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Additional Insured vs. Indemnitee: Are Contractual Liability Coverage and AI Status the Same Thing?

Author: Bill Wilson
Below are several “Ask an Expert” questions we have received that imply or explicitly state the belief that an additional insured and an indemnitee are the same thing.
Question...“I write CGL for a contractor based in MS and working in MS. The owner is a public entity (school system) and the owner's attorney is requiring the insertion of this phrase on the COI: ‘All of the Contractor's contractual liabilities, including but not limited to its indemnity obligations, are covered by the Commercial General Liability policy.’ The general contractor has provided a 100% performance and payment bond for the project, in favor of the Owner. The contractor has also purchased a Builders Risk Policy for the full value of the work. We have a superb general contractor with a long history of completed projects and happy owners. Regardless, it seems that the owner's counsel is trying to turn the CGL into a bond. Is this assumption correct, and what are the potential repercussions of putting such language on a COI?" – Mississippi agent
Question...“Under form CG 00 01 04 13, if an individual is required to provide a municipality with an additional insured endorsement, is it necessary since an insured contract includes ‘An obligation, as required by ordinance, to indemnity a municipality, except in connection with work for a municipality.’ If there is no need for an additional insured endorsement, is there anything that the additional insured endorsement would provide in addition to contractual liability?”
Question...“In the past, we have not been individually adding Additional Insured endorsements, relying on them being an indemnitee in the ‘insured contract’ wording of the CGL or BOP policies, which gives them AI status without endorsing that on the policy. Our state now has a law that says if we put AI status on the certificate, we MUST have an AI endorsement added to the policy. Is this correct or can we still rely on ‘indemnitee in an insured contract’ and not go to the trouble or expense of using AI endorsements?” – Texas agent
Question...“Our insured sells and repairs boats. A parts supplier has asked to be added as a CGL AI. The insurer says there is no ISO form to do this. I am wondering if the contractual coverage under the policy would take care of this.” – South Dakota agent
Answer?These are two totally different things. Contractual liability coverage deals with indemnity while an AI endorsement deals with insurance. If you have been relying on contractual liability coverage rather than AI status, you have a HUGE E&O exposure. One of the top authorities on this is VU faculty member Craig Stanovich, CPCU, CIC, AU who explains:
An “insured contract” is separate and distinct from additional insured coverage. The former is coverage for the municipality’s contractual obligation to indemnify the municipality under a non-insurance indemnity provision; the latter is a requirement of insurance from your customer for the municipality by adding to your customer’s CGL policy the municipality as an insured. So the municipality needs to be added by endorsement to the CGL as an additional insured. You may wish to consider this article excerpt which explains the difference between an additional insured and contractual indemnity:
Too often, an indemnitee is thought to automatically have the status of an insured or additional insured on the CGL policy of the indemnitor. Using our illustration of tenant and landlord, the landlord does not have the status of an insured or additional insured on the tenant's CGL policy merely as a result the indemnity agreement.
Contractual Confusion. The confusion seems to stem from the failure to distinguish insurance from indemnity obligations. As it is very common for the landlord to be listed as an additional insured on the CGL policy of the tenant in addition to the indemnity agreement, it is too often assumed that the an indemnitee is an additional insured. Put another way, because additional insured status and indemnity agreements are so frequently seen together, they may seem indistinguishable from one another or at least appear that one is the result of another, i.e., an indemnity agreement results in additional insured status. The reasoning seems to be that if the contract fits within the definition of "insured contract," such as a lease of premises agreement, it follows that "insured contract" also means the landlord is automatically an additional insured. This belief is simply mistaken. An indemnitee is not an insured.
The tenant's CGL policy must be amended to extend coverage to provide additional insured status to the landlord. Just because the contract happens to be an "insured contract" does not mean the tenant's CGL provides additional insured status to the landlord. In other words, the indemnitor's CGL policy must be amended to include an additional insured endorsement to provide the indemnitee the status of additional insured. To repeat—having the status of indemnitee is not the same as being an additional insured.
Excerpted from:
Contractual liability coverage for “insured contracts” extends indemnity to the other party but usually not defense outside limits. If you have a $1M CGL policy and a lawsuit against the other party under an “insured contract” results in a judgment of $900,000 and the defense, court and related costs are $600,000, the other party gets $1M. If the other party is an AI, the policy pays $1,500,000. If you were supposed to add this party as an AI and you didn’t, look for large E&O claim.
If the contract requires AI status, reliance on any contractual liability coverage without AI status is a breach of contract and will likely have penalties for your customer spelled out in that contract, such as refusal to pay for work performed. In addition, since the other party is not an AI, in the absence of a clearly applicable waiver of subrogation, the insurer could seek contribution from the other party to the extent of their own liability.
Also, some states prohibit the contractual transfer of risk via an indemnity agreement, but allow such transfer as an AI on an insurance policy, so you could have a HUGE E&O exposure, perhaps in excess of your policy limit. There are many reasons why an indemnitee and AI are two very different things.
Do you need to brush up on AI and COI issues? Here are two FREE archived webinars:

Last Updated: February 26, 2016
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