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Insurance Companies that issued Commercial General Liability (CGL) policies to subcontractors, including completed operations coverage as to projects completed before the inception dates of the policies were held to owe a duty to defend the additionally insured general contractor in third party litigation asserting its vicarious liability for the subcontractors’ acts.   The carriers argued that the additional insured status was not intended to provide coverage for liability arising out of work performed by the subcontractors prior to the policies’ inception dates.  The court concluded that absent clear language excluding such coverage in the policies, certificates and endorsements, the insurer owe the general contractor a duty to defend.

Pardee, the general contractor, subcontracted with various subtrades for installation of insulation, HVAC systems, stucco, plastering, asphalt paving, and the like.  Each subcontract required the subcontractor obtain general liability insurance naming Pardee as an additional insured on all policies for work performed on the project, including completed operations.

According to the court, the unambiguous language of the polices and endorsements provides Pardee with coverage for the completed operations of the named subcontractors.  The only issue in question was whether the additional insured endorsements explicitly exclude coverage for the subcontractors’ completed operations.  Unless coverage limitations are “conspicuous, plain and clear” in nature they will not be effective, says the court.   Policies by several carriers were involved. Three of them contained an Insurance Services Office (ISO) “form 2010” additional insured endorsement. They provide coverage for the additional insured limited only by the phrase, “liability arising out of ‘your [the named insured’s] work’ for [the additional insured] by or for you.”  Since the products-completed operations hazard definition specifically used the language “arising out of ‘your product’ or ‘your work’” and that “your work” is defined as meaning “work or operations performed by you or on your behalf,” the court concluded that it was apparent that completed operations was intended to be included in the type of liability referred to in the form 2010 endorsements.

The carriers argued that the above-described language demonstrates an intent of the carriers to cover Pardee only for the subcontractors’ work performed on the Pardee project after the insurance was obtained.  Prior to 1993, the form 2010 endorsement contained no language expressly limiting the time frame of the additional insured coverage to the time of the ongoing operations of the named insured.  The court says, “Had the insurers wished to limit coverage ‘to work in progress,’ they could have easily done so by defining ‘your work’ as work ‘now being performed or to be performed during the term of this policy.’”  The endorsements in this case did not limit covered completed operations as to time or particular project.

In 1993, the Insurance Services Office (ISO) revised the language of the form 2101 to expressly restrict coverage for an additional insured to the “ongoing operations” of the named insured, thereby effectively precluding coverage for completed operations losses.  As viewed by the court, the insurance carriers in this case could have used available language to expressly exclude completed operations, even without waiting for ISO to revise the form endorsement in 1993.  This, consequently, implied an intent by the carriers not to so limit the coverage in this case. Pardee Construction Company v. Insurance Company of the West, 77 Cal. App. 4th 1340; 2000 Cal. App. LEXIS 73; 92 Cal. Rptr. 2d 443 (2000).

Comment on Case:
The case discussed above pertains to additional insured endorsements on CGL policies.  When it comes to obtaining additional insured endorsements on design professional, errors and omissions policies, insurance carriers rarely, if ever, grant such endorsements.

By granting an owner blanket, or qualified additional insured status, the professional liability insurer would be exposing itself to coverage (defense and indemnification) for risks, liabilities and claims which potentially may substantially exceed the coverage traditionally offered to design professionals.  An owner’s implied warranty of specifications, for example, exceeds the liability that the design professional has for those same specifications.  It is entirely possible that the owner could be liable to the contractor for breach of the implied warranty of specifications, but have no recourse against the design professional because the specifications, although imperfect, were not negligently prepared.

In view of these issues, if an endorsement naming the owner as an additional insured is to be issued at all, it should carefully define and limit its own terms to limit the owner’s coverage to that which is afforded to the design professional under the policy.  It has been suggested that at a bare minimum such an endorsement, when issued as an accommodation to the design professional should specifically disclaim any obligation or duty to defend the owner.  And the indemnity obligation defined in the “owner endorsement” should be limited to liability, judgments, costs or expenses to the extent caused by actual or adjudicated (as distinct from merely alleged) negligence of the design professional in the performance of professional services.

If an owner is to be added as an additional insured, the endorsement must be carefully drafted so as to define the meaning of “additional insured” and to specifically preclude recovery by the owner for claims and damages not caused by the negligence of the design professional.  See David Hatem, Architectural/Engineering Briefings, Zurich Insurance, Vol.2, No.1 (February 1997).

Copyright 2001, ConstructionRisk.com, LLC – Virginia

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. 3, No. 1 (Jan/Feb 2001).