoluted; someone trying to enforce (or defeat) these obligations must look at the contract itself, one or more insurance policies and state statutes and decisions from multiple states.
This article and another to follow briefly survey additional insured provisions and contractual indemnity provisions in standard liability insurance policies. This installment addresses additional insurance requirement.
STARTING POINT: A CONTRACT
Analysis of additional insured [“AI”] and contractual indemnity [“CI”] questions begins with a contract—say an agreement between ABC and XYZ that may require ABC may to indemnify XYZ. ABC and XYZ may be required to indemnify each other; so called “knock-for-knock” indemnity provisions are an example of this. Contracts requiring indemnity generally also require the indemnitor (ABC) to provide insurance to support its indemnity obligation, usually in language stating that “ABC will provide insurance of at least [fill in an amount] naming XYZ as an additional insured for [fill in scope].” This is where our analysis begins.
ADDITIONAL INSURED STATUS
ABC usually will try to satisfy its obligation to provide coverage for XYZ by adding XYZ to an existing policy via an additional insured endorsement, likely on the ISO CG 20 10 and CG 20 37 forms. (Beware! Some companies use their own forms with different language. Also beware because the CG 20 10 and CG 20 37 forms have evolved since their introduction. The latest versions can be identified by the numbers 04 13 after the form number – e.g., CG 20 10 04 13.)
Each AI endorsement answers three questions:
•Who is entitled to status as an additional insured?
•What is the scope of coverage for the additional insured?
•When does coverage begin and end?
WHO IS AN ADDITIONAL INSURED?
The CG 20 10 and CG 20 37 each have space to list specific AIs. ABC may also obtain blanket additional insured status for every “XYZ” that contractually requires it. Additional insured status can be restricted to certain projects, work or locations, or to be bestowed on XYZ at all locations contemplated by its contract with ABC. The only requirement is that the contract requiring ABC to provide additional insured status take effect before the loss occurs. This “effective-before-loss” requirement can cause problems when the loss occurs before all parties have signed the underlying agreement. In such cases, the insurer may assert that there is no AI coverage. Typically, however, this is not an issue.
SCOPE OF COVERAGE—THE DIFFERENCES BEGIN
The CG 20 10 04 13 provides coverage for XYZ only if XYZ’s liability is caused in whole or part by the named insured. Thus, if the theory asserted against XYZ does not depend on ABC being liable, XYZ may not be entitled to AI status, at least to the extent of its percentage or share of fault. How this will be resolved varies substantially from state to state because of differences in how various states analyze theories of liability such as negligent hiring or negligent supervision.
In contrast, AI status under the CG 20 37 form applies whenever the claim relates to ABC’s “work” —i.e., the project rather than the named insured. Under the CG 20 37, there is no requirement that the ABC be negligent or even named for there to be coverage for XYZ. Scope documents, bid packages and other similar documents may help define what the “work” is, but serious coverage questions may arise if the claim may or may not be within an ill-defined scope of work.
MORE DIFFERENCES—DURATION OF COVERAGE
Under the CG 20 10 04 13, AI status for XYZ exists only during ABC’s “ongoing operations.” Coverage for XYZ as AI generally ends when ABC is done with all of its work at the location for which AI coverage must be provided. “Operations” can be “ongoing” despite weather delays, quitting for a weekend or overnight, even strikes. This is a fact question and answers will vary from case to case and even state to state. By contrast, AI status under the CG 20 37 form does not begin until operations are “completed” as defined in the policy.
Under the second, XYZ’s coverage “will not be broader than that which [ABC is] required by the contract … to provide.” Thus, if the base contract requires $1,000,000 of coverage for XYZ while the policy has limits of $2,000,000, XYZ gets $1,000,000 in coverage. It is not clear how this provision operates where the base contract requires a “minimum of [$X]” as limits for XYZ, however. Use of the term “will not be broader” may also act as a limitation on the perils covered as well as on limits.