When a company requires a vendor to name them as additional insured on a commercial general liability (“CGL”) policy, it is assumed the additional insured party will be covered in the event of a claim. But when the policy is subject to a self-insured retention, it is less clear whether the additional insured party will be protected in the event of a claim.In recent years courts are facing a tough question. Does the term “commercial general liability insurance” imply that the CGL policy is also primary and non-contributory over insurance carried by the additional insured party? In other words, when a company asks their broker to acquire a CGL policy, does it imply a reasonable assumption that what is being requested is a CGL policy that is also primary and non-contributory to other available insurance.
If the CGL policy is subject to a self-insured retention where the named insured would have to cover a certain amount of a claim before the CGL policy kicked in, it makes it unlikely the additional insured party would be covered under most tort claims likely to arise, thus defeating the purpose of being named an additional insured under the policy.
In a growing number of cases, an additional insured certificate holder who relied on a named insured's CGL policy for additional insured status learned after a claim surfaced that the policy was subject to a self-insured retention which operated to the additional insured’s detriment.
In one recent case(1) an additional insured party learned that the named insured’s $1 million CGL per occurrence policy was first subject to a self-insured retention of $2 million.
The facts of the case are not unusual. Pac-Van leased a work trailer to CHS. An employee of CHS was injured in the trailer and sued Pac-Van, who then demanded CHS defend Pac-Van per their agreement. CHS had named Pac-Van as additional insured, but CHS’ $1 million CGL coverage was first subject to a $2 million self insured retention, making the policy excess and not primary coverage. Pac-Van sued claiming that CHS breached their agreement by not purchasing explicitly primary insurance which would cover Pac-Van before the self insured retention had to be exhausted. CHS defended by arguing that their contract did not specifically say that it had to purchase “primary” CGL coverage. The court disagreed, and decided that the general understanding of the term "commercial general liability insurance" means "primary coverage.” The court held that Pac-Van did have a reasonable expectation that when they required CHS to name Pac-Van as additional insured on the CGL policy, it was implied that the coverage should be primary, and not subject first to a self-insured retention which effectively blocked Pac-Van from receiving any coverage under most conceivable claims which could arise under their agreement.
While the court decided that Pac-Van had a reasonable expectation that additional insured status under a CGL policy implies primary coverage, Pac-Van had to go through a long and costly litigation process all because of a self-insured retention which was not known about prior to a claim.
Certificate holders used to insist that additional insured endorsements accompany certificates. The same insistence should now be made that a certificate of insurance show the existence of a self-insured retention on a general liability policy. While the standard ISO ACORD forms for general liability do not have a specific checkbox to indicate the presence of a self-insured retention, in most instances an insurance broker should be able to clearly indicate on the certificate if the policy is subject to a self-insured retention, or at the least communicate in writing whether or not the policy is subject to such a restriction.
As with many other coverage issues, it is far better to investigate coverage at the beginning of a contract relationship by scrutinizing policies and certificates than waiting until after a claim arises. A comprehensive vendor insurance certificate tracking risk management program needs to screen for self-insured retentions on CGL policies, and know how that affects coverage for the additional insured party.
(1) PAC-VAN, Inc., v. CHS, Inc.