Summary: The commercial general liability (CGL) coverage form has a "who is an insured" section in which it describes "an insured" to whom the provisions of the CGL form apply. However, that section does not deal with entities known as "additional insureds," those that are added as insureds to the CGL form by way of endorsements, or modifiers of the standard coverage form.
This article offers a general discussion of additional insureds—how they are added to a general liability policy, their relationship to named insureds and insurers, and issues that arise based on that relationship. Updated information is provided in the article: Additional Insureds – A General Discussion.
In today's business world, a company often is asked (or required) to put another entity on its commercial general liability coverage form as an additional insured. This is usually done by attaching an endorsement to the CGL form, adding the other entity as an insured. The endorsement can be a standard form—for example, the Insurance Services Office (ISO) CG 20 15 07 04, additional insured – vendors endorsement; or, the endorsement can be a manuscript form, such as one adding gray yak breeders in Tibet as additional insureds. The endorsement can be simple, like the two-sentence CG 20 02, additional insured – club members; or more complicated, like the two-page CG 20 09, additional insured – owners, lessees, or contractors. (Note that this endorsement has been withdrawn from use by ISO.) (For more information on specific additional insured endorsements, see CGL Endorsements.
But regardless of the length or format of an additional insured endorsement, an insured should realize that a decision to make some entity an additional insured on his or her general liability policy should not be dismissed as just a simple business decision that has no real consequences; there can be legal and financial consequences arising from that decision. After all, the insured is sharing his or her liability insurance with another entity, and is more often than not paying the insurer to extend that insurance to apply to sums that the additional insured becomes legally obligated to pay as damages.
As noted, if an insured adds another entity as an additional insured onto a general liability policy, this is usually done through an endorsement. Some of these endorsements can be attached to the named insured's CGL form at no additional charge; others result in additional premium for the named insured.
Some ISO endorsements that can be added to a general liability policy at no additional charge to the insured are: CG 20 07 07 04 additional insured—engineers, architects, or surveyors, and CG 20 22 10 01 additional insured—church members and officers. Those additional insured endorsements that require a premium charge include: CG 20 34 07 04 additional insured—lessor of leased equipment; CG 20 15 07 04 additional insured—vendors; and the omnibus CG 20 26 07 04 additional insured—designated person or organization. The charges for the latter endorsements are on a "refer to company" basis.
Named insureds under a CGL form should also take note that the limits of insurance paid out for claims are shared with additional insureds. For example, if the general aggregate limit on a named insured's CGL policy is $500,000, that is the most the insurer will pay regardless of the existence of additional insureds on the policy. And, any losses paid on behalf of an additional insured will decrease the aggregate amount available to the named insured.
In connection with this point, named insureds need to know that experience modification factors that may lower or increase the policy premium can be affected by the losses and claims of the additional insureds. If the named insured has a spotless loss history, but the insurer has paid out tens of thousands of dollars for claims against an additional insured, chances are that the premium for which the named insured is responsible will be higher at the next renewal date.
Premiums and sums paid as damages are not the only areas under a CGL form where named insureds and additional insureds relate. The CGL forms consider the named insured (using the terms "you" and "yours") and (additional) insureds as connected, but yet distinct entities. Both are covered by insuring agreements and both are touched by exclusions and conditions. Note, however, that there are parts of the CGL form that apply only to the named insured, and parts that apply to all insureds, including additional insureds. For example, when an insuring agreement or an exclusion or a condition or definition uses the word "you" or "your", only the named insured is the affected party, not the additional insured. Another example is the medical payments insuring agreement—it applies only for the named insured, not additional insureds.
Finally, while the CGL policy of the named insured will provide liability coverage for an additional insured, the CGL policy will not act as a guarantor for the named insured's adding the additional insured onto the policy. If the named insured is required, or volunteers, to list a party as an additional insured on the named insured's CGL form, but then does not follow through with the listing, the CGL form will not just automatically provide coverage for the additional insured. Further, the provisions of the CGL form will give no coverage to the named insured if the jilted additional insured should sue for that lack of follow through; this is a breach of a contractual agreement—either written or verbal—and the CGL form does not apply to the upholding of performance agreements.
If the insurer is going to provide liability coverage for an additional insured through an endorsement to a CGL form, the insurer must also live up to the duty to defend. After all, the insurer states that it has "the right and duty to defend the insured against any suit seeking … damages". This statement obviously includes an additional insured within its scope. However, the duty to defend is limited by the declaration that "we will have no duty to defend the insured against any suit seeking damages … to which this insurance does not apply". So, for example, if an exclusion on the CGL form clearly applies to the named insured and the additional insured, there is no duty to defend on the part of the insurer. A problem arises, though, when it is not clear whether the additional insured has liability insurance, and this lack of clarity more often than not springs from the wording on the additional insured endorsement.
