March 8, 2018

What is additional insured coverage and why is it important for owners and contractors?

Millstein

All contractors in Washington have a searchable webpage maintained by the state Department of Labor & Industries' Contractor Registration Department. A contractor's webpage contains a decent amount of basic information.

One section of each contractor's webpage is devoted to insurance.

In Washington, all contractors are required to carry a minimum amount of commercial general liability insurance as part of the registration requirements. For general contractors, that amount is $1 million. This amount is the maximum a given insurance carrier is required to pay for any and all claims during a certain coverage period.

Next to the word “insurance” on a contractor's L&I webpage you will find a small blue circle with a question mark inside it. Click it and up pops a bubble with these words: “Information about this contractor's required general liability insurance. If the contractor damaged your property, you may be covered by it. To make a claim, contact the insurer directly.”

This is true. However for owners learning this after there is a problem can be too little too late.

This article covers what is known as additional insured (AI) coverage, which every owner needs to know about and every contractor must understand.

What is AI coverage?

AI coverage is typically provided via an endorsement to the contractor's underlying commercial general liability policy.

The requirement for additional insured coverage should be clearly stated in a construction contract. It is important that a contractor is not agreeing to provide broader coverage to the additional insured than its policy provides. It is easy for a contractor to email or call its broker to verify and confirm.

Also, every contractor should verify the limits of its policy to ensure it is enough. If a claim is filed against you and an additional insured, any damages assessed against the additional insured may reduce future amounts available under the policy during a given period of time.

Here is an example from the AIA A201:

“The contractor shall cause the commercial liability coverage (excluding workers' compensation) required by the contract documents to include (1) the owner, the architect and the architect's consultants as additional insureds for claims caused in whole or in part by the contractor's negligent acts or omissions during the contractor's operations; and (2) the owner as an additional insured for claims caused in whole or in part by the contractor's negligent acts or omissions during the contractor's completed operations.”

Why is AI coverage important?

As an owner, you might have “triple” coverage if you are also an AI.

First, if the contractor's work causes property damage (or personal injury), you can tender that claim directly to the contractor's carrier, who is also now your carrier.

Second, if you end up suing the contractor to recover the damages, the contractor is likely to tender that claim under its own policy. Even though the issue might be identical (broken sewer line), and you are sued, the carrier must now cover you and the contractor. Later on, you can demand the carrier “split” the file, since it is defending you and the contractor. It might be the same issue, but these are two separate claims, and such claims cannot be commingled. The carrier may be forced to hire two separate law firms — one for you and one for the contractor.

Third, you should also have your own coverage (typically under a general homeowner's policy or course of construction coverage, which is an easy topic to discuss with an insurance broker since carriers almost always offer such coverage).

Remember, an endorsement is not equivalent to a general liability policy. It generally covers the additional insured only with regard to the premises, project, product, equipment, etc. described in the endorsement. It does not cover the additional insured for any other activities.

As an additional insured, you are typically covered for claims arising from the named insured's errors, even if you and the contractor commit such errors jointly. An additional insured endorsement may provide no coverage for claims that are attributable to your negligence alone.

To protect your company against such claims, you should purchase a good policy devoted to coverage during construction.

If you are an owner, you want to make sure that any coverage you receive under an additional insured endorsement applies on a primary basis. That is, if a claim is filed against you, the contractor's insurer should be first in line to pay. You should not have to rely on your own policy to cover the claim unless and until your additional insured's coverage limits have been exhausted.

Why does it matter?

By now what should be an easy concept suddenly seems incredibly complex. And it certainly can be. On large construction projects, where damage is involved, insurance almost always proves to be the key. Often you and the contractor will have defense attorneys, and there will also be coverage lawyers. It can feel like a game of three-dimensional chess.

On the other hand, it can also be rather simple. If you are a contractor, you may not be invited to bid if you do not offer enough insurance and properly agree to make the owner an additional insured. This may increase your premiums too, especially if there is a large claim and your carrier must defend you and the owner.

Even if the claim leads to a lawsuit and even if the lawsuit settles or no affirmative judgment is rendered, simply by defending (twice!) promises to cause a large loss run due to the cost of defense.

If you are an owner considering hiring a contractor for significant construction work, your contract should include — at a minimum — these words: “Contractor shall endorse owner as an additional insured on its policy. In the event of a claim the contractor's policy shall be primary.”

To turn a well-known phrase on its head: less is more — unless it is too little. Then, well, it is not enough.

Make sure you don't find out you don't have enough coverage before there is a problem. Insurance is one area where more is often indeed more — including the cost. Don't get caught short.

Seth Millstein started Pillar Law in 2010. He represents owners, developers and contractors in Washington state.

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