Does Additional Insured Status Replace the Need for a Waiver of Subrogation?

Over the last few weeks the VU has received questions similar to this: “A subcontractor told our insured, the general contractor, that the contractual requirement to add the general contractor as an additional insured made the requirement to attach a waiver of subrogation unnecessary. The subcontractor’s contention is that the insurance carrier can’t subrogate against an additional insured and thus there is no need for a waiver. What is your opinion?“

Actually, this is an old argument made out of some level of ignorance regarding how these two risk management methods differ. While there is a sliver of truth in the subcontractor’s assertion, a “sliver of truth” is not the same thing as truth.

Additional insured status does not grant the same type of protection to the general contractor as does the waiver. Further, these risk management techniques exist to accomplish different goals.

Before digging any further into the need for both techniques, let’s correct terminology to allow for a better explanation of the differences between these risk management requirements. In the commercial general liability (CGL) policy, there is no such thing as a “waiver of subrogation” endorsement. There is the CG 24 04 – Waiver of Transfer of Rights of Recovery Against Others to Us endorsement (referred to as “waiver endorsement” in the remainder of this paper). The difference is more than semantic, the difference real.

If the only action waived by this endorsement was subrogation – then the subcontractor would be almost fully correct. However, this endorsement waives more than just subrogation, it also waives contribution. Here is the difference:

• Subrogation: The ability of the financially harmed party to recover from the fully at fault party.
• Contribution: The ability of one party who was jointly liable with another party to recover the amount from the joint wrongdoer (tortfeasor) such that each pays their share of the damage.

The waiver endorsement disallows ANY recovery against the named party – subrogation or contribution – by the lower tier’s insurance carrier. Note the party who is precluded from recovery – the subcontractor’s insurance carrier. There is no insurance protection provided by this provision, only the insurance carrier’s agreement to not seek any sort of recovery from the named party.

Additional insured status provides some level of insurance protection to the named party (the upper tier contractor) for injury or damage to a third party caused in whole or in part by the actions of the lower tier contractor (the named insured). The belief that the named insured’s insurance carrier won’t (or can’t) subrogate against the additional insured because an insurance carrier can’t subrogation against its own insured is, to some extent, true. However, some loss situations may fall outside this pseudo protection granted by additional insured status. Examples include:

• The injury or damage falls outside the scope of the additional insured endorsement. If either the CG 20 10, CG 20 33 or CG 20 38 is used to provide additional insured protection to the upper tier, protection is granted for ongoing operations only. If the loss is a completed operations loss, the insured still has the opportunity to recover from the upper tier if it contributed to or caused the loss. This possibility can possibly be remedied by the CG 20 37; however, at present there is no automatic additional insured endorsement for completed operations. The CG 24 04 extends to completed operations.

   

• Loss exceeds the contractually required limits. ISO’s 2013 edition of its additional insured endorsements limit the amount of coverage extended to the additional insured to the lesser of the amount: 1. Required by the contract or agreement; or 2. Available under the applicable Limits of Insurance shown in the Declarations. It is possible a court might allow the lower tier’s insurance carrier to recover the difference between the contractually required amount and the policy limit from the upper tier additional insured. The CG 24 04 would not allow this action.

   

• Loss results from an activity outside the insured’s normal operations. The lower tier is hired to install hardwood floors. While on site, the upper tier asks the flooring contractor to help another trade resulting in injury or damage. Because the loss arose out of activities outside the contracted work, the carrier may attempt to recover from the upper tier.

   

• Not every policy can include an additional insured endorsement. This steps outside of the CGL protection and discussion into the realm of workers’ compensation (as just one example). There is no additional insured endorsement available for workers’ compensation; however, a waiver endorsement is still available.

   

• Losses fall outside the breadth of contractually agreed to transfer. (This is not a likely scenario, but one that should be considered.) Indemnification or “anti-indemnification” statutes limit the amount of risk that can be transferred from an upper tier contractor to a lower tier contractor. Each state statutorily limits or allows the level of transfer to limited transfer, intermediate transfer or broad transfer. Some states may use more than one level depending on the specifics of the project and the contract. Current ISO additional insured endorsements limit the amount of protection extended to the additional insured to the narrowest of the contract or the level allowed by statute. If the statute allows intermediate transfer but the contract is limited transfer, the lower tier’s insurer may attempt to recover from the upper tier in the event both parties are jointly liable. The CG 24 04 waives any right of recovery – including contribution – disallowing the carrier’s ability to seek recovery. Again, an unlikely scenario, but worth considering.
  

Both additional insured status and the waiver endorsement are required by the upper tier to close potential gaps. Lastly, if the contract between the general contractor and the subcontract is well written, the lower tier likely has already waived its rights to recovery making the waiver endorsement a safeguard (a belt and suspenders approach) in case the contract is declared void by the court. The only reason an insurance carrier has any right of recovery against another party is because its insured has a right of recovery. If the insured has given up that right via a contract entered into prior to the injury or damage, the insurance carrier has no right of recovery either. Remember, the carrier has no more authority than its insured in regard to subrogation or contribution.

Ultimately, the sub should get over themselves and provide the endorsement because they have likely already given up their rights in the contract (again, provided the contract was written correctly). This appears to be the subcontractor’s attempt to assert some authority over the party doing the hiring. It’s also a breach of contract – but that’s irrelevant.