What if there was a magical way of shifting financial responsibility for losses to another party’s insurance company? There is, though the magic is not always the good kind or, for that matter, the intended kind. 

Additional insured provisions are one of the more effective forms of risk transfer among owners, contractors, subcontractors and suppliers.  Typically, the owner seeks additional insured status from the general contractor, and the general contractor from its subcontractors.

Not all additional insured coverage is created equal. It is also prudent to consult local counsel when reviewing or drafting additional insured provisions in any tier of construction contract. To increase the likelihood that you obtain the desired type and amount of risk transfer, there are several things you can do.  

Tip #1: Use written contracts to specify insurance requirements.

Additional insured coverage is typically granted through an endorsement or rider to an insurance policy. There are many different types of additional insured endorsements, but most require that a written contract exists between the general contractor and subcontractor or between the subcontractor and lower-tier supplier, and that the contract requires additional insured coverage.

One side effect of having so many different types of additional insured endorsements is that, unless the contract provides very specific language about the type of additional insurance desired, you may not get what you bargained for.

For instance, some additional insured endorsements only cover incidents that occur while the construction is ongoing—an ongoing operations limitation.  That type of endorsement does little to assist with claims regarding construction defects that arise many years after construction is complete.  

Tip #2: Update the insurance provision to keep up with current laws and industry standard forms

We review and litigate many contracts where the insurance provision looks like an afterthought, cut and pasted from another contract.  One tell-tale sign is a reference to an ISO additional endorsement form that is no longer available or is not congruent with case-law or statutes restricting the breadth of available coverage.

Many states, including Texas, have anti-indemnity statutes that also impact the coverage available for additional insureds.  That may result in not having any additional insured coverage.

One means of protection is to have an insurance agent familiar with construction industry coverage and forms, or an insurance coverage attorney review the contractual insurance provisions, including the additional insured endorsement, on an annual basis.

Tip #3: Obtain the declaration page and additional insured endorsement to the insurance policy.

Some contractors believe the best and only proof needed of additional insured status is a certificate of insurance that lists the contractor as a certificate holder. A certificate insurance does not, however, bind coverage on the insurance company, except in very limited situations.  

To make certain that additional coverage exists and is the type required by contract, you should obtain a copy of the subcontractor’s or supplier’s declaration page and the additional insured endorsement.

The declaration page will list all the endorsements to the policy, including exclusions to coverage and the additional insured endorsement.  The additional insured endorsement should show the form number, an easy way to quickly determine whether the coverage matches what is required in the contract, and the conditions and scope of coverage.  

Tip #4: Create processes to update insurance information every term

Insurance is typically purchased in one-year terms.  Some contractors, subcontractors, and suppliers stay with the same insurers for years; others change constantly and inconsistently.

One year they may buy a robust policy with correct additional insured coverage and the next year, they may buy a highly exclusionary insurance policy that endorses out almost all coverage and lacks any additional insured coverage.

The problem is more complicated on projects that last multiple years and in which multiple insurance policies are potentially at risk.  Among the best practices is to create and implement a process to update insurance information from each subcontractor and supplier prior to the expiration of the current term.

The same documents discussed above—the declaration page and additional insured endorsement—should be requested, reviewed, and maintained for at least 10 years after completion of the project.

Tip #5: Tender, tender, tender

If a claim arises from the work of a subcontractor or supplier and additional insured coverage may exist, you should tender the claim to the additional insured carrier.  If the claim metamorphizes into a lawsuit, tender again. If the facts change, tender again. 

Aside from whether the insurance policy contains an additional insured endorsement, the insurance company will look to whether its duty to defend has been triggered by the facts alleged.  Those facts tend to change over time.

Similarly, an insurance company’s position as to whether it owes you a defense or to pay a judgment tends to change as the facts and allegations evolve.  Tendering and tendering again and again to an insurance company, and not just to the subcontractor, supplier or its attorney, allows the insurance company to consistently reevaluate its position, hopefully resulting in a finding of additional insured coverage.

With these 5 tips in mind, you can stay aware of the additional headaches insurance coverage may cost you. When reviewing your next contract, the professionals at Gerstle Snelson, LLP will have you covered!