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Contractual Liability vs. Additional Insured Status

Author: VU Faculty

Question: "I have had discussions with agents who believe that the wording in the ISO CGL policy pertaining to an "insured contract" covers the requirement to add additional insured status to a policy when required in a subcontractor's agreement. They attach a copy of that wording in place of the additional insured endorsement. Is this correct? If so, why are AI endorsements even needed?"

 

Answer?"My question has to do with additional insureds. I have had discussions with agents who believe that the wording in the ISO CGL policy (CG 00 01 12 07) pertaining to an "insured contract" covers the requirement to add additional insured status to a policy when required in the sub-contract agreement. They attach a copy of that wording in place of the additional insured endorsement. I feel this is a real stretch. I would look forward to your thoughts."

Answer?Saying that equating contractual liability coverage to additional insured status is a "stretch" could be the understatement of the year. In our opinion, anyone not providing true additional insured status via endorsement is opening him/herself up to a significant E&O exposure. Below are comments from the VU faculty on this premise.

Faculty Response
It's more than a stretch. The contractual liability coverage exception to the contractual liability exclusion provides coverage to the insured if the insured's breach of an "insured contract" causes bodily injury or property damage. It does not make the other party to the contract an insured, nor does it give that party any right except as a claimant seeking indemnity.

Faculty Response
The answer is no. Subparagraph f. of the definition of an “insured contract” does not give additional insured status to the individual involved. What it does is create the undefined status of “uninsured indemnitee” for the individual that is being held harmless by the named insured in the “insured contract,” but has not been added as an additional insured. 

What is the problem or difference, you may ask. The answer is defense costs. All insureds under the CGL have their defense costs outside limits. The “uninsured indemnitee” has his or her defense costs inside limits. Since the 1996 edition of the CGL, it has stated as such. Just refer to the exclusions section of Coverage A in the CGL, exclusion b. Contractual Liability, subparagraph (2). In the fifth line of the subparagraph begin with the sentence that starts, “Solely for the purposes….”

This verbage was added in the 1996 edition of the CGL for clarity that any defense costs to someone “other than an insured” (beginning line 9 of the subparagraph), would be inside the limits of the insurance. The person who is “other than an insured” is the uninsured indemnitee. By the way, this term is not defined nor even found in the CGL

Faculty Response
Paragraph F. adds as an "insured contract," any contract in which the insured assumes the tort liability of another party for BI or PD. This provides protection for an insured who assumes the liability of a third party in a contract (i.e., hold harmless clauses and indemnity agreements). If the third party wants to be an additional insured, they want to be a party to your insured's policy. They need to be added by endorsement. Additional insureds and indemnitees are not the same.

Faculty Response
No it does not! Contractual liability provides for the assumption of another party's tort liability if the loss is covered by the GL policy. The requirement to add an additional insured is not the type of action that is covered by contractual liability. That practice sounds like a great way to lose an E&O claim as well as a client.

Faculty Response
These agents are wrong. The complexity of the situation is outlined, in part, in this article from the public area of the International Risk Management Institute:

http://www.irmi.com/Expert/Articles/2006/Stanovich03.aspx

Faculty Response
The limited contractual liability coverage in the CGL won't cut it when AI status is needed. Even full contractual liability coverage may be inadequate. Here's an article from CGL guru Don Malecki on this from the archives of Rough Notes magazine:

http://www.roughnotes.com/rnmagazine/2003/sept03/09p70.htm

More information:

http://www.contractormag.com

http://www.constructionweblinks.com/Resources/
Industry_Reports__Newsletters/May_24_2004/insured.aspxl

Faculty Response
If you are relying solely on contractual liability coverage, even the provision that says it applies to the assumption of tort liability, you're opening yourself up to claims that an event is not an "occurrence" under the policy if it consists of a pure breach of contract shrouded in tort. This is a real danger in many legal jurisdictions, as discussed in this article.

When the other party is given additional insured status, this becomes a non-issue since you aren't relying exclusively on contractual risk transfer.

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