ADDITIONAL INSURED SOUGHT COVERAGE FOR FAULTY WORK
A general contractor was added to a general liability policy that covered a sub-contractor it hired to perform roofing work for a theater that was part of a theater and mall complex. The roof developed serious leaks and the general contractor was obligated to redo the work. The general contractor sued the sub’s insurer when its attempt to recover the cost of the repair work was denied. A lower court found in favor of the general contractor and the sub-contractor’s insurer appealed that expensive decision.
Here is how the higher court viewed a finding that the general contractor, as an additional insured, was protected against its sub-contractor’s faulty work.
Double AA Builders (AA) was the general contractor hired by Harkins Theater to build a theater complex. AA hired Anchor Roofing Inc. (Anchor) as a subcontractor to build the complex’s roofing system. At the time it completed the roof, Anchor’s general liability protection was provided by Preferred Contractors Ins. Co., (Preferred). At Anchor’s request, AA was added as an additional insured with regard to the roofing project. AA had its own general liability coverage provided by Westfield Ins. Co.
Harkins asked AA to replace the roof which had developed leaks, driving theater customers away and damaging the work of other complex subcontractors. AA, after replacing the roof system, sought coverage from Westfield, Anchor and Preferred. Westfield settled with AA. AA and the other parties filed cross motions on the additional amount of AA’s coverage request. After a court ruled in favor of AA, Anchor and Preferred appealed.
Upon appeal, the court reviewed the basis on which the lower court decision was made. It ended up disagreeing with the result.
The higher court focused on whether AA’s additional insured status under Anchor’s general liability policy allowed it to rely on being reimbursed for the cost of dealing with the consequences of Anchor’s defective, completed work. Preferred’s policy language included both a completed work exclusion as well as an exception for work of subcontractors. The court’s examination included consideration of the policy wording that put the completed work exclusion aside for work performed on its behalf by subcontractors. The lower court decided that the exclusion was inapplicable, so coverage was granted. The higher court considered conclusions reached in other cases that it felt were relevant.
In the higher court’s opinion, the policy wording applied to a different situation than what was represented in the AA search for coverage. In its opinion, the exclusion applied to work performed by a subcontractor that is done on behalf of the named insured. In this case, the damage involved defective work performed by a subcontractor that was the named insured under its policy from Preferred. AA was an additional insured, so Anchor’s completed work was not subject to the exclusion’s exception. The higher court reasoned that allowing the lower court decision to stand would result in the insurance policy acting as a performance bond, guaranteeing the faulty work. The insurance policy was not meant to deal with the financial consequences of a business performing its own work poorly.
The lower court decision in favor of AA was reversed and remanded for rehearing.
Double AA Builders, Ltd., an Arizona Corporation, Plaintiff/Appellee, v. Preferred Contractors Insurance Company, LLC, a Montana Company, Defendant/Appellant. Court of Appeals of Arizona, Division 1. No. 1 CA-CV 15-0375. Filed December 30, 2016. Reversed and Remanded. https://caselaw[.]findlaw[.]com/az-court-of-appeals/1763701[.]html [downloaded 4.1.2020]
It’s Always Important to Understand Who’s Insured
Regardless the type of coverage, an insurance policy’s opening language devotes space to explain what entities qualify under it as a covered party. In other words, they explain who are insureds. The entire point of purchasing insurance is to be able to rely on protection, so it’s important that both insurers and policyholders are clear on who is covered. Policy definition sections are usually where covered parties are described.
Below is an excerpt of wording on covered acts found in the AAIS Commercial Liability Coverage Form Analysis found in PF&M.
(December 2018)
COVERAGE FORM INTRODUCTION
A table of contents is provided as an aid when exploring the coverage form.
Certain words or phrases have special meanings. They are listed in the Definitions section, which follows the insuring agreement, and are shown in bold type or in quotation marks throughout the coverage form.
Editorial note: The bolded words above were added by CL-300–Amendatory Endorsement.
INSURING AGREEMENT
The insurance company agrees to provide the commercial liability coverage described in the policy. However, the coverage is provided subject to terms and conditions of the policy being met. All contracts require consideration be provided and, in an insurance contract, the consideration is the insured’s payment of the required premium.
