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The Illusion of Additional Insured Status Two Court Cases Highlight Trends in Coverage

Gavel and book.

Upstream parties, such as owners and general contractors, often rely on their status as additional insureds on the insurance policies obtained and maintained by downstream parties, such as subcontractors, to protect themselves from various third-party claims—such as claims for bodily injury and property damage—that may arise from a construction project.

However, recent Illinois case law suggests that such reliance may be illusory. Two such recent cases from the Illinois Appellate Court—Old Republic Insurance Company v. Gilbane Building Company (2014 IL App [1st] 123430-U ) and West Bend Mutual Insurance Company v. Athens Construction Company (2015 IL App [1st] 140006)—have held that, under the circumstances of those cases, the upstream parties were not additional insureds on the subcontractors’ insurance policies and therefore were not entitled to coverage.

In the Old Republic case, the contract between the subcontractor (Air Comfort) and the general contractor (Gilbane) only required that Air Comfort list Gilbane as an additional insured on its certificate of insurance, which Air Comfort did. The court pointed out that the contract did not require that Air Comfort add Gilbane as an additional insured to Air Comfort’s policy itself. As the court also pointed out, the certificate of insurance in question (which showed Gilbane as an additional insured) contained certain critical provisions; namely, that:

  1. the certificate is informational only and “confers no rights upon the certificate holder;”
  2. the certificate “does not amend, extend or alter the coverage afforded by the policies” listed on the certificate; and
  3. that if the certificate holder is an additional insured, the policy “must be endorsed.”

In this case, the policy was not endorsed to add Air Comfort as an additional insured.

In the West Bend case, there was a contract between the general contractor (Athens) and a plumbing subcontractor (Carrozza) with respect to work on a certain building. A plumbing incident resulted in damage to the building. The building’s owners sought damages from Athens and Carrozza. Athens, believing that it was an additional insured on Carrozza’s insurance policy, tendered its defense to West Bend, Carrozza’s insurer. The policy West Bend issued to Carrozza included an additional insured endorsement, which provided in pertinent part that the “Who is an insured” section of the policy “is amended to include as an additional insured any person or organization” that the named insured (Carrozza) is “required to add as an additional insured on this policy under a written contract or written agreement.”

The Athens-Carrozza contract only required that Athens be named on the certificate of insurance as an additional insured. West Bend argued that “Athens did not qualify as an additional insured because the Athens-Carrozza subcontract did not fulfill the ‘written contract’ requirement of the West Bend endorsement.” West Bend also argued that “the certificate of insurance did not qualify Athens as an additional insured because certificates that identify the insurance policy, but contain disclaimer language, confer no rights on the certificate holder and are for information purposes only.” The court agreed with West Bend, finding that the subcontract did not require Carrozza to name Athens as an additional insured on Carrozza’s policy.

The lesson these cases teach is clear. It is not enough that the contract require the downstream party to name the upstream party as an additional insured on a certificate of insurance; the contract must require that the upstream party be added as an additional insured to the insurance policy itself.

Another issue these cases implicate—albeit not directly—is whether the upstream party is covered on the downstream party’s insurance policy if the cause of the injury is the upstream party’s own negligence. The most recent versions of standard additional insured endorsements only obligate the insurer to defend and indemnify the additional insured if the injury is caused, “in whole or in part,” by the named insured’s (that is, the downstream party’s) acts or omissions or the acts or omissions of those acting on the named insured’s behalf. If the downstream party itself was not responsible for the injury, then coverage may not apply. Put another way, if the named insured was not responsibleat least in part—then coverage for the additional insured is likely to be denied.

These trends from the courts, and in the standard form additional insured endorsements, have made the relationship between upstream and downstream parties more perilous, even in situations where upstream parties have followed best practices by inserting contractual requirements that require that the downstream parties add to their liability policies the upstream parties as additional insureds. But if these contracts are not keeping up with these recent trends, then upstream parties may find themselves without coverage if, for example, the downstream party is cleared of any wrongdoing in the underlying lawsuit, or if the plaintiff in the underlying doesn’t name the downstream party at all.

So, how does an upstream party know if it is covered? According to Michael J. Smith, vice president of Aon Construction Services Group, “There is no black and white answer to this question. The question is not truly answered until the upstream party has tendered a claim and it has been accepted without a reservation of rights. In order to achieve this result, the owner or upstream contractor is advised to have the contract language regarding indemnification and insurance requirements reviewed for the applicable jurisdictional protection. There are tools to help assist in this evaluation of the risk transfer mechanism. These tools offer comprehensive oversight and additional clarity in regard to jurisdictional laws and trending construction risk topics that can affect contracts and indemnification agreements.”

Consequently, it is recommended that contractors and owners review their own insurance programs side by side with the contracts they are using or are subject to, especially if such contracts have been in use for quite some time. The legal world may have passed them by.

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