Many additional insured endorsements make the designated entity an insured "but only with respect to liability arising out of …." Just what does "arising out of" mean?
Some insurers would read the phrase very narrowly, limiting an additional insured's role as an insured only to vicarious liability—that is, no coverage for any negligence of the additional insured that is independent of the activities of the named insured. Put another way, the liability of the additional insured flows only from the liability of the named insured. Others would say "arising out of" deserves a broader interpretation—so broad that the additional insured's own activities could lead to liability coverage under the named insured's CGL form. Put another way, if the activities of the additional insured (instead of the named insured) cause injury to someone, the named insured's CGL form will apply to a claim as long as there is some connection between the additional insured's activities and the named insured's operations or premises.
As usual in such circumstances, the courts will provide the definitive interpretation on a case by case basis. Note that, at this time, most courts are not buying the more narrow vicarious liability only argument. Following are some examples of the judicial viewpoints.
In Shell Oil Company v. AC&S, Inc., 649 N.E.2d 946 (Ill. App. 1995), the court was faced with interpreting the "arising out of" phrase and chose the broad viewpoint. In the case, Shell Oil had filed a declaratory judgment action to see if the defendant and its insurers had a duty to defend in a lawsuit by an employee of AC&S for injuries sustained while working on Shell's premises. The lower court sided with Shell and the appeals court agreed. The appeals court said that the "key language for determining potential coverage and the duty to defend is the phrase 'arising out of', and it means originating from, having its origin in, growing out of, or flowing from. The injuries arose from operations of AC&S on Shell's premises, and the injuries would not have occurred but for the employment and presence of the injured worker on Shell's premises." Thus, the policy covered any liability that would not have occurred, but for the operations of the named insured.
In Hormel Foods Corporation v. Northbrook Property and Casualty Insurance Company, 938 F. Supp. 555 (D. Minn. 1996), the court looked over an additional insured endorsement and offered a compelling argument in favor of the broad interpretation of the "arising out of" phrase. In that case, Hormel sued in a declaratory judgment action over the duty to defend due to a death at a hog processing plant, and the resultant lawsuit. Hormel was added as an additional insured on the general liability policy of Quality Pork Products (QPP) for liability "arising out of the ownership, maintenance, and use of" leased premises. When someone was killed by a machine on the premises and Hormel was sued, Hormel sought protection from the liability policy of QPP. QPP's insurer, Northbrook, denied coverage and said the additional insured provision only protects Hormel from negligence by QPP, that is, vicarious liability. The district court disagreed and said "if there is a causal relationship between the place covered by insurance and acts giving rise to legal liability, the liability is covered. The machine was so intimately and necessarily intertwined with the operations as to make the injuries flowing from it attributable to the ownership, maintenance, or use of the facility". Put another way, the term "arising out of" requires only a causal connection; it does not require proximate cause.
On the other hand, in Harbor Insurance Company v. Lewis, 562 F. Supp. 800 (D.C. Pa. 1983), the court wrote that "by providing additional insured endorsements, the insurer is only insuring additional insureds against vicarious liability for acts of the named insured". However, note that this decision was clarified in Philadelphia Electric Company v. Nationwide Mutual Insurance Company, 721 F. Supp. 740 (E.D. Pa. 1989) when that same court stated that "the Harbor case did not articulate a rule of law limiting the interest of additional insureds to vicarious liability". What the Harbor case did show was that contract language—the words and phrases on the additional insured endorsement—was crucial in interpreting the extent of coverage for an additional insured. In other words, if an insurer wants to limit coverage for an additional insured to vicarious liability only, that intent has to be written into the endorsement (as was done in the Harbor case); otherwise, the additional insured endorsement giving coverage to an additional insured for injuries "arising out of" the ownership of a premises or the operations performed by an insured will be seen as extending beyond mere vicarious liability to include liability for the negligence of the additional insured itself (as long as there is some causal connection between the claimed injuries and that negligence).
Because of the differences in interpreting "arising out of," ISO has attempted to amend the language in some of the current additional insured endorsements to reflect the intent. For example, endorsement CG 20 07 (1987 edition) additional insured – engineers, architects, or surveyors amended section II, who is an insured, to state that the provision included "as an insured any architect, engineer, or surveyor engaged by you but only with respect to liability arising out of your premises or 'your work'." Compare this with CG 20 07 07 04, which amends the provision to include as an additional insured "any architect, engineer, or surveyor engaged by you but only with respect to liability for 'bodily injury', 'property damage' or 'personal and advertising injury' caused, in whole or in part, by your acts or omissions or the acts of omissions of those acting on your behalf: 1. In connection with your premises; or 2. In the performance of your ongoing operations." Thus, the form attempts to eliminate coverage for an additional insured's sole negligence. Of course, with this wording (namely, in whole or in part), if the additional insured can show that the named insured is at least one percent at fault, the additional insured may have coverage, regardless of how much of the fault rests with the additional insured.
