An insurer denied coverage for a contractor. The carrier held that the contractor was not owed coverage as it was not explicitly shown under a written agreement to be an additional insured. The contractor, seeking reimbursement after being sued by a city for negligent work, sued the insurer for recovery.
See if the courts agreed whether the contractor was eligible for coverage.
In May 1999, KB Home Tucson, Inc., hired GRG Construction Co., Inc., to perform work at a residential subdivision in Tucson. Their contract lasted approximately four years. Charter Oak Fire Insurance Company (Charter) provided liability coverage for GRG. It included additional insured coverage for any entity GRG was obligated to cover under a written contract or agreement. Drachman Leed and American E&S were GRG’s insurance agents/brokers who, at GRG’s direction, issued certificates of insurance requested by KB relating to GRG’s policy with Charter and a policy with another insurer, Evanston Insurance Company.
Editor’s note: This court case discussion, for purpose of length and clarity, does not include the portion of the claim involving Evanston Insurance Company.
Charter issued two annual general liability policies to GRG during the relevant time periods. The policies included a blanket additional insured endorsement that amended the policy’s Who Is An Insured section. The wording granted additional insured status to entities requiring that status under a written contract or agreement. The agreements had to be in effect during an applicable policy period and before any loss occurred. GRG’s written contracts with KB contained several requirements including the following:
- GRG was obligated to protect KB from losses/claims caused by GRG’s negligence
- GRG was to purchase specified amounts of liability, property damage, product liability and product performance coverage
- GRG, before beginning any work, had to supply KB with insurance certificates and/or copies of all insurance policies
After the parties signed the contract, KB sent annual letters to GRG describing its insurance requirements, including a statement that KB “must be named as an Additional Insured on the General Liability Policy.” In response, GRG directed Drachman Leed to provide KB a copy of Charter’s blanket additional insured endorsements and insurance certificates listing KB as an additional insured for commercial general liability and automobile insurance.
In May 2001, the City of Tucson filed a claim against KB alleging deficiencies in streets and sidewalks within KB’s residential subdivision project. KB sued GRG and other subcontractors for reimbursement for repair costs and attorney’s fees incurred in defending against the city’s claims. KB tendered its defense to Charter on all of the claims.
Charter denied coverage, stating that there was no written contract or agreement requiring that GRG add KB as an additional insured. KB filed a separate action against Charter for declaratory relief, breach of contract, and breach of good faith and fair dealing. Charter, Drachman Leed, and American E&S filed separate motions for summary judgment on all of KB’s claims. After the superior court ruled in favor of Charter, Drachman Leed, and American E&S, KB appealed.
On appeal, the court noted that Charter’s obligation to provide additional insured general liability coverage to KB turned on whether GRG was required under a written contract or agreement to include KB as an additional insured. The court said: “… because there was written evidence from which a fact finder could conclude either that (1) there was a written agreement between KB and GRG requiring GRG to include KB as an additional insured on GRG’s general liability policies with Charter, or (2) the ‘rules and requirements’ provision in GRG’s written contract with KB contemplated the type of requirement subsequently evidenced by written correspondence and completed conduct of the parties.” The appeals court reversed the superior court’s granting of summary judgment in favor of Charter.
With respect to Drachman Leed and American E&S, the appellate court affirmed the superior court’s ruling in their favor, finding that KB could not prove negligence, breach of the duty of care, negligent misrepresentation, or fraud.
Finally, the appellate court vacated the award of costs, fees, and sanctions to Charter.
KB Home Tucson, Inc., vs. Charter Oak Fire Ins. Co.-Arizona Appellate Division Filed November 25, Reversed in Part and Affirmed in Part. 2014-2014 WL 6678662.
Is Policy Language Always Sufficient?
Insurance policies are simply contracts and, when disputes arise, their wording is often relied upon to support arguments for or against coverage. This is a major reason why clear wording is very important. Court cases are a significant source that triggers changes in policy language. They may occur either through the impact of actual cases or indirectly through changes in the law that have their origins in addressing wider spread situations on how insurance responds to certain types of losses. Examples involve confusion over water-related losses, concurrent causes of loss and confusion over how the word “insured” is interpreted.
With regard to more parties being granted insured status, insurers recognize that coverage obligations should be extended under certain circumstances. However, carriers want to have sufficient knowledge of parties that they may be obligated to reimburse or defend against claims.
