While construction contracts (and subcontracts) generally include specific requirements for insurance coverage that the contractor or subcontractor agrees to maintain, the contract may not specifically require all of the bells and whistles that are part of the insurance program purchased by the contractor or subcontractor. Insurers are increasingly engaging in a version of the “battle of the forms” by writing policies to limit their coverage to what is required in the construction contract. That means, in entering into contracts with insurance specifications, your client gets only what it asks for. Should it matter if the contractor maintains higher limits or has broader coverage than required by the construction contract? It may. This article identifies some common ways that insurers limit the scope of coverage by referencing only what is required in the construction contract’s insurance specifications.
Additional Insured Endorsements—Insurance Limits
In 2013, the standard ISO (formerly the Insurance Services Office) form for additional insured endorsements began limiting coverage afforded to additional insureds by including the following language:
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 [the insured] are required by the contract or agreement to provide for such additional insured.
The endorsement also specifically states that the limits available to the additional insured will be the lesser of the limits of insurance purchased by the contractor or the limits required by the construction contract. Some practitioners wage a battle of the forms by setting the limits required in the construction contract with the following caveat: “or such other higher limits actually maintained by contractor.”
While contractors and insurers will argue that restricting coverage to the limits required by the construction contractor allows the contractor/insurer to apportion risk across multiple projects, the unwary who rely on standard requirements for multiple projects may specify limits too low for the risks of the project and, in so doing, may inadvertently limit the amount of coverage available to their clients as additional insureds.
Additional Insured Endorsements—Specifying the Form
The limits available to the additional insured under the contractor’s or subcontractor’s policy are important to determining whether the client’s risk is adequately mitigated and must be considered in light of the client’s own insurance coverage and the objectives of its own insurance program. If the client’s goal is to transfer as much of its risk in the project as possible to the contractor or subcontractor, then careful attention must be paid to the additional insured endorsement required in the contract. Older ISO form endorsements (from November 1985 and October 2001) have generally been interpreted to provide broader coverage to the additional insured, including coverage for the additional insured’s own negligence. If the client has low limits on its own policies, an exclusion for coverage when it hires an independent contractor, or simply a goal of protecting its own policies from losses, the older ISO forms are essential.
While contractors and subcontractors often assert that the older ISO forms are not available in the marketplace, there are some endorsements that will provide the coverage if the contract specifications require it. Some insurers offer non-ISO additional insured endorsements (known as “manuscript” endorsements) that state they will cover the additional insured in the same way as the ISO form specified in the construction contract. Thus, even if the insurer does not offer the 1985 ISO form endorsement, it may offer an endorsement that provides the same coverage as the 1985 endorsement—but only if the construction contract requires the 1985 endorsement. Bear in mind that the endorsements available to the contractor will vary from market to market and insurer to insurer. The most efficient way to determine the breadth of coverage available under the additional insured endorsement is to simply ask the contractor or subcontractor for copies of the endorsement it has, and if broader coverage is desired, ask the contractor or subcontractor whether it can purchase a different endorsement with the broader coverage.
Additional Insured Endorsements—Blanket Forms
Many additional insured endorsements are written so that they apply automatically when the contractor or subcontractor agrees in a written contract to obtain additional insured coverage. The endorsements are known as “blanket” endorsements. Thus, identifying the additional insureds in the construction contract triggers coverage for those parties. It is important, therefore, to make sure the construction contract identifies all parties who should be covered as an additional insured. Consideration needs to be given to whether there are parties who should be added because of contractual obligations undertaken by your client (e.g., landlord, lender, architect, parents, and consultants). While some of those parties may not be at risk for significant liability arising from the project, it is important to remember that additional insured status is about more than indemnity. It affords a defense against claims arising from the project. Parties who are not identified as additional insureds will not be defended by the contractor’s or subcontractor’s insurer.
In addition, it is important to obtain a copy of the endorsement to verify that the parties required by the construction contract are in fact covered. Some endorsements are written to automatically provide coverage to any party the primary insured has agreed to cover as an additional insured in a written contract. Other forms, however, cover only parties “with whom” the additional insured has a contract. Several courts have interpreted those forms to require privity of contract to apply. See, e.g., Gilbane v. St. Paul Marine Ins. Co., 31 N.Y.3d 131 (N.Y. Ct. App. 2018); Westfield Ins. Co. v. FCL Builders, Inc., 948 N.E.2d 115 (Ill. Ct. App. 2011). Caution must be used to determine whether the blanket form will cover all parties required to be covered.
An additional wrinkle is that sometimes the standard ISO forms contain a box that is intended to identify the parties to be covered as an additional insured. Sometimes the box incorporates the blanket language so that each additional insured does not have to be specifically listed (a time-consuming process potentially fraught with errors). The language within the box is not standard, may vary from insurer to insurer, and may require privity of contract to extend coverage.
Waivers of Subrogation
Similarly, waivers of subrogation are another aspect of risk transfer that should be addressed in the construction contract. While many insurers offer “blanket” waivers of subrogation, a copy should be obtained to verify that the benefit extends to all of the intended parties.
Primary and Non-Contributory Requirements
One aspect of apportioning risk is to require that the contractor’s or subcontractor’s policy must respond first and must not seek contribution from the client. Insurers, however, have been increasingly writing their additional insured endorsements to provide that they will be primary and non-contributory only if the construction contract requires it. This is yet another way the construction contract must be written to trigger insurance coverage.
In preparing insurance specifications in construction contracts, the practitioner should approach the task with the understanding that it is engaging in a version of a battle of forms with insurers. Attention to details is important to trigger coverage in a variety of circumstances to properly manage risk for your client.
Ellen M. Chapelle is cochair of Gould + Ratner’s construction practice in Chicago, IL.
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