Part II – Additional Insured Endorsements: Ongoing Operations, Completed Operations and Musical Chairs.
One of the more important insurance requirements you will find in a construction contract is a demand by a general contractor or owner for additional insured status for ongoing and completed operations under the subcontractor’s general liability policy. In my experience, this provision has been the most frequent source of headaches for subcontractors and reminds me of the game “musical chairs”. When the right forms are not in place, subcontractors can’t get on the jobsite. In other cases, they will not get paid for work until the correct endorsements are on the policy. And, if an accident occurs and the coverage is not in place, you will not have a chair when the music stops. Getting these endorsements squared away in the bidding process will save you time and reduce the hassles associated with any contract.
Additional Insured Status
First, what is additional insured status? There are many articles and books written on the subject, but in theory, it provides certain protections to your customer through your general liability policy for accidents for which you are responsible. So, if you cause an accident resulting in injury on the jobsite and the general contractor is sued because of your negligence, your policy may treat them as an insured as outlined in the endorsement. Since the owner and general contractor may hire many subcontractors, their exposure grows as the complexity of the project increases. Therefore, it is critical for these parties to make sure they and their own policies are protected against liability arising from incidents for which they may only be vicariously, and not directly, responsible.
The two most important exposures for which your customers will need additional insured coverage is for ongoing operations and completed operations. In regard to ongoing operations, your customer will want to have protection for accidents that occur while you are doing work on the jobsite. The completed operations exposure covers injuries and damages resulting from your work once you have finished your part of the project.
So how do you know if your insurance endorsements will comply with the construction contract and not become a problem down the road? The first place to determine this is, as discussed in the last article, in the contract. The endorsement parameters are usually highlighted in the insurance requirements section. Unfortunately, contracts are sometimes not clear as to what is required. It is important to ask questions before the bidding process so your policy is in line with the demands of the contract. It will also give your agent some time to help you get the forms you need.
Below are some of the commonly requested additional insured forms and their potential pitfalls:
“..the additional insured status shall be written on the CG 20 10 11 85 or its equivalent”
The endorsement, CG 20 10 11 85, Additional Insured – Owners, Lessees or Contractors, is a form that provides additional insured status for completed operations and ongoing operations. This request may be a problem for you, your agent and insurance company. The Insurance Services Office (ISO), which develops and publishes insurance forms, discontinued this endorsement in 2004 and replaced it with two other forms. One is for completed operations (CG 20 37 07 04) and the other is for ongoing operations (CG 20 10 07 04).
There is good reason for ISO not continuing the old form. Although this endorsement gives coverage for both completed operations and ongoing operations, it puts your policy at risk for responding to accidents for which the general contractor may be solely responsible. In other words, your policy could pay for claims for which you had no responsibility other than the fact that you were on the job site that day. This will also affect your loss experience and dilute the limits of your policy should there be a claim. The ISO forms, and most other proprietary forms released after 2004, are intended to only provide additional insured coverage if you, the subcontractor, are at least partially responsible for the accident.
The other problem with this requirement is the phrase “or its equivalent.” Whenever you see this after any coverage request, you should ask your customer, “What is the equivalent form?” Why do you need to ask? Because there is only one equivalent to the CG 20 10 11 85………. the CG 20 10 11 85! Some general contractors will provide a list of equivalent forms. For those that do not, you should forward your preferred or suggested additional insured form(s) to your customer and request that they confirm in writing that your form(s) will satisfy their requirements. Make a million copies and store them in a Swiss deposit box.
“…the additional insured forms must be primary and noncontributory…”
Primary and noncontributory is a phrase that is thrown around quite often with little attention to what it actually means. What owners and general contractors want is for their policies, both the general liability and the umbrella policy, to be the last to pay in the event of a claim. It is not an unreasonable request, but the ISO additional insured endorsements do not say anything about which policies should be primary and noncontributory. Not even the CG 20 10 11 85 discusses it.
