View this article online: https://www.insurancejournal.com/blogs/academy-journal/2017/07/26/458807.htm
If you didn’t read last week’s post, Renovation at the Deli; A Story About Additional Insureds, go ahead and do that now. It’ll give you the background on this week’s post.
When Frank (the deli owner) asked to be additional insured on Jimmy’s (general contractor) CGL policy, he was only following his agent’s advice. It didn’t seem to be a big deal to either Frank or Jimmy. We are going to explore a few places where this could create an issue for either of our main players in the story.
First, here are some reasons that Jimmy’s customers usually ask to be additional insured.
Jimmy has some customers that draw up contracts for the work. He has some other customers that simply require the construction quote and a handshake.
All of these factors can affect which additional insured form Jimmy needs and the advice he needs from his agent. Frank and Jimmy didn’t enter into a formal contractual agreement for the construction project. Frank accepted the bid on a single sheet of paper and authorized the work.
This is the first item that impacts the selection of additional insured endorsement. Without a contract, Jimmy’s insurance company can’t apply certain endorsements. The policy may already include an endorsement that provides automatic additional insured status when required by contract (such as the ISO CG 20 33 04 13), but that doesn’t mean anything in this case. They didn’t sign a contract, so even if Jimmy has this endorsement on his policy, it doesn’t cover this job.
Jimmy needs an endorsement that lists this additional insured, such as an ISO CG 20 10 04 13. That endorsement provides additional insured status to a particular person or organization at a specific location. When he goes to his agent, he’ll need to know that he’s working for Frank’s deli and the location where the work is being done.
Some additional considerations for Jimmy (that his agent wants to discuss) are that this endorsement is pretty specific. There is no coverage for the additional insured beyond Jimmy’s operations at Frank’s location. If for some reason he asks Jimmy to do some work on his second location, that location isn’t covered by this additional insured endorsement unless it is added to it.
It’s also worth mentioning that this is coverage for Jimmy’s operations, not his completed operations. That makes a difference because once the job is done and Jimmy cleans up and gets his crew moving to the next job, that additional insured coverage doesn’t exist for Frank.
Another point to consider is that this endorsement only provides additional insured status to Frank when the damages are caused in whole or in part by Jimmy, his crew, or his subcontractors. There’s no coverage for Frank’s sole negligence.
You may be asking, “what if Frank and Jimmy did have a contract that required that Frank be added as additional insured?” That’s a fair question because it does complicate things a little. In this case, the agent could request either type of additional insured form. If Jimmy already has an automatic additional insured endorsement on his policy that fits this situation, there’s coverage in place for Frank’s new exposures.
If this endorsement doesn’t already exist as part of Jimmy’s policy, the company has a choice to make. Do they want to provide Jimmy with the automatic status endorsement, or do they want to see any additional insured request for Jimmy’s policy? That’s a business decision that the company is going to have to make. It’s a matter of making a trade. Does the company want to reduce their administrative time dealing with a policy, or do they want to maintain control of who gets approved for additional insured status?
For this underwriter, it’s a matter of the needs of the customer, balanced with the relationship he has with the agency and agent, and the company appetite. Here are the questions (in the order they should be considered).
Whether Jimmy gets Frank added to an additional insured endorsement, or Frank fits on an automatic status endorsement, there is one other issue that comes up. What policy limits are required by the contract? The problem arises here when there is a conflict between the policy and the contract. If the contract requires Jimmy to carry $1,000,000 occurrence limit on his liability policy and he has at least that amount, there’s no problem. The contract controls the recovery amount to the contractual limit and to enforce that, the endorsement specifically requires that liability is limited by the contract.
The problem occurs if the contract requires at least $1,000,000 occurrence limit and Jimmy carries a $500,000 occurrence limit. The policy will not pay more than the limit available and to reinforce this, the endorsement specifically states that the liability will be no more than the policy limit. What happens if the policy limit is less than the contract requirements and there’s a judgment above the liability limit? That’s up the court in the event of a claim, but someone could be required to make up that difference.
In the end, all’s well that ends well. Jimmy’s crew finishes the work on budget and on time with no incident. Frank gets his second floor dining area in the deli and Jimmy gets a good recommendation on all of the social sites that rate contractors.
What’s the moral of the story? Requests to add additional insureds are so ubiquitous that we can start to assume that one request is just like the last request. For insurance professionals like us, we should look at every request and make sure that we’re providing our named insured with exactly what they need to protect themselves. That may mean reviewing the contracts if you have someone skilled in that area. It certainly means making sure that the insured knows what coverage is being extended to the additional insured.