Author: Bill Wilson, CPCU, ARM
Associate VP, Education & Research and Virtual University Director
Independent Insurance Agents & Brokers of America
Abstract: In 2013, ISO made some of the most significant revisions to its additional insured (AI) endorsements ever. Several of these revisions have given a number of industry experts pause as to how they may be interpreted by insurer claims personnel and the courts. This article attempts to enumerate those concerns.
Why ISO makes policy form changes
What prompts ISO to change its policy forms? Sometimes changes are made reactively in response to events and emerging issues ranging from the rapid growth of cyber exposures to the increased frequency of catastrophes, either manmade (e.g., terrorism) or natural (e.g., tsunamis) or a combinations of both (e.g., hurricanes and levees).
ISO often makes changes in response to the unintended consequences of court decisions. For example, case law may indicate an interpretation of coverage broader than intended, so ISO feels a need to clarify the language. This can be dangerous because the trial bar may respond with an “Aha! This proves they knew the old language covered those kinds of losses and now they’re trying to close that language loophole.” The reality often is that ISO is just trying to clarify the original intent of the policy language which was misconstrued by one or more courts.
In addition to these sources of changes, ISO also proactively solicits feedback on the need for policy language changes or perhaps even new policy forms and endorsements. Along with their own staff, ISO employs insurer panels as sounding boards. They also maintain a liaison committee that consists of participants from diverse industry groups ranging from our own Big “I” agent association to other organizations such as The Institutes and the International Risk Management Institute (IRMI).
The Big “I” continues to support other platforms providing ISO input. One is our National Technical Affairs Committee which meets at ISO headquarters annually. This group consists of myself, a state association staff member, and 3-4 insurance agents from around the country who are outstanding policy coverage technicians. Our agenda of recommendations often has exceeded 200 pages. The second forum is the Mid-America Insurance Conference (www.matcinsurance.com) which also meets annually and consists of agents and insurer representatives that meet with staff members from ISO, NCCI, ACORD, and, as warranted, other organizations. MATC has been meeting with ISO and its predecessor organizations for almost 80 years.
The CG 20 33 “blanket” additional insured endorsement
These last two mechanisms for input into ISO form revisions and creation bring us to the point of this article. In 2010, our national committee brought an issue to the attention of ISO that was first identified by IRMI in an article reviewing the New York trial court case of Brooklyn Hosp. Ctr. v. One Beacon Ins. This decision analyzed the following language of ISO’s “blanket additional insured” CG 20 33 - Additional Insured – Owners, Lessees Or Contractors – Automatic Status When Required In Construction Agreement With You endorsement [emphasis added]:
Section II – Who Is An Insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.
A contract had required that a laundry list of entities be added as additional insureds to a CGL policy. This was thought to have been accomplished by the existing CG 20 33 endorsement that was attached to the CGL policy. However, the court pointed out that the language of the endorsement indicated that an entity was an additional insured only when the named insured had directly agreed in writing to add such person or organization as an additional insured. As we all know, many contracts require that parties remote to the job being performed be added as additional insureds. According to this decision, additional insured status was triggered only if there was a direct contractual relationship, thus eliminating coverage for most upstream parties in construction agreements, such as project owners, managers, and others.
The CG 20 38 “blanket” additional insured endorsement
In the following year or so, we documented at least three other NY trial court cases and an Illinois appeals court case, Westfield Insurance Company v. FCL Builders, Inc. that reached the same conclusions as the original Brooklyn case. As a result of the request through our committee, ISO introduced a new blanket additional insured endorsement, the CG 20 38 - Additional Insured – Owners, Lessees Or Contractors – Automatic Status For Other Parties When Required In Written Construction Agreement, in their 2013 CGL filing.
This new endorsement attempts to solve the problem of a lack of privity of contract by adding the following category of additional insureds:
Any other person or organization you are required to add as an additional insured under the contract or agreement described in Paragraph 1. above.
Paragraph 1 contains the CG 20 33 additional insured language. Rather than replace the CG 20 33 with the CG 20 38, ISO has retained the former endorsement as an underwriting option for insurers who might not want to extend additional insured status to a litany of entities. So, on the surface, the new CG 20 38 appears to solve the privity issue.
Issue: Performance privity vs. contractual privity
However, our review of the following CG 20 38 endorsement language gives us pause [emphasis added]:
Such person(s) or organization(s) is an additional insured only with respect to liability for “bodily injury”, “property damage”, or “personal and advertising injury” caused, in whole or in part, by:
a. Your acts or omissions; or
b. The acts or omissions of those acting on your behalf;
in the performance of your ongoing operations for the additional insured.
Note that an entity is an additional insured only if the named insured is performing operations FOR that additional insured. A restrictive interpretation of this language is that the only parties that really have additional insured status are those with which the named insured has a direct working (as opposed to contractual) relationship. If a contract requires that dozens of entities, from employees to successors and assigns to government subdivisions, be provided additional insured status, what is the likelihood that the named insured will be performing operations FOR those entities?
