INDEMNITY AND ADDITIONAL INSURED REQUIREMENTS: WHY AM I
DEMANDING THEM, WHY DO OTHERS WANT THEM, AND WHAT DOES IT ALL
MEAN? PART 2.
-IRMI; Mark M. Bell, Waller Lansden Dortch & Davis LLP
www.irmi.com
Additional Insured Status
Because of the two problems (among others) with contractual liability insurance discussed in Part 1,
owners often require contractors to name them as additional insureds. Similarly, contractors require
their subcontractors to name them as additional insureds on the subcontractors' CGL policies.
As an additional insured on the policy, the owner has direct access to the contractor's CGL policy.
This means that the owner can look to the contractor's CGL policy for a defense of a claim that
potentially could be covered by the policy. The history of ISO's additional insured endorsements will
be discussed in a future article, but standard additional insured clauses cover the owner's liability for
bodily injury or property damage caused by the contractor's acts or omissions.
In addition to avoiding the problems associated with contractual liability coverage alone, additional
insured status also has several other benefits to the insured concerning defense costs and
subrogation.
CGL policies provide unlimited, or uncapped, defense costs. When an owner is included as an
additional insured under the policy, there is no limit to the defense costs to which the owner is
entitled, and the defense costs do not "waste" the limits of the policy. When the owner is not named
as an additional insured but relies only on coverage under the contractual liability portion of the
policy, the owner's defense costs are paid under the policy limits, meaning that the defense costs and
indemnity paid by the insurer are capped at the policy's coverage limits.
Additional insured status also helps in preventing subrogation. As a general rule, "[t]he insurer's
basic right to pursue subrogation does not extend to its own insured, including any party covered as
an additional insured under the policy."5
Recent Case on Contractual Liability Insurance and Additional Insureds
The Minnesota Supreme Court recently addressed these issues in Engineering & Constr. Innovations, Inc.
v. L.H. Bolduc Co., Inc., 825 N.W.2d 695 (Minn. 2013). There, ECI was a subcontractor for a sewer
pipeline and Bolduc was a sub-subcontractor to ECI. Bolduc had a CGL policy with Travelers
Insurance, and ECI was included as an additional insured. The contract between ECI and Bolduc
also required Bolduc to indemnify ECI for any losses ECI incurred.
During construction, Bolduc damaged a sewer pipe, and ECI paid to have the damage repaired. ECI
sued Bolduc and Travelers. ECI and Bolduc went to trial first. The jury ultimately decided that
Bolduc damaged the sewer pipe but that it was not negligent in doing so. ECI then proceeded to its
breach of contract claim with Travelers, arguing that Travelers owed a defense under the contractual
liability clause and because ECI was an additional insured under the policy.
The Minnesota Supreme Court ultimately held that the indemnity clause between ECI and Bolduc
was unenforceable. By statute, Minnesota allows only limited form indemnity agreements. The court
held that requiring Bolduc to indemnify ECI when Bolduc was not negligent would violate the
statute. Thus, there could be no coverage under the contractual liability section of the policy.
The court also discussed Bolduc's status as an additional insured at great length. The additional
insured endorsement was not on an ISO form but still only included ECI as an additional insured
"if, and only to the extent that, the injury or damage is caused by acts or omission of [Bolduc] or
[Bolduc's] subcontractor in the performance of 'your work.'" ECI argued that the plain language of
the additional insured endorsement should grant coverage: ECI was an additional insured and the
losses occurred because of Bolduc's acts. Travelers disagreed, arguing that the language "acts or
omissions" indicates that there must be some fault by Bolduc before coverage can apply.
The court agreed with Travelers. The court explained that the liability could appear in the
contractor/subcontractor relationship in three ways:
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Direct liability when the contractor is liable through its own acts of negligence
Vicarious liability when the contractor is liable solely because of its relationship with the
subcontractor that was ultimately responsible
Assumption of liability when one party assumes liability for another's actions by contract
The court ultimately found that the additional insured endorsement applied only to situations
involving vicarious liability. The court held that, because Bolduc was not liable for the damages, ECI
could not be vicariously liable for the damages, and therefore, the additional insured endorsement
did not grant coverage.
Conclusion
The availability of insurance coverage often depends on the contractual relationship between and
among the owner, contractor, subcontractor, and insurer. Indemnity agreements and additional
insured endorsements play a key role in providing coverage. Insureds, however, need to understand
what relationship they are seeking and why they are seeking it to ensure that they are adequately
covered.
Feel free to contact your EHD insurance professional at 800-544-7292 for further information.