Two subjects that producers have come to abhor (with some justification) are additional insured endorsements and insurance certificates. One reason is that those who want to be additional insureds and/or certificate holders usually demand more than what can be delivered. Producers either must comply with the demands of additional insureds and/or certificate holders or lose business.

Fortunately for producers, currently existing laws preclude producers or insurers—and sometimes both—from having to meet the demands of those who want broad additional insured coverage and certificates that provide information that does not exist in the actual policies.

Many states, for example, have enacted laws, regulations or regulatory directives governing certificates and evidences of insurance. These laws vary by state but they can be summed up generally as (1) prohibiting anything on these documents that does not also apply to the policy or policies identified on the certificate or evidence of insurance and (2) sometimes consisting of a warning of a possible fine and/or imprisonment for any violation.

Several producers have recently lamented that unless they comply with their named insureds’ demands in showing information on the certificates or evidences of insurance that does not exist, such as giving notice of cancellation, nonrenewal and material changes, these insureds will find other producers who will do this.

What producers need to do here is to use the so-called “good cop, bad cop” routine. In other words, they need to explain that doing anything beyond what ordinarily is permitted by law is beyond what they can do. It is not the producer’s (good cop’s) fault but those (bad cops) who have enacted those laws, regulations or directives.

It is easier said than done, of course, but giving in to the pressures of named insureds may be the Achilles’ heel of what otherwise could be a profitable and prospering insurance agency. This would be the case particularly in a state with a law imposing a fine and imprisonment.

On the other hand, those producers who desire to obtain the competitive edge and ignore these laws should have another career path in mind, because what is in store in violating these laws can have serious repercussions. Producers who have spent time in court defending their actions will attest that the time, expense and irritation of having to attend hearings and trials should be avoided.

Additional insured endorsements

What some producers, and insurers for that matter, do not appear to know is that many of the states have statutes that also affect the kind, and extent, of coverage that may be permitted in covering indemnification agreements. The reason insurers are included in this category is that they have permitted the issuance of broad additional insured endorsements even when they have not been allowed by law in some states.

The laws in question are referred to as anti-indemnification statutes. They were enacted primarily with the construction industry in mind, which includes designers. These laws hold void and unenforceable, transfers of liability representing the sole and/or partial fault of the indemnitee (the additional insured and one who attempts to transfer the financial consequences of its liability to an indemnitor who is the named insured). The purpose of these statutes is to encourage safety and to allocate fault to the party responsible for the injury or damage or both.

What is likely to beg the question here is how these statutes work. Let’s assume that a general contractor is employed in Arizona to do some work and requires all of its subcontractors to obtain additional insured coverage which is the equivalent of Additional Insured Endorsement CG 20 10 (11-85). Insurance veterans will recognize this endorsement, which was replaced by ISO in 2004, as covering additional insureds for their sole fault.

No matter how much the general contractor demands that kind of an endorsement, whether a standard ISO or manuscript, an endorsement that broad is not permitted in Arizona. The reason is that the anti-indemnification statute in Arizona does not permit hold harmless and indemnification agreements involving sole negligence.

If the anti-indemnity statutes were all of the same, that would simplify matters. Unfortunately, to the extent they exist, they differ, sometimes widely. For example, some anti-indemnity statutes hold void and unenforceable both sole and partial negligence assumptions. These statutes go on to say, however, that they remain unaffected by the validity of certain insurance; that is, when the insurance is written with a licensed insurer, an authorized insurer, or an admitted insurer.

The state of New York is within the above category. So long as the insurer issuing the contractual liability and additional insured endorsement is admitted, both coverages would be applicable, to the extent they can be obtained, against the sole fault of the indemnitee. It may not be possible to obtain an additional insured endorsement that covers the sole negligence of the additional insured, but contractual liability coverage may still be possible.

California does not permit sole or partial fault assumptions having to do with residential work. This means that the latest ISO additional insured endorsement (CG 20 10 07 04) is not permitted because it includes the partial fault of the additional insured. The anti-indemnity statute of this state, however, does permit both sole or partial fault assumptions having to do with commercial construction, so long as the insurer is admitted. The problem is in finding an admitted insurer in that state that will write those coverages for construction contractors.

Not all states have these anti-indemnity statutes precluding the assumption of sole and/or partial fault of indemnitees. The problem will be in obtaining a broad additional insured endorsement and contractual liability coverage that is not amended with Contractual Liability Limitation Endorsement CG 21 39, or Amendment of Insured Contract Definition Endorsement CG 24 26.

The first such endorsement eliminates coverage for the tort liability of the indemnitee assumed by the indemnitor (named insured) and provides contractual liability for only the five common types of contracts: leases, easements, agreements required by municipalities (except work for them), sidetrack, and elevator maintenance agreements. This is not to say that these five types of contracts do not include tort liability assumed, because they can.

The second endorsement eliminates tort liability assumed to the extent of the indemnitee’s sole fault. If the indemnitor is partially at fault, coverage could apply to the indemnitee brought into a suit for its partial fault.

If an indemnitee imposes a broad hold harmless agreement encompassing its sole fault in a state such as Alabama, Pennsylvania or Wisconsin, it may be difficult for an indemnitor to obtain contractual liability coverage or an additional insured endorsement encompassing that kind of hold harmless agreement, even when sole fault coverage is permitted.

It undoubtedly is the intent of the state legislators and many insurers to limit additional insured endorsements and contractual liability coverage so that the excessive demands of indemnitees will eventually subside to a more reasonable level. The problem is what happens until then, and who is going to be hurt in the interim?

Role of insureds and insurers

Realistically, indemnitees, such as general contractors and project owners, cannot demand additional insured endorsements and/or contractual liability coverage encompassing their sole or partial fault until they know whether an anti-indemnitee statute applies and what it permits.

Producers do not have to read these anti-indemnity statutes. They need to know, however, that they may exist so they can inform their named insureds about them. Being informed about the nature of an existing statute, and determining the nature of protection prescribed in a contract, the producer is then in a better position to explain why additional insured and contractual liability coverage can or cannot be obtained—to the extent the demand for coverage exceeds what a statute permits.

To the extent producers read contracts and laws, they will need to read the contract specifications regarding any hold harmless agreement and insurance requirements. They then must determine whether any anti-indemnitee statute applies and the extent to which insurance is permitted. They are then in a position to determine whether the coverages required can be obtained.

Insurance companies’ claims people have to improve their role, particularly regarding additional insured status. In other words, it is not just a matter of looking at the allegations, the policy and any applicable additional insured endorsement to determine whether any coverage applies.

Claims people also must read the contract to determine the nature of protection sought. They then must determine whether any anti-indemnity statute applies and the extent to which insurance still is permissible. With these answers, the claims people can then look at the policy and endorsements to determine not only whether the coverage written is otherwise permitted, but also whether, based on the allegations and facts, coverage applies.

The coverage routine involving additional insured and contractual liability coverage may appear to be difficult at first, but as producers get into handling many requests, this procedure is likely to become relatively easy to do. However, it is likely to take time and to elicit some problems. In short, producers would rather do without involvement in this routine.

However, since part of the role of producers is to provide service, they need to know the essentials of additional insured and contractual liability coverage, which is unlikely to go away anytime soon.

The author

Donald S. Malecki, CPCU, has spent 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.