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Counting on Someone Else’s Insurance Policy for Protection?
First Check the Fine Print

6/27/2016 | By: Eugene H. Goldberg, Esq. | Summer 2016 Newsletter
A business or property owner starting a project often stipulates that the contractor/service provider name the owner as an “additional insured” on the contractor’s insurance policy, and that the contractor require all its subcontractors to name the owner as an “additional insured” on each subcontractor’s insurance policy.

The owner takes comfort that if it is sued for something a contractor/subcontractor did, then the contractor/subcontractor’s insurance policy will provide insurance coverage, rather than the owner’s own policy.

When a contractor/subcontractor’s liability policy provides an owner with additional insured coverage (“AIC”), it is generally understood that the owner has the same protection as the contractor/subcontractor. Standard language affords coverage for injury arising out of the contractor/subcontractor’s acts or omissions as well as of those acting on the contractor/subcontractor’s behalf. If a suit is brought within these criteria, the owner can turn to the contractor/subcontractor’s insurer for defense and payment of a loss/judgment.

However, before the project starts, an owner should closely examine each contractor/subcontractor insurance policy to make sure that it actually provides the coverage the owner is counting on. Unfortunately, insurers are increasingly using nonstandard policy language to limit and deny AIC in contractor/subcontractor’s policies.

For example, a subcontractor’s liability policy with AIC may exclude coverage for bodily injury to the subcontractor’s own employees. From the subcontractor’s point of view, the subcontractor is not concerned believing that worker’s compensation will shield the subcontractor. But from the owner’s point of view, this exclusion can cause a problem. When the owner is sued by the injured subcontractor’s employee, the subcontractor’s liability policy affords the owner with the same coverage the subcontractor has—none. AIC is illusory.

Insurers are also diluting AIC in other ways. Some insurers are reducing AIC with nonstandard policy language resulting in the owner not receiving the same protection as the contractor/subcontractor. For example, a subcontractor liability policy may provide no AIC unless the subcontractor caused the injuries and/or was negligent. When an injured subcontractor’s employee sues the owner alleging it (not the subcontractor) was solely at fault and/or solely caused the injuries, the owner has no coverage under the subcontractor’s policy.

In another variant, the subcontractor’s policy may provide AIC only to the extent that the subcontractor is proven at fault. Unless the subcontractor is entirely at fault, the subcontractor’s insurer pays only a portion of the owner’s defense and loss. The owner’s own policy may end up paying a portion of the AIC defense and loss.

There are other holes to be found. Language in an endorsement to a contractor/subcontractor’s policy may provide that any AIC loss/settlement payment is “excess” to the owner’s policy. The owner’s policy pays first. Under this language not only will the owner bear the loss, the owner’s policy may be paid out entirely to an injured contractor/subcontractor employee, leaving nothing left for the owner to pay towards other claims.

Furthermore, there are gaps specific to subcontractors. Some AIC language requires that before an accident occurs there needs to be a written executed contract between the additional insured and the subcontractor. The insurer is playing two games: the contractor may have orally hired the subcontractor and there is no contract between an owner and subcontractor.

We have warned in previous newsletter articles not to depend on certificates of insurance and to contractually require that a contractor/subcontractor’s liability policy contain specific endorsements (such as Insurance Service Organization form CG 20101185 or the equivalent). But the contract/subcontract does not override the insurance policy. Even if the policy contains a specified endorsement, other policy language may nullify or weaken the policy’s AIC.

Many insurers licensed in New York do not play these games. Others, such as surplus line insurers, issue policies with proprietary forms and/or endorsements subtracting from AIC. To avoid gaps and omissions, an owner must obtain the contractor/subcontractor’s complete liability policy before the contractor/subcontractor ever steps foot on the project, and then furnish it to an insurance professional for scrutiny.

An owner should not learn of AIC holes after suit starts. Early review will reduce significant exposures later.