The policy terms related to cancellation, changes made to the policy, examination of books and records, surveys and inspections, and assignment or transfer of rights or duties also apply even though they are not contained in this coverage part. These are mentioned separately because they are not part of this coverage form. They are found in CL 0100–Common Policy Conditions which must be attached to every commercial lines policy.
DEFINITIONS
When any of the following terms are used in the policy, the explanation in this section applies rather than the dictionary definition of the term.
You and your
The entity named as the insured on the declarations. There can be more than one you or your.
We, us and our
The insurance company providing the insurance coverage in this form.
Designated Insured (No number assigned)
There are five types of entities that can be considered designated insureds.
The first four designated insureds are based on the type of business entity entered on the Declarations and is similar to the definition of insured found later in the policy:
- Individual: The individual and his or her spouse are designated insureds. However, they are so designated only with respect to the conduct of the business for which the named insured is the sole owner.
- Partnership or Joint Venture: The named insured, its partners, members and their spouses are designated insureds. However, they are so designated only with respect to the conduct of the named insured’s business.
- Limited Liability Company: The named insured, its members and its managers are designated insureds. However, each is so designated only within the scope of their particular duties.
- Organization That Is Not a Partnership, Joint Venture or LLC: The named insured and all its executive officers and directors are designated insureds. However, each is so designated only within the scope of their particular duties. The named insured’s stockholders are also so designated but only for their liabilities as stockholders.
- Any employee that is defined below and has been authorized to either provide or to receive an occurrence or claim notice.
Note: There is no indication as to who must provide the authorization to the employee.
Others Can Be Invited to the Coverage Party
There are instances in which other entities may be added to a base insurance policy. This is done, typically, by endorsing parties. Generally added parties are covered on the same basis under a given, amended policy. Such additions are often made because the party has a relationship with the defined insureds. Under property policies, the relationship usually involves some form of ownership interest in covered property. Under liability policies, the relationship usually involves some form of contractual or vicarious responsibility.
Here is an excerpt of descriptions of various additional insured endorsements from the ISO Commercial General Liability Available Endorsements article found in PF&M.
CG 20 01–Primary and Non-Contributory–Other Insurance Condition (12 19 change)
When an additional insured carries insurance that might apply to a loss, this insurance company will not ask for contribution when that additional insured is a named insured on the other insurance. This applies only when a contract between the additional insured and the named insured requires such non-contribution.
CG 20 02–Additional Insured–Club Members
This endorsement adds members of a club as insureds but only with respect to their liability for the named insured’s activities or for activities they engage in on the named insured’s behalf.
CG 20 03–Additional Insured–Concessionaires Trading Under Your Name (12 19 changes)
This endorsement adds any concessionaire on the endorsement schedule as an additional insured but only with respect to its liability as a concessionaire that trades under the named insured’s name. Coverage is limited to what the law permits. When the endorsement is required by contract, coverage and limits are further limited to not being broader than what that contract requires.
CG 20 04–Additional Insured–Condominium Unit Owners
This endorsement adds each individual unit owner of the insured condominium as an insured. This is limited to liability that arises out of ownership, maintenance, or repair of the premises’ common areas.
CG 20 05–Additional Insured–Controlling Interest
This endorsement adds the party on the endorsement schedule as an additional insured. This is only for liability that arises out of its financial control of the named insured or for premises it owns, maintains, or controls that the named insured leases or occupies. Coverage is limited to what the law permits. When the endorsement is required by contract, coverage and limits are further limited to not being broader than what that contract requires.
CG 20 07–Additional Insured–Engineers, Architects, or Surveyors (12 19 changes)
This endorsement adds any engineer, architect, or surveyor that the named insured hires as an additional insured. This is limited to only losses caused by the named insured’s acts or omissions or acts or omissions of parties that act on its behalf related to its premises or performing its continuing operations. It does not include professional liability coverage or allegations of negligence in the hiring, training, or monitoring of those who provide professional services. Coverage is limited to what the law permits. When the endorsement is required by contract, coverage and limits are further limited to not being broader than what that contract requires.
