Welcome to the month of November, a time of Thanksgiving gatherings and minefields. Minefields?
Setting aside for the moment how turkeys must view the holiday, my reference is to the tradition of many folks who use the Thanksgiving holidays for reunions or other assorted family gatherings. Have you have ever been to one of these events as an outsider? If so, your mission consists of nothing less than making a favorable impression on all of the relatives without inadvertently stepping into one or more patches of emotional quicksand, sure to ruin your day and hasten your exit from the good graces of possibly all attendees. Talk about tiptoeing through the minefield!
When confronting such dangers, the key is to proceed slowly and carefully, making no assumptions. Elvis had it right: Fools rush in where angels fear to tread.
Such an attitude of careful wariness also extends to many an insurance issue that is far too often treated as "Move along now, nothing to see here."
For example, here is one such potentially dangerous scenario recently brought to my attention from the e-mail bag. She writes:
I attended the Rubles seminar you instructed last week in Minnesota.
I have a question regarding Separation of Insureds and Transfer of Rights of Recovery.
We write a lot of contractors, therefore see a lot of construction contracts. I always thought that if a contract requires a Waiver of Subrogation (WOS) on the GL, it was automatically included under Transfer of Rights of Recovery. Therefore, we do not endorse the policy to add a WOS. Usually the contract will also require parties to be named as additional insured. Most of the accounts I work on have a Blanket Additional Insured endorsement. Did you say because cross liability is included, the WOS would not apply? And if that is the case, should we be endorsing the policy to add a WOS each time?
Ah, grasshopper, welcome to the minefield.
Just as a simple generalization made in all innocence may detonate the anger bomb at Thanksgiving dinner, contractor considerations are too often treated as easily addressed on a broad brush basis.
In the situation my e-mailer describes, she is on the right track in general terms. If the contract requires a waiver, the CGL automatically grants it. And by using a blanket additional insured endorsement, excess paperwork is avoided, it appears trees are saved, and all is happy in Lake Woebegon. If you stop here, you are believing in a Disney-like world, where cross liability, hold-harmless agreements, waivers of subrogation, additional insured requirements and contractual liability are all treated as members of one big happy family, getting along famously and without friction.
In reality, the only way to keep everything clear is to unravel the tapestry and look at each thread individually. Then the treatment for any particular problem becomes clear. Let's take that approach to answering the astute query posed above, using the 2007 edition of the ISO CGL cited in her class.
First, the Separation of Insureds provision provides the equivalent coverage of what was formerly knows as "cross liability." That now-obsolete endorsement was utilized to preserve the right of one insured under a policy to retain its right to sue another insured under the same policy. Some folks still find it strange such a lawsuit is allowed. The most common query is, "But if both parties are covered by the same policy, isn't the insured just suing itself?"
This is a great example of an obvious truth eclipsed by an invalid assumption. If the insureds are separate legal entities, then one suing the other is no different legally than any other lawsuit among plaintiffs and defendants. The fact they are covered by the same policy is irrelevant. And the Separation of Insureds provision makes that clear:
Except with respects to the Limits of Insurance, any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:
a. As if each Named Insured were the only Named Insured; and
b. Separately to each insured against whom claim is made or "suit" is brought.
Because typically additional insureds, especially if added by a blanket endorsement, are not named insureds under the policy, "b" applies. And note while it specifically states the policy will apply "separately to each insured" being sued, it provides no restriction on what entity might be doing the suing. So even if that entity is another insured under the same policy, the "separation" means they can still sue each other. Bingo, you have cross liability.
To the second part of the e-mail question, what affect, if any, does this have on a WOS?
None! They are two different animals. Separation of Insureds addresses the issue of direct suit of one insured against another. Subrogation is when a third party legally acquires an insured's right to sue. As the Transfer of Rights of Recovery Against Others To Us provision reads:
If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring "suit" or transfer those rights to us and help us enforce them.
Because we already have seen the Separation of Insureds provision provides such rights to each insured, under this provision a third party could acquire those rights under certain circumstances and then exercise them. But here is where the WOS comes in. If there is a WOS already agreed to by the parties involved, and such waiver did not take place after the loss that created the original right to sue, then the policy will honor the waiver and no subrogation will be allowed against an insured by the third party.
Note, however, a key fact: Nothing about a waiver affects the original insured parties and their rights to sue each other, as granted by the Separation of Insureds clause. It is the subrogation of those rights to others that is prohibited under a WOS. If the intent is to eliminate the ability of one insured under the policy to sue another, utilize a hold-harmless provision, not a WOS.
Further confusing the issue, that water is often muddied by contracts that require cross-liability and a hold-harmless provision. Asking for a provision that specifically allows insureds to sue each other (cross liability) while simultaneously requiring a provision prohibiting them from suing each other (hold-harmless) is counter productive.
As to the question of whether a WOS requires a policy endorsement or is automatically provided by the Transfer of Rights provision, please note one other important detail in the provision's
language: It only prohibits waivers that take place after a loss. By implication, any WOS agreed to before a loss is thus valid. The key word here is "implication." There are more than a few carriers who prefer to see any waivers in advance of agreeing to honor them, and some carriers also prefer, especially in harder markets, to make a separate charge for agreeing to a WOS. So while the insured can no doubt make a winning argument in court that a pre-loss WOS must be honored by the carrier under the policy language, the agent who makes a standard practice of not informing carriers of all such waivers runs the risk of turning its relationship with said carriers from warm to frigid. Just like that innocent remark at Thanksgiving dinner that blew up in your face, your easy assumption that the carrier didn't need to know about the WOS doesn't mean the carrier won't perceive it differently. In any type of relationship, it is always better to ask than assume.
So dear grasshopper, your question is a great one. Rather than reinforcing each other, the Separation of Insureds and Transfer of Rights of Recovery Against Others To Us provisions in the ISO CGL don't contradict nor do they reinforce each other--they deal with separate issues which must be addressed as such. Once you approach them as separate issues, you can then see that WOS and additional insureds are also separate issues, even though often treated by bid specs and contracts as if they were one and the same.
Which brings me to my response to the e-mail's last query. An abundance of caution, and a fervent desire to preserve and strengthen her relationship with her carriers prior to what may be a coming harder market for all, not just contractors, suggests she ask her carriers the same question she just asked me. I would not be surprised if more than a few indicate a preference for that separate WOS endorsement--and potential additional premium--rather than embracing the idea that all is well in the world of blanket additional insureds. If, on the other hand, they tell her there is absolutely nothing to worry about, I'd get that in writing.
And if the carriers respond that everything is fine, but won't provide written assurance of same, I'd give her the same advice as if she heard, "Oh, don't worry about anything, we all get along just fine" from one of those new relatives at Thanksgiving dinner: "Run for your life!"
