Additional insured status is an endorsement placed on a pre-existing liability insurance policy, such as a General Liability Policy. It extends the reach of the endorsed policy to otherwise uncovered parties who may benefit.
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 provisions, such as additional insured endorsements, which could have significant consequences regarding your insureable interests.
Most experienced risk managers are aware of common pitfalls affecting the respective parties of a project. This understanding is, however, complicated 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 amount of documents risk managers are tasked with analyzing and maintaining.
For this reason, many general contractors hire BCS to check the insurance coverage of subcontractors that they bring on to a project.
Additional Insured for Construction Projects
An example of when an additional insured endorsement is rightfully used is 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 start working with an architect or engineer and, after the blueprint is completed, they'll find a general contractor to do the job of building it. Obviously they'll need funding, so a lender will be brought into the picture 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. The construction contract will include the agreed-upon insurance requirements that are typically very detailed as to which party is responsible for the various insurance coverages needed to protect the project against loss.
That insurance section in the contract requires the general contractor to maintain commercial general liability (CGL) insurance for the project or work and extend coverage to the hotel chain as an additional insured. Even though the hotel chain is not doing any of the work, they are the project owner and ultimately are responsible for any loss related to the project.
In most claims, plaintiffs will usually sue not only the general contractor, but the owner and any other potentially responsible parties. By having the general contractor extend coverage to the hotel chain under the CGL policy, if there is a claim made against a hotel chain alleging bodily injury to a third party, like a passerby who walks too close to a construction site, the hotel chain will tender, or push, the claim to the general contractors insurer rather than the hotel chain’s insurer.
Pitfalls of Additional Insured Endorsements
If the named insured or the general contractor is required to extend CGL coverage to a third party, like a hotel owner or lender, this can be achieved by amending the CGL policy with an endorsement so the third party can be added to the policy as an additional insured.
Not all additional insured endorsements are created equally, however, and you should beware 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 completed.
- Sole negligence exclusions are used to eliminate coverage for the additional insured if the additional insured is found to be 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 is applicable 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 be provided 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, like personal and advertising injury.
How BCS Helps
Unlike other insurance tracking companies, BCS employs a full-service compliance solution, by combining best-in-class software with outstanding customer support. Not only will BCS collect and monitor your insurance documents, but they will review and actually correct them, too. Correction is the key to achieving the highest standard in third-party liability risk mitigation.
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