CLIENT ALERT - Changes for Additional Insureds: Coverage could be Expanded, but Recovery could be Limited
Insurance Services Office, Inc. (“ISO”), the publisher of many standard form insurance agreements, recently revised various General Liability coverage forms and endorsements to reflect the changing needs of insureds and insurers. The revisions are especially important with regard to the additional insured (“AI”) status of third parties and the potential limitations on recovery.
AI status is commonly granted through an endorsement to an insurance policy. Insurers have recently begun to extend AI status to third parties via a blanket provision in the policy that confers AI status when the named insured and the party obtaining AI status have agreed in writing in a contract or agreement to do so. Not all policies contain this language. Moreover, some courts have interpreted this blanket provision as requiring a direct contractual relationship between the primary insured and the party receiving AI status. The new revisions to ISO form CG 20 38 04 13 attempt to address that inconsistency. The endorsement now reads (new language is in bold):
Section II – Who Is An Insured:
- Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy; and
- Any other person or organization you are required to add as an additional insured under the contract or agreement described in Paragraph 1 above.
Paragraph 2 extends coverage not solely to those in contractual privity with the named insured, but also for anyone the contract requires the primary insured to add as an AI even if the prospective AI is not a party to the contract that requires the extension of AI status. For example, if the contract between a general contractor and a subcontractor mandates that the owner be added as an AI to the subcontractor’s insurance, this new endorsement will automatically confer such AI status on the owner. This change will also have an impact on landlord/tenant relationships in situations where a sublease between a tenant and a subtenant requires the subtenant to name the landlord as an AI. In those situations, AI status will automatically be conferred on the landlord. AI status will be extended even if the owner is not a party to the contract between the general contractor and a subcontractor or when the landlord is not a party to the sublease between the tenant and the subtenant.
ISO has also clarified the policy limits available to AIs. The new endorsements provide that: (1) the coverage extended to the AI is limited by the laws of the state; and (2) the insurance for the AI will not be broader than the insurance required in the contract. As a result, if the contract calls for limits of liability that are lower than the policy limits, the lower limits will apply.
The parties cannot increase the amount of coverage beyond the policy’s limits by specifying higher limits in their contract. Indeed, if the limits provided in the contract are lower than the insured’s policy limits, then the AI will only get the lower amount of coverage. In light of these revisions, it is important to carefully review contracts to ensure the desired coverage is described fully and accurately and to avoid disappointment in the event of a claim.
Please feel free to contact either of the attorneys listed below if you would like to discuss this matter.