(Note that this rewrite of additional insured endorsements by ISO is yet to be thoroughly tested in court rulings.)
One issue that often arises with the presence of additional insureds is the relevance of certificates of insurance.
Sometimes, the additional insured may receive only a certificate of insurance showing that it has been named as an additional insured on the named insured's policy. That certificate may show some policy numbers and the name of an insurance company, but it is no guarantee that the additional insured has the coverage it wishes or requires. So, the additional insured should insist on a certificate of insurance and a copy of the policy and the additional insured endorsement, and then read and compare the certificate with the policy and endorsement.
A certificate of insurance will list the policy period. However, this will not help the additional insured if the named insured cancels the policy or has it cancelled through nonpayment of premium. Cancellation notice goes to the first named insured and not the additional insured. So, the additional insured needs some mechanism beyond a certificate of insurance to assure itself that actual coverage exists when it is needed.
The wording on a certificate of insurance may contradict the wording or the intent of the insurance policy. The terms of the policy should prevail over those on a certificate; but for this to be the case, the insurer has to make it clear to the additional insured that the certificate is not an insurance policy, and that any coverage granted is done so through the policy and the additional insured endorsement. If this is not clear and unambiguous, a case could be made that the language on the certificate gives the additional insured more coverage than the insurer had intended. As an example of this, see International Ampitheatre Company v. Vanguard Underwriters Insurance Company, 532 N.E.2d 493 (Ill. App. 1988). In that case, the court found terms on a certificate of insurance ambiguous in relation to just what the policy covered and what it excluded, and so the insurer ended up covering a claim it had intended to exclude. For an example of a court's opinion as to what constitutes unambiguous wording on a certificate of insurance, see Pekin Insurance Company v. American Country Insurance Company, 572 N.E.2d 1112 (Ill. App. 1991). The wording on the certificate of insurance in that case was as follows: "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend, or alter the coverage afforded by the policies below. The insurance afforded by the policies described herein is subject to all the terms, exclusions, and conditions of such policies." The court in the Pekin case said that this was a clear showing that the certificate was not part of the policy and conveyed no rights to the certificate holder.
Another case to consider is United Stationers Supply Company v. Zurich American Insurance Company, 896 N.E.2d 425 (2008). In this case, the Appellate Court of Illinois, First District, Third Division, ruled that, where the certificate of insurance refers to the policy and expressly disclaims any coverage other than that contained in the policy itself, the policy should govern the extent and terms of the coverage.
For more information on certificates of insurance, see Certificates of Insurance. This article is in the General C- pages.
Another issue that can arise with additional insureds concerns the other insurance clause that is on the CGL forms, with its question of primary insurance versus excess insurance. When an entity is named as an additional insured on someone's general liability policy, is that policy primary or excess insurance for the additional insured? The terms of the other insurance clause in the CGL form have to be reviewed for an answer to the primary/excess question.
Language in the other insurance clause of the standard CGL form starts off with "if other valid and collectible insurance is available to the insured". So, the discussion of whether the general liability insurance is primary or excess is based on the assumption that there is other valid and collectible insurance; in other words, the additional insured has his or her own general liability policy as well as the other general liability policy on which he or she has been named as an additional insured.
Assuming this point, the other insurance clause then states that "this insurance is primary except when b. (excess insurance paragraph) applies". The excess insurance paragraph lists several specific examples of when "this insurance" is excess; for a description of these examples, see General Provisions of the CGL. However, the example that is most relevant to an additional insured states that "this insurance is excess over any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement". In other words, the additional insured's own general liability policy is declaring it is excess coverage over that general liability policy on which he or she has been listed as an additional insured. It can thus be said at this time that, if both the additional insured's CGL form and the named insured's CGL form have that paragraph in the other insurance clause, then the additional insured endorsement has attempted to make the additional insured a primary insured on the liability policy to which the endorsement has been attached; the additional insured's own CGL form is excess coverage.
Litigation notwithstanding, requests to add additional insured to general liability policies are one of the most common occurrences in the daily insurance routine. Great thought, then, should go into the reason for the request, and the nature of the entity making the request.
Remember that the requirement to add an additional insured to one party's insurance policy is a performance obligation. It requires that one of the parties do something. Failure to comply with the requirement is a breach of contract that is not insurable by a general liability policy. Since breach of contract generally isn't covered by any general liability insurance that a party carries, that party may find itself on its own to defend any action arising from failing to another party as an additional insured.
