Additional Insured coverage is a common method of risk transfer used in construction projects. In 1985, the standard form of the additional insured endorsement used in insurance policies conferred much broader protection than the forms subsequently published in 2004 and 2013.
The net effect has been a narrowing of the risk transfer that can be achieved through standard form additional insured endorsements. In addition, some recent court decisions have limited the reach of additional insured coverage available under the current standard forms. This narrowing of additional insured protection can have a significant impact on P3 projects where the projects are expensive, the risks are significant and the parties have great need for risk transfer.
Even where a project involves a project specific insurance program like an OCIP, CCIP or other wrap-up, some form of additional insured coverage is likely to still be needed because some participants and some risks will be excluded from the project’s insurance program. Risk managers and others in the construction industry should pay close attention to the risk transfer process to avoid disappointment in the event of a loss.
Until 2004, it was not unusual to see additional insured coverage extended to claims that arose in some way, nearly any way, out of the project work, irrespective of who was at fault. After 2004, changes in the policy forms began to narrow the scope of additional insured coverage available. Coverage for a claim would often be denied unless the primary insured was at least partially at fault, even if the claim arose out of the project. After 2013, that coverage narrowed further, confining it to be no broader than that required by the underlying contract and limited by the anti-indemnity statutes seen in most states.
Meanwhile, some recent court decisions have supported the denial of coverage in a variety of instances. For example, in Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Mar. Ins. Co., 38 N.Y.S.3d 1 (N. Y. App. Div. 2016), an insurance company challenged the additional insured coverage that was sought by a participant on a project. The endorsement in the Gilbane case specifically extended additional insured coverage where required by written contract. The construction manager’s agreement with the project’s financier required the prime contractor to name the construction manager as an additional insured to its insurance. In its construction contract, the prime contractor agreed to provide such coverage and it supplied a certificate of insurance evidencing that such insurance was in place. Yet the insurance company later denied coverage, pointing to language in its own policy form that limited additional insured coverage to those “with whom you have agreed to add as an additional insured.” The insurance company successfully argued that this was different from a requirement to extend such status to someone “for whom” you agreed to extend additional insured coverage. The use of the preposition “with,” versus “for,” completely changed the outcome of the case, even though every party involved other than the insurance company agreed that coverage should be extended.
In Burlington Insurance Co. v. New York City Transit Authority, 2017 NY Slip Op 04384 (N.Y. June 6, 2017), the Transit Authority employed a contractor to perform tunnel excavation. The contract between the Transit Authority and the contractor required additional insured coverage. The contractor’s insurance policy required fault on the part of the contractor, at least partially, for coverage to be extended. A Transit Authority employee was injured when he tried to avoid an explosion after the contractor’s equipment touched a live electrical cable buried in concrete at the excavation site. New York’s highest court found that no coverage was available because the Transit Authority had buried the live cable and had failed to advise the contractor of it. The court recognized that the contractor’s actions were causally linked to the accident because “but for” the contractor’s striking the live cable, the accident would not have occurred. However, the court held that the language of the additional insured endorsement required that the actions of the insured be the ‘proximate’ cause of the accident and therefore ruled that there was no coverage for the Transit Authority under the additional insured endorsement. This ruling will confound those in the marketplace. The lower court had interpreted the policy language to require only a causal connection, making no distinction between the legalistic concepts of ‘but for’ cause and ‘proximate’ cause, as no such distinction was made in the policy. The distinctions are concepts that lawyers and insurance companies can argue about, but they do not have a lot of relevance to construction workers on a job site. In dissent, one of the judges aptly noted that if the insurance company had wanted to limit coverage by requiring proximate causation, it could easily have put those words into the policy.
The narrowing of additional insured coverage will force companies to depend more on contractual indemnity provisions, although these are of limited value if the other party has limited assets. Companies should examine their additional insured endorsements and, when possible, require that broader language be used, like that seen in older standard form endorsements (“arising out of” is broader than “caused in whole or in part”). Instead of benefiting from coverage as an additional insured when there is property damage or bodily injury, a would-be additional insured may have to sue the primary insured to gain access to that party’s insurance policy.
The use of a project specific insurance program like an OCIP or a CCIP, where most participants are covered by the same policy, can avoid many of the complications associated with the tangled web of additional insured coverage. This is particularly relevant for P3 projects such as large infrastructure jobs. But OCIPs and CCIPs are not without their own pitfalls and problems. In the context of additional insurance coverage, those pitfalls include the problem that some design professionals and some trades may not be eligible to participate in the program. Some may not qualify due to nature of their work. Some may not qualify due to their work comp history or other factors. Some may fabricate materials away from the job site and need separate coverage for that location and in transit. Whenever these problems arise, they will need to be addressed on both sides of the equation: the project specific insurance program must accommodate the involvement of these “outsiders” and their separate insurance coverage; the “outsider’s” separate insurance coverage must extend additional insured status to those inside the OCIP/CCIP and not be excluded because the project is otherwise covered by a wrap up (a common exclusion).
Risk managers embarking on P3 projects and on other complex projects should carefully analyze their risk transfer program and should engage knowledgeable brokers, lawyers and others to ensure that their expectations are met and that they are not disappointed in the event of a loss.