Published October 28, 2020 • 4 minute read
Insurance provisions are all-important in protecting your contractual liability when working with third-party vendors, subcontractors, and other parties sharing risk on a project. Everyone involved will be working to secure the greatest blanket of protection available in the event of an insurance-triggering incident, so it’s vital to keep a close eye on insurance clauses, including additional insured endorsements, which could have significant consequences regarding your insurable interests.
Most experienced risk managers are aware of common pitfalls affecting the respective parties of a project. This understanding is complicated, however, by the fact that the terms and conditions of a policy held by a contractor will never match those held by other insured parties. As a business grows, so too do the number of documents risk managers must analyze and maintain.
For this reason, many general contractors hire BCS to check the insurance coverage of subcontractors brought on to a project.
Additional Insured for Construction Projects
An additional insured endorsement is rightfully used, for example, when a project owner insists they are included as either an additional or named insured on a contractor’s general liability policy. In this instance, the client becomes protected in case of bodily injury, property damage, or myriad other job-site faux pas that could result in an insurance claim.
Picture this: A major investor wants to build a hotel in downtown Chicago. The investor will first work with an architect or engineer, and once the blueprint is complete, find a general contractor to build it, and a lender to provide capital.
The hotel owner will enter into a construction contract with the general contractor to oversee and manage the project, purchase supplies, and hire subcontractors to perform work. This will include the detailed, agreed-upon insurance requirements specifying which party is responsible for the various insurance coverages necessary to protect the project against loss.
That insurance section in the contract requires the general contractor to maintain CGL insurance for the project, and extend coverage to the hotel chain as an additional insured. Even though the hotel chain is not performing any of the work, it is the project owner, and ultimately responsible for any related losses.
In most claims, plaintiffs will sue not only the general contractor, but the owner and any other potentially responsible parties. Extending coverage to the hotel chain under the CGL policy can tender claims alleging injury or damage to the general contractor’s insurer instead of its own.
Pitfalls of Additional Insured Endorsements
If the named insured or the general contractor is required to extend CGL coverage to a third party, such as a hotel owner or lender, the CGL policy can be amended with an endorsement naming the third party as an additional insured.
Not all additional insured endorsements are created equally, however, and you should beware of certain language often employed in drafting these tricky insurance provisions. Here are four ways additional insured status could fail to protect you from liability:
- If the endorsement restricts coverage to ongoing operations, then an additional insured is vulnerable to liability in cases of bodily injury or property damage that occur after the contracted work is complete.
- Sole negligence exclusions eliminate coverage for the additional insured if found solely responsible for the negligence that resulted in the claim.
- Some states have anti-indemnity laws that prohibit contracts requiring one party to assume liability for negligence committed solely by another or that obligate one party to purchase insurance covering another party's sole negligence. Therefore, it is not uncommon for additional insured endorsements to contain a provision stating that the coverage applies only to the extent provided by law, meaning in accordance with local anti-indemnity statutes.
- You may encounter a clause in an additional insured endorsement that states the additional insured will receive coverage that is no broader than the contract. In other words, if the contract states that the additional insured must be protected against bodily injury or property damage claims but includes a "no broader than the contract" provision, then the additional insured may still be held responsible for different types of claims, such as personal and advertising injury.
How BCS Helps
Unlike other insurance tracking companies, Business Credentialing Services (BCS) offers both self-service and full-service compliance solutions. The self-service option gives clients access to best-in-class software, while the full-service solution adds outstanding support for expert compliance analysts. Not only does the full-service solution provide collection and monitoring of your insurance documents, but it also offers review and correction. Correction is the key to achieving the highest standard in third-party liability risk mitigation.
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