Contractors are often required by contract to name the project owner as an “additional insured” under a commercial general liability (CGL) policy and this is routinely done. Subcontractors are sometimes required to name both the general contractor and project owner as additional insureds under their CGL policy. Design professionals, on the other hand, rarely are able to provide additional insured status to the owner under the professional liability policy. For a good explanation of this distinction, see the Zurich Insurance Architectural/Engineering Briefings at Vol.2, No.1 (February 1997), http://www.zurichamerican.com/za/news/nwslttrs/archeng/2-97.htm
An additional insured endorsement can provide broad coverage to the additional insured or it can carefully limit the coverage to only those damages that arise from the named insured’s acts and omissions. In American Country Ins. Co. v. Cline, No. 1-98-2021, 1999 Ill. App. LEXIS 853, the court held that an additional insured endorsement effectively limited the coverage to only those damages arising out of the insured subcontractor’s own conduct and did not extend coverage to the owner or general contractor for damages arising out of their own conduct. The endorsement provided the following:
“The coverage afforded to the Additional Insured is solely limited to liability specifically resulting from the conduct of the Named Insured which may be imputed to the Additional Insured. This endorsement provides no coverage to the Additional Insured for liability arising out of the claimed negligence of the Additional Insured, other than which may be imputed to the Additional Insured by virtue of the conduct of the Named Insured.”
An employee of the electrical subcontract sued the project owner and general contractor for their active negligence in causing an electrical conduit pipe to fall on his ladder, resulting in his fall to the floor. Both the owner and contractor gave the claim to the subcontractor’s insurance company, American Country Insurance Company (“American”). American refused to defend the case since the employee alleged active negligence of the owner and contractor, and the endorsement limited coverage only to liability caused by the insured and imputed to the additional insureds. The issue to be decided by the appellate court was whether American correctly interpreted and applied the language of the endorsement.
The court found that the coverage was not illusory and meaningless even though the language of the endorsement strictly limited what would be covered. This is because it would cover claims from the vicarious liability of the owner and contractor arising out of actions of the subcontractor. The narrow coverage seemed appropriate to the court, particularly in view of the small price of $150.00 paid for the endorsement. In addition, “this limitation on coverage recognizes that businesses in the construction industry carry coverage for liability arising out of their own work, and assumes that [Contractor] would have its own general liability coverage. If an additional insured seeks the same level of coverage that it already receives from its own insurer, then insurers like plaintiff should receive a larger premium payment.” The court concluded that the terms of the endorsement reflect the fact that the insurance company was only willing to provide coverage of its own insured’s actions.
Another issued determined by the court was whether the endorsement violated public policy. Since the insurance company had filed the endorsement with the state insurance commissioner of Illinois and it had not been rejected by the Insurance Department, this was one indication that the endorsement was not contrary to public policy. In addition to this, the court found that the parties were sophisticated commercial entities that negotiated their insurance policy and endorsement. This bound the owner and contractor to their decision accepting the endorsement.
Since the endorsement was enforceable as written, the court found that the insurance company had no duty to defend the contractor and owner in the suit by the subcontractor’s employee. That employee’s suit alleged negligence only on the part of the contractor and owner, and not the insured subcontractor. Thus there was no negligence of the named insured imputed to the others. The claim, consequently, was not covered by the endorsement.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 1, No. 6 (Jun 2000).
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