Here is an excerpt of wording on “Who Is An Insured” found in the ISO Commercial General Liability’s coverage analysis in PF&M.
SECTION II–WHO IS AN INSURED
- The declarations lists different types of entities. Who is an insured is based on the type(s) of entities selected.
- If the named insured is an individual, the named insured and his or her spouse are insureds. They are insureds only with respect to operations of the business the named insured solely owns.
|Example: Mr. John, a sole proprietor, sells farm produce. Both he and Mrs. John are insureds. In addition, Mr. John is the sole proprietor in another venture where he makes wood kitchen cabinets. Here again, both he and Mrs. John are insureds. However, if he and his brother own the carpentry business as a partnership, coverage does not apply to the partnership.|
- If the named insured is a partnership or joint venture, that named insured is an insured. The named insured’s members and partners and their spouses are also insureds. Their status as insureds is limited to operations of the named insured’s business.
|Example: Mr. John and Mr. Joe are partners in a carpentry business. Both partners and their spouses are insureds with respect to conduct of the carpentry business. However, none of them are insureds under this coverage form for any personal exposures or for any other business activities.|
- If the named insured is a limited liability company, the named insured is an insured. Members of the company are insureds but only when conducting the named insured’s business. The named insured’s managers are also insureds but only when performing specific duties as managers.
- If the named insured is any other organization, the named insured is an insured. The executive officers and directors are insureds while performing their duties as such. Stockholders are insureds but only in their very limited capacity as stockholders.
- If the named insured is a trust, the named insured is an insured. The trustees are insureds but only while performing duties the trust requires.
- Each of the following is also an insured:
- Volunteer workers but only when performing duties related to the named insured’s business. Employees, excluding executive officers or corporations and managers of a Limited Liability Company (LLC), are insureds within the narrow range of activities within the scope of their employment or while conducting the named insured’s business.
(1) Volunteers and employees are not insureds for bodily injury or personal and advertising injury:
Additional Information Means Better Coverage
One major reason to seek full prospect or client information is to, when necessary, secure proper premium for additional parties. This is typically achieved by adding endorsements. Endorsements allow coverage to be modified to fit situations that deviate from what is covered under a base policy form. Naturally, separate endorsements and, when applicable, additional premium allows for more precise coverage and pricing.
Below is an example of an additional insured endorsement’s wording under one commercial general liability’s endorsements section in PF&M.
Section II–Who is an Insured
This endorsement amends Section II–Who is an Insured to include any party on the endorsement schedule as an additional insured. That party must be a vendor and the loss must arise out of the named insured’s products that the vendor sells or distributes as part of its regular business.
The 04 13 edition adds two conditions to the endorsement which limit coverage.
- This insurance provided for the vendor’s benefit is only to the extent that applicable laws permit.
Note: This is important because of anti-indemnification laws in various states that prohibit certain types of risk transfer. This limitation brings the policy into conformity with those laws.
- There may be a contract or agreement that requires such coverage in favor of the vendor. In that case, this insurance is not broader than the coverage the contract or agreement requires.
Note: Additional insured status is normally provided because of contractual requirements. This policy should not provide more coverage than is actually required. This benefits both the named insured and the insurance company because it limits coverage to only that required.
Example: Grackle LLC sells parts to Mavis Manufacturing. Mavis uses those parts in several of its products. Mavis is a vendor for Grackle. Mavis requires that Grackle’s policy name it as an additional insured. The contract requires only coverage for bodily injury. Mavis is sued because of property damage that Grackle’s products cause. Mavis turns to Grackle’s carrier for coverage. Coverage is denied because the contract required only bodily injury coverage.
- There are eight additional exclusions that apply to only this coverage. Insurance coverage that extends to the vendor does not apply:
- To damages for bodily injury or property damage the vendor must pay because it assumed liability in a contract or agreement. This exclusion does not apply to the vendor’s liability for damages it has without a contract or agreement.
- For warranties the vendor made that the named insured did not authorize
- For intentional physical or chemical changes the vendor made to the product
- To repackaging. However, there is an exception. This exclusion does not apply to any unpacking the vendor did to inspect, demonstrate, or test and then repackage the product back into the original container. This exclusion does not apply even when the vendor substituted parts prior to repackaging but only if such a substitution was handled according to the manufacturer’s instructions.