What’s interesting is that this language is not new. It has been in most ISO additional insured endorsements, in one form or another, for years (dating back to at least 1985), including the most popular CG 20 10 (ongoing operations), CG 20 37 (completed operations), and CG 20 33 (“blanket”) endorsements. A notable exception is the ISO CG 20 26 – Additional Insured – Designated Person Or Organization endorsement which extends additional insured status to entities scheduled on the form with regard to the “performance of your ongoing operations,” not “performance of your ongoing operations FOR the additional insured.”
The plain language of the endorsement requires two conditions to be met in order for an entity to qualify as an additional insured under JAK’s policy with Westfield. First, the entity must be one “for whom you [JAK] are performing operations.”
We are not aware of any claim denials based on the “performance FOR” type of language that indicates that this is a widespread interpretive issue or cause for general alarm. However, we have asked ISO to examine the issue relative to how this language might be interpreted in the future.
Issue: New “extent permitted by law” language
This and the next two issues are changes being implemented by ISO across their additional insured endorsement portfolio as part of their 2013 CGL filing. The first is new language which says [emphasis added]:
[T]he insurance afforded to such additional insured described above…Only applies to the extent permitted by law….
While we have become aware of some concern about this new language, our understanding is that it is being added simply to reflect that an increasing number of states have passed anti-indemnity statutes that vary considerably from one jurisdiction to another. Rather than address these limitations on contractual risk transfer (and sometimes additional insured status) on a state-by-state basis, ISO has introduced this language to recognize that someone is an additional insured only to the extent provided by law in the governing jurisdiction. Many insurers already do this in their proprietary forms and many contracts already condition indemnity or additional insured status on that permitted by law.
Often agents are asked to add commentary on a certificate of insurance that “XYZ, et al.” is/are added as additional insureds for CGL (or other) coverage. The issue of what to put or not put on a certificate of insurance is a topic for another conversation, but we urge agents NOT to add any extraneous language to a certificate of insurance for many reasons, the most obvious being legislative and regulatory prohibitions on misrepresenting policy terms and conditions on a certificate of insurance.
For the issue at hand, the obvious reason is that the entity shown may, in fact, NOT be an additional insured because such status is limited by law. Agents can minimize their E&O exposure by not placing such broad statements on a certificate of insurance or separate agent “affidavit.” In addition, agents can avoid potential regulatory sanction for allegations that comments on a certificate of insurance violate an insurance law, regulation, or insurance department directive relative to misrepresenting policy terms and conditions.
Issue: Policy terms and conditions subject to a third-party contract
The lead language in the title of this article is “Be Careful What You Ask For.” Sometimes when we request ISO to make changes, the policy language revisions address our request in a general sense but do not accomplish exactly what we had hoped or there are undesirable (in our opinion) additional revisions made that have nothing to do with our request. Thus, the adage, be very careful what you ask for…you might get something different.
The new “extent permitted by law” language does not, at this point, appear problematic. Many carriers have been using this language for some time. However, there is new language that we find very disturbing and perhaps precedent-setting from the standpoint of standardized or advisory policy language. The first example is the following new language in ISO additional insured endorsements [emphasis added]:
[T]he insurance afforded to such additional insured described above…Will not be broader than that which you are required by the contract or agreement to provide for such additional insured.
We might be overlooking something, but we can’t think of any other ISO policy form that restricts coverage under a policy to the terms of a contract the insured has entered into with a third party. Conditioning the terms of an insurance policy on the terms of an unrelated contract seems to be a very dangerous path to travel.
First of all, if this unknown third-party contract does limit coverage to an insured under an insurance policy, doesn’t that, by definition, make that contract an endorsement and, if so, wouldn’t it have to be filed with the insurance department? The ISO IL 00 17 – Common Policy Conditions form states:
This policy contains all the agreements between you and us concerning the insurance afforded. The first Named Insured shown in the Declarations is authorized to make changes in the terms of this policy with our consent. This policy's terms can be amended or waived only by endorsement issued by us and made a part of this policy.
If the policy can be amended by a third-party contract entered into by the insured, does the policy really contain all of the agreements between insurer and insured concerning the insurance coverage afforded? One would not think so. Have the policy’s terms and conditions been amended by endorsement issued by the insurer in the form of the additional insured endorsement or is the policy actually being amended by a legal document not issued by the carrier and expressly made a part of the policy?
Second, if coverage available to the additional insured is governed by the contract between the named insured and additional insured, doesn’t this mean that the adjuster must carefully and fully review the contract in order to determine its impact on coverage under the policy? How many adjusters have the training and expertise to analyze a 120-page construction contact? We’ve seen construction contracts where the insurance requirements alone spanned 61 pages.
Third, what governs the “broadness” of coverage required by the contract? Some contracts simply require “general liability insurance.” Presumably, with that broad a requirement, the additional insured would have all of the coverages available to other insureds under the CGL policy being provided.