So what do you do? Well to start off, it is your customer’s policy that most likely determines primary and noncontributory status as between its insurance and yours. If the customer has an ISO-issued CGL policy form, it almost certainly states that if the customer is an additional insured on someone else’s policy, then the customer’s policy will be excess to that other policy. So all is good, right? Not really.
Some customers are going to want to see this language on their subcontractors’ additional insured endorsements. ISO does not actually use these words on their endorsements. Many proprietary forms will include this language in the additional insured endorsement to close the loop from their policy to your endorsement. For those that don’t, they may have an endorsement that makes all additional insured endorsements primary and noncontributory. Again, share your forms with the customer to see if yours meets all requirements. Once you get the customer’s OK to use your additional insured form in writing, make a million copies and store them in a Swiss deposit box, too. You notice the trend?
You are still not free and clear. If you noticed, the ISO CGL coverage form only makes the additional insured policy excess of the customer’s primary policy. It does not say anything about umbrella and excess policies. You will want to review the contract with your lawyer to determine whether your customer also wants the umbrella excess of your entire liability program. If they do, you will need a separate endorsement to do this. Those type of forms are not consistently available in the marketplace. When they are, there is usually a premium charge. I will discuss this item in more detail in a future blog.
“…the additional insured status shall remain in effect for at least (x) years for completed operations…”
This requirement can be a challenge and tough to manage, but it is extremely important to maintain as you renew your liability coverage. It means that if you finish a project, you need to keep liability coverage in place and add your customer as an additional insured for as many years as you have agreed. So, if the contract requires 4 years of completed operations coverage, you need to keep a viable CGL policy in place for 4 years after the completion of your work, and that policy must give the customer additional insured status all those years.
Although this is not always mentioned in the contract, many of the more sophisticated general contractors and owners know that bad things can happen a few years after a project is done. They want to make sure that those responsible will be able to pay and provide them a legal defense in the event of a claim. If a particular subcontractor can’t pay, that increases the chance that your customer and other subcontractors (or their insurance carriers) will pay more of the claim.
You need to pay close attention to this issue during a policy renewal. When you renew, you will want to make sure that any additional insured status provided by the policy continues to the next policy when such is required by contract. This can become burdensome as you do more projects over time. Excellent record keeping is imperative (as I alluded to earlier). It is best to review with your agent each entity named as an additional insured at renewal, and to check to see if you need to continue adding each to the new policy. Letting the potential additional insured pool aggregate over time may seem like a time saver and safe practice, but that practice does increase the likelihood of you providing additional insured protection beyond the terms of the contract, and thus may affect your loss experience. Endorsements providing additional insured status on a blanket basis can help, but these may be more expensive and some customers insist on seeing their name on the endorsement. Work with your agent to see what options you may have.
An even trickier situation is when you switch insurance companies. Not only do you need to make sure the additional insured status is carried over to the next policy, you will need again to find forms that will meet your customer’s contractual requirements. If your policy uses standard ISO forms, you are in a better spot not to create a gap in coverage. If your forms are proprietary to your insurance carrier or were customized to meet the needs of a particular customer, you will need to get that exact same coverage on the new policy or make sure that your customer is fine with the newer endorsement. It is critical to consider this well before you change your insurance company because this can take time.
“…all subcontractors you hire will have the same insurance coverage we require you to have…”
When I see this phrase, I think of the game of musical chairs. You want to make sure you have a chair when the music stops. When the music stops in construction, it means there is a claim. If you do not make your sub-subcontractors have the same additional insured coverage granted to you and your customers, you may not have a chair. When there is no chair to sit in, you are out, so your own insurance is now in play. Any payments by your insurer may lead to a poor loss history. In some cases, you could be held in breach of the contract with your customer for failure to secure the required insurance, which means you may have to pay any liability yourself. As hard as it may seem, it is important that you take the same steps to protect yourself that your customer takes to protects itself. Seek a qualified attorney to help you create a contract that will help you look after your interests.
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