CG 20 08–Additional Insured–Users of Golfmobiles (04 13 changes)
This endorsement includes as an additional insured any party that uses or is legally responsible for using golfmobiles. The party is an additional insured only for liability that arises from using the golfmobile.
CG 20 10–Additional Insured–Owners, Lessees, or Contractors–Scheduled Person or Organization (12 19 changes)
This endorsement adds the person or entity on the endorsement schedule as an additional insured. This is limited to losses caused by the named insured’s acts or omissions and acts or omissions of others that act on its behalf in performing continuing operations at designated locations. Coverage is limited to what the law permits. When the endorsement is required by contract, coverage and limits are further limited to not being broader than what that contract requires.
Note: CG 20 37–Additional Insured–Owners, Lessees, or Contractors–Completed Operations can be used if the additional insured requires completed operations coverage.
Circumstances Change Who Benefits From Protection
Being contracts, insurance policies always have other provisions that can affect the eligibility of losses. Additional insured status can expand the entities that may be covered. However, added parties typically are not covered on the same basis as other insureds. In fact, such parties are typically added in order to formally and more fully address coverage parameters for the parties named under a policy rather than expand coverage. Insurance is designed to deliver focused coverage. Different parties and different operations are meant to find their own sources of protection. That can be the case for situations involving completed products or work.
Below is an excerpt of a discussion on the Products-Completed Operations Hazard from P&C Insurance by Gordis in Advantage Plus.
DISCUSSION ON THE PRODUCTS-COMPLETED OPERATIONS HAZARD
At one time, manufacturers felt protected by a general rule that they were not liable to anyone with whom they did not deal directly. This rule has deteriorated to the point that products liability cases are often the most expensive cases litigated and paid. The Uniform Commercial Code–Article 2 provides a nationwide understanding of the relationship between the buyer and the purchaser. This change moved product lawsuits from occurring only when a product was inherently dangerous to a strict liability where the manufacturer must prove innocence.
This is not a problem only for manufacturers. Court decisions are holding servicepersons and repairpersons liable for failure to take steps that would have prevented accidents. Even a seller may be held liable for a defect in the goods it markets, even though the product is made up and packaged by a remote manufacturer and is sold in the original sealed container. Although the retailer may do nothing to the product except turn it over to the purchaser, it has been held that it makes an implied warranty that the goods are fit and proper for the purpose announced. The retailer’s liability is even clearer, of course, if it makes any statement regarding the safe or adequate or effective nature of the product it merchandises.
Coverage for products-completed operations is provided under Coverage A–Bodily Injury and Property Damage. It covers bodily injury and property damage arising out of the insured’s product or work. Coverage applies only to bodily injury or property damage occurring away from the insured’s premises or out of work the insured has already completed.
It is not required that the product be paid for. Coverage begins when the product has been relinquished to others and is away from the insured’s premises.
As an example, assume that a customer comes into the insured’s hardware store to purchase a lawn mower. While checking the equipment in the store, the customer is injured by a mower blade. The liability of the store owner for the occurrence would not come under the products-completed operations hazard, but under the basic policy. However, if the insured had delivered a lawn mower to the customer’s home and left it for the customer to try out, and a defect in the equipment caused an accident, the products-completed operations hazard would apply to the loss, even though the customer had not paid for the item, and it was still legally the property of the merchant.
By the same token, if an insured contractor is working for a customer at the customer’s premises but has not completed the contracted-for work, and an accident arises out of a condition in the work that the client contends is the liability of the contractor, the occurrence would not come within the products-completed operations hazard. If, on the other hand, the work had been completed and sometime later an accident occurred, which was claimed to be due to the faulty work of the contractor, the latter’s policy would respond under the products-completed operations hazard coverage.
Completed Work
The policy states that the insured’s work is considered to be completed at the earliest of the following:
- When all of the work called for in the insured’s contract has been completed
- When all the work called for at a particular site has been completed, even though the contract still calls for work at other sites
- When that part of the work at a site has been put to its intended use by any person or organization other than another contractor working at the same site
Work that may need service, maintenance, correction, replacement, or repair, but is otherwise complete, is treated as complete.
