By Mark Farenkrug

Unplanned explosions, collapsing cranes or scaffolds, catastrophic equipment failures, timber harvest, construction and ship repair projects -- all of them carry their share of risks and have resulted in claims or lawsuits.  Increasingly, many foresters, general contractors and ship builders call for certain insurance guarantees from their subcontractors and independent contractors. The reality is that contracting parties often do not understand what type of insurance protection is called for and may not recognize that the protection they sought by contract was not provided.

All commercial enterprises should carry liability insurance, including a comprehensive general liability (CGL) policy or one of its cousins, such as a Logger’s Broad Form Liability policy. These policies pay not only for damages that an insured causes to another or to another’s property, but they also provide a defense against lawsuits. Because the duty to defend is broader than the duty to indemnify, a CGL insurer will pay an attorney to defend the insured.

Because of the benefits of a CGL policy, and because so many businesses carry liability coverage, it is now common for a contract to provide that “subcontractor shall carry liability coverage with minimum limits of $1,000,000 per occurrence, and shall name contractor as an additional named insured on such policy.” This is done for a variety of reasons, but overall, general contractors have found it to be one method to shift risk away from themselves in construction defect and injury claims. 

The term "additional insured" or “additional named insured” refers to an individual or business that has been added to another’s insurance policy. The “additional insured” then has the benefit of direct rights on the insurance policy and enjoys the same coverage as the purchaser of the policy (the named insured), while enjoying no responsibility to pay any premiums or deductibles. In other words, the additional named insured can make his own direct claim under the policy, even though he was not the original purchaser of that policy.

Additional insured endorsements are interpreted very broadly; thus, only the slightest suggestion that a subcontractor has some fault can force that subcontractor's insurance to pick up the defense (provide attorneys for) of multiple parties.

However, many contracting parties who are involved with an accident or other claim find that they are not additional insureds at all. While they thought that a subcontractor or independent contractor had named them as an additional insured, all they find in the file is a certificate of insurance. They are denied a defense and denied rights under the policy. In addition, a subcontractor who fails to correctly name the contractor as an additional insured may face claims for breach of contract, and could be forced to pay whatever the promised insurance would have paid if it had been arranged.

If you are asked to name a business or an individual as an additional insured, or if your contract calls for you to be so named, you should know the following:

-- There are specific policy forms used to grant an individual or business rights as an additional insured (e.g., ISO Endorsement Form CG 20 09 or ISO Endorsement Form CG 20 10. 35.).
-- A certificate of insurance is NOT the same as an Additional Insured Endorsement.
-- A certificate of insurance only shows that coverage is in place. It does NOT grant anyone else direct coverage under the identified policy. 
-- Your attorney and your insurance broker should make sure that when an additional insured endorsement is called for in an agreement that such an endorsement is actually issued.

Additional insured endorsements are one of several techniques for the allocation of risks. Again, however, it is simply not enough to provide proof of insurance. Contracting parties should make sure that “additional named insured endorsements are in place when called for, or there is no extra coverage in place.

Mark Farenkrug is a contract attorney with the Mikkelborg firm.  He specializes in insurance law and insurance coverage issues.