Other contracts require CGL policies “at least as broad as” a particular ISO CGL edition date. So, if a 2004 ISO CGL policy is the basis for coverage under the contract and the insured has a 2013 policy, for any given claim, will the adjuster need to compare coverage under the 2004 and 2013 policies to ensure that no coverage is being afforded to the additional insured under the 2013 policy broader than that provided by the 2004 policy?
Some contacts are more specific than others with regard to expressed coverage requirements. For example, what if a contract specifies minimum limits for BI and PD but makes no specific reference to fire damage legal liability coverage or medical payments because no minimum limit is required. Does the absence of a specific requirement for medical payments coverage mean that such coverage is not available to the additional insured? Just how specific do contracts need to be or perhaps the question is, “How broad and/or vague should contract terms be so as not to limit coverage already provided?
Will contracts in the future simply be rewritten to include a requirement that coverage must be the broader of the minimum required by contract or that actually included within the insured’s policy? If so, what is the point of the change in endorsement language?
Issue: Policy limits subject to a third-party contract
The last change that gives us immediate cause for concern is this new endorsement provision:
If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:
1. Required by the contract or agreement; or
2. Available under the applicable Limits of Insurance shown in the Declarations;
whichever is less.
First, what constitutes “the amount of insurance…Required by the contact”? For example, many contracts specify minimum limits but most of them also include indemnity agreements that have no limits. Some contracts combine indemnity agreements and insurance requirements [emphasis added]:
“To the fullest extent permitted by applicable law, Contractor shall insure and defend, indemnify, and hold harmless Owner and Agent and their respective officers, directors, members, employees, agents, shareholders, partners, joint venturers, affiliates, successors, and assigns from and against any and all liabilities, obligations, claims, demands, causes of action, losses, expenses, damages, fines, judgments, settlements, and penalties including, without limitation and without regard to the cause or causes thereof….”
This hybrid requirement is for insurance “without limitation and without regard to the cause or causes thereof.” There is a separate section that specifies minimum insurance limits. However, the requirement above appears to insist on insurance policies without limits or exclusions. What kind of scavenger hunt must adjusters go through to identify and interpret such language in contracts in order to determine what limits are available to an additional insured?
Second, how does this provision work with the contractual liability coverage in the CGL policy? For example, consider a contract that requires at least a $1M per occurrence CGL limit. The insured’s CGL limit is $5M. A claim or suit is brought against the additional insured for $3M. Under prior editions of the additional insured endorsements, the additional insured would have up to $5M in coverage. Presumably under this new language, the additional insured would only have $1M under the endorsement.
However, under the indemnity agreement in the contract, the insured is liable to the additional insured without limitation, so presumably the additional insured would claim $2M in coverage under the contractual liability coverage of the insured’s CGL policy. So, what has been accomplished with this new language other than perhaps muddying the water as to what part of defense costs are outside (under the additional insured endorsement) limits or inside (under contractual liability coverage) limits?
Third, is restricting one class of insureds in a policy to lesser limits than other insureds legal in all states? We have not done any research in this area other than noting that, purely as an example in the area of auto insurance, Louisiana has the following law [emphasis added]:
22:§1282. Standard motor vehicle insurance form; prohibited provisions
No motor vehicle liability insurance policy nor any uninsured motorist coverage for bodily injury shall limit the coverage of, or the amount that can be recovered by, the named insured, or the spouse or other family member of the named insured, or express or implied permissive users, for whom the policy provides coverage, to any amount less than the highest policy limit provided in the policy for the respective coverage or potential recovery. Any recovery is limited to damages actually sustained. Any provision of a motor vehicle insurance policy issued in, or for delivery in, the state of Louisiana that is not in accord with this Section is contrary to the public policy of this state and shall be null, void, and unenforceable.
Note that this law applies to both limits and coverages. Does such a law exist in one or more states outside the auto insurance realm? If tested in court, would the new additional insured endorsement language be deemed to be contrary to public policy?
Conclusions
At this point, we have more questions than answers. While some additional insured endorsement changes will be embraced as positive moves in clarifying coverage, other changes raise serious concern as to the intent of the new language, how it may be interpreted by adjusters or courts, and what impact it may have on the drafting of contracts that insureds enter into every day. Our organization has presented its concerns to ISO and we anticipate substantive dialog on these issues in the coming months. If you would like to get updates on these and other issues, we recommend that you consider subscribing to the free bi-weekly email newsletter published by our Virtual University. For more information, go to www.bigivu.com.
About the Author:
Bill Wilson, CPCU, ARM is the Associate Vice President of Education and Research and the Virtual University Director for the Independent Insurance Agents of America, the nation’s largest trade association of independent insurance agents. He is a prolific author of insurance coverage articles and a frequent speaker at the CPCU Society Annual Meeting and Seminars.
UPDATES:
The following is an informative legal viewpoint on these changes:
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Last Updated: May 20, 2013