This is the same type of thing as failing to live up to other terms of the contract—failing to pay the rent, failing to manufacture the goods in a certain way, or failing to complete a job in a certain time frame. They also are breaches of contract that aren't covered by general liability insurance.
In addition to thinking of indemnification clauses and additional insured requirements in contracts as separate items, there are a number of areas that should be considered before agreeing to name an additional insured on a liability policy. Among them are:
—Direct access to the policy
Additional insureds may be given direct access to the named insured's policy for both defense and settlement, a fact that often is overlooked in the haste to negotiate the terms of a contract. An additional insured has the same rights under the policy as other "insureds". They can turn claims arising from additional insured activities directly over to the insurance carrier without consulting with the named insured. That consultation should occur when the decision is made to name the company an additional insured.
—Right to Defense
In addition to paying judgments, the additional insured coverage provides defense for claims to which the coverage applies. This means that the insurance carrier does have to defend the additional insured as well as the named insured if both are involved in the same claim. This could require separate defense strategies and sets of counsel, especially if the interests of the named and additional insureds conflict.
The right to defense is the same for both the named and additional insureds. Defense is provided when there appears to be coverage under the policy and coverage limits still are available.
—Dilution of limits
Judgments against both parties will be paid from the same set of limits. Every time an additional insured is added to a policy the coverage limits are diluted. Instead of the named insured carrying a dedicated $1,000,000 of coverage for each occurrence, it is carrying $1,000,000 per occurrence that it may have to share with all additional insureds that are involved in the claim. This sometimes comes as a shock to the named insured after the claim is turned over to the insurance carrier.
—Is the request reasonable?
At times it seems as if some companies want to be added as additional insureds as a matter of routine. There should be a legitimate reason behind the request; the coverage should not be granted just because a company asks for it. Often, a party that is in the superior bargaining position automatically requests additional insured status as part of its standard requirements. It is worthwhile to question the request if a logical reason for it is not evident. Companies often will reconsider in the face of legitimate questions. The additional insurance requirement should be viewed as an area of negotiation and not a pre-set requirement.
—Proper flow of coverage
In general, the party that has control over the work or property provides the primary insurance. As examples, the tenant who is occupying the building usually adds the building owner as additional insured. The manufacturer that is producing the product usually names the vendor as additional insured. The subcontractor who is installing the equipment usually names the contractor or owner as additional insured.
There are exceptions to this coverage hierarchy. However, it is worthwhile to think through the relationship before automatically agreeing to provide additional insured status.
—Control of coverage
The additional insured is at the mercy of the named insured in regard to scope and continuation of coverage. The evidence of additional insured status usually takes the form of a certificate of insurance or a policy endorsement. An additional insured rarely has the opportunity to review the named insured's entire policy and claims history. Aggregate limits may be impaired; limiting endorsements may be attached. Additional insureds probably will not be notified if the policy is canceled. All of these factors could add up to problems when claims arise and the additional insured turns to the named insured's policy for protection.
—Other insurance
An additional insured may have access to two policies that apply to a claim: the policy on which it is named an additional insured and the policy that covers its general business activities. The company usually wants the policy on which it is an additional insured to be primary when both policies apply. There may be a conflict, however, between the other insurance clauses of the two policies. This could occur if they have identical other insurance clauses or if the clauses contradict one another. With either of these situations, the policies both may contribute to the loss on a pro-rata basis or a court could decide which is primary, which defeats the intention of the insureds.
In order to avoid this problem, the additional insured endorsement should be endorsed as primary. Since this may be difficult to negotiate, the additional insured could ask that its general business liability policy be endorsed as excess to valid coverage under an additional insured endorsement. Either of these methods should result in the additional insured coverage being used as the primary insurance.
—Unintended coverage
The additional insured endorsement should limit the coverage to the extent of the relationship between the named and additional insureds. Standard ISO endorsements attempt to limit it to the applicable relationship, and care should be taken to do the same with additional insured endorsements that are manuscripted for special situations. The coverage should be limited to the specific work being performed, the specific contract requiring the coverage, or the specific relationship being insured (such as tenant-landlord). There are some who believe that the additional insured may be able to tap into the named insured's policy for broader coverage than was intended if the additional insured endorsement is not limited in this way.
Restrictions also should be placed on the amount and length of coverage being provided by the endorsement or more coverage might be provided than was intended. If only $1,000,000 of general liability coverage is required for the additional insured, the endorsement should reflect only that amount of coverage.
In other words, the extent of the additional insured coverage that is provided should be consistent with the breadth of the indemnification clause.
Too often, requests for additional insured status are handled as just routine activity. They are "processed" by companies entering into contracts and by those who arrange insurance coverage. However, insufficient understanding of what additional insured status means, or a failure to study the reasoning behind the coverage request, can result is a serious misapplication of coverage—or no coverage at all.