- If the vendor agreed to inspect, adjust, test, or service a product in the usual course of its business and failed to do so
- When the vendor demonstrates, installs, services, or repairs. There is an exception. If the performance of these operations is in connection with the selling of the product and the operations take place while the products are at the vendor’s premises, there is coverage.
- Products the named insured sold to the vendor for the vendor’s own use. This includes products that were labeled or relabeled. The exclusion also applies to products used as a container, part, or ingredient of anything else that belongs to the vendor.
- For any bodily injury or property damage due to the vendor’s sole negligence. This exclusion applies to the vendor’s own acts or omissions and those of its employees and any other party that acts on its behalf. This exclusion has two important exceptions.
- The exceptions in exclusions d. and f. also apply to this exclusion. The exceptions in d. and f. are actions the additional insured takes and would be considered its sole negligence. However, those actions are covered because of this exception.
- Any actions the vendor takes while inspecting, adjusting, testing, or servicing the product are covered. This is provided that the named insured agrees to them in the contract with the named insured and they are part of the usual distribution process.
- This insurance coverage does not apply to any person or organization that supplied such products to the named insured. It also does not apply to any ingredient, part, or container that becomes a part of such products, is sold with such products or has such products within it.
Section III–Limits of Insurance
This section revises Section III–Limits of Insurance with respect to the vendor as an additional insured. The limits provided to that additional insured are not the same as the limits available to the named insured. They are limited to the lesser of the following:
- The amount of insurance the contract or agreement requires
- The limit of insurance on the declarations that applies
|Example: The contract between Grackle LLC and Mavis Manufacturing requires that Grackle name Mavis as an additional insured on its policy for $500,000. Grackle’s policy limits are $1,000,000/$2,000,000/$2,000,000. Mavis is sued because its products caused damage. Because part of the suit specifically addresses Grackle’s parts, Mavis sends the suits to Grackle and expects defense and compensation. Grackle’s carrier assesses the situation, realizes the serious nature of the situation, and offers the $500,000 limits in order to avoid protected defense costs. Grackle’s aggregate is reduced by $500,000 instead of the full $2,000,000 that would have been exposed without this condition.|
The limits of insurance provided for the additional insured do not increase the limits of insurance on the declarations.
Examining A Risk In More Detail
Another important reason for seeking more information is to gain enough knowledge to decide where the broader risk is still acceptable. Asking the right questions of a prospect or current client is a critical way to be aware of the total exposure presented by its operations. Ignorance of what risks are created by a client’s work is not a shield against legal responsibility for injury or damage caused to others. So, ask plenty of questions.
See how a questionnaire permits exploration for information that helps identify contractual risks that may need to be addressed. It’s from the Risk Survey – Commercial.
Does the applicant lease the premises? ___ Yes ___ No
If yes, answer the following:
Does the lease include a written waiver-of-rights provision for damage to property? ___ Yes ___ No
Does the lease include a written waiver of subrogation? ___ Yes ___ No
Does the lease include a written hold harmless agreement? ___ Yes ___ No
Does the lease clearly delineate maintenance responsibilities? ___ Yes ___ No
Indicate under which of the following agreements the applicant has assumed liability of others:
|___ Lease agreements for real estate||___ Lease agreements for signs, refrigerators, etc.|
|___ Sidetrack agreements||___ Contracts for electric power, steam, etc.|
|___ Easement agreements||___ Elevator maintenance|
|___ Other contracts such as construction, installation,
compliance certificates, etc.
Attach a copy of each contract and/or agreement indicated above.
Is the applicant’s insurance policy required to be primary under any of the indicated contracts? ___ Yes ___ No
What are the applicant’s procedures to ensure that it is an additional insured on the subcontractor’s policy?
Do any current contracts contain requirements that list specific endorsements or insurance coverage wording? ___ Yes ___ No
If yes, attach a copy of the contract(s).
Does the applicant regularly use subcontractors? ___ Yes ___ No
If yes, answer the following:
Describe the type of work the subcontractors perform.
Describe procedures used to monitor timely receipt of certificates of insurance from subcontractors.
Does the applicant have a written contract with each subcontractor? ___ Yes ___ No
If yes, attach a copy of each contract.
If no, describe the terms and agreements between the applicant and the subcontractor.
What are the subcontractors’ required insurance limits? $___________
What is the percentage of work subcontracted: ____%