By Donald S. Malecki, CPCU

Mention the term "additional insured" and it undoubtedly will conjure all kinds of responses, particularly in relation to the construction industry. Both the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO) have a variety of additional insured endorsements available, but only a few are designed for construction-related work.

Almost everyone likely would agree that the old song "Bewitched, Bothered, and Bewildered" fits this subject perfectly. Next to uninsured and underinsured motorists coverage cases, additional insured status and certificates of insurance have to be today's second most litigious area. The issues that surround additional insured status go beyond determining the extent to which a given person or entity is considered to be covered, or whether such status applies on a primary or excess basis. The most common argument is whether additional insured status applies in the first place.

The reason agents and brokers "drop the ball" as often as they do, and thereby create what is known as the "fictitious insured syndrome," is lack of communication. Briefly, a fictitious insured situation arises when a certificate of insurance represents that the holder is an additional insured but the policy has not been endorsed to accurately reflect that status.

Some agents and brokers have been fortunate to escape the pitfall of being solely at fault for persons and entities not being covered when they thought they were. What agents and brokers cannot avoid, however, is the time and expense it takes to resolve the issue through the legal process.

Further, not all agents and brokers have been successful in avoiding responsibility. In the case of Marlin v. Wetzel County Board of Education, et al., 569 S.E.2d 462 (Sup. Ct. of App. of W. Va. 2002), for example, the court held that the agent's misrepresentation in a certificate of insurance stating that the owner was an additional insured estopped the insurer from denying coverage.

Referring to The Additional Insured Book, the court echoed the authors' sentiments that when a certificate misrepresents additional insured status, it should become a matter of principal-agency liability. It should not detrimentally affect the additional insured, who otherwise would be punished (i.e., denied protection), for reasonably relying to its detriment on the representations made by the insurance company's authorized representative.

Considering the somewhat distant relationship between agents and brokers and their insurers today, it doesn't take much pondering to realize what action an insurer is likely to take when it cannot deny protection, despite an agent's or broker's misrepresentation of an insurance certificate.

The likely first action of the insurer, in its attempt to transfer the entire blame to the agent or broker, is to maintain that its agency agreement has been violated by pointing out that the matter of binding coverage is solely at the discretion of the underwriter.

What some insurance company claims people and defense attorneys fail to realize, however, is that, while an exposure is created by adding someone to the named insured's policy as an additional insured, no additional coverage is being created! The only provision of the policy being changed, barring some addition to the exclusions, is the Who Is An Insured section. Agents and brokers need to keep this in mind for defense purposes, because this misunderstanding is likely to persist.

Good news and bad news

In the construction business, the requests for additional insured status are so numerous that those insurers still willing to dabble in this business have decided to discontinue the use of standard scheduled endorsements and instead to develop their own blanket endorsements.

One reason to use a blanket additional insured endorsement is that the insurer need not issue a separate endorsement for each person or entity requiring additional insured status. Another reason is that it gives the insurer the opportunity to be creative in the nature of the coverage it is willing to provide such person or entity.

For example, growing numbers of these blanket endorsements state that if a person or entity requires additional insured status in a written or oral contract and such status is reflected on an insurance certificate, the person or entity so shown is considered to be an additional insured.

This is good news, because these endorsements should eliminate the "fictitious insured syndrome." In circumstances such as this, an agent or broker does not have to worry about the accusation of misrepresentation when a policy is not endorsed with additional insured status.

The bad news, however, is that these blanket additional insured endorsements are nonstandard, meaning that they are worded differently. As a result, although someone may be considered an additional insured, the coverage provided may fall short of what has been requested. In fact, a review of some of these endorsements reveals some alarming conflicts in additional insured status.

Playing with fire

What agents and brokers must understand is that a specialist, rather than a generalist, is required to cater to the needs of persons and entities desiring coverage relating to the construction industry. Indemnitees (i.e., those who seek to transfer the financial consequences of their liability to others), who have traditionally requested additional insured status without further specificity and have obtained coverage often broader than they might otherwise have expected, are going to find some surprises.

Some insurers have structured their blanket additional insured endorsements so that if certain coverage is requested (i.e., sole fault coverage for ongoing and completed operations on a primary basis), they will provide coverage. But failure to be specific about what is desired as an additional insured will result in coverage that will likely be very limited. An example might be to limit the additional insured's coverage not only to vicarious liability, but also to ongoing operations and on an excess basis.

In effect, agents and brokers must wear two hats. The first one is worn when they represent the indemnitors (i.e., those who assume the financial consequences of indemnitees' liability). Here, agents and brokers must make sure that the coverage being provided by the appropriate endorsement meets contract requirements. If additional insured status falls short, the burden will likely fall on the indemnitor, and it bears repeating that failure to procure the proper coverage is not liability assumed; that is the subject of contractual liability insurance.

The second hat is worn by agents and brokers when representing the indemnitees. Sometimes indemnitees need to be counseled about being more specific with their coverage requirements. Simply asking to be an additional insured and nothing more is almost certain to cause a problem. If indemnitees have certain expectations about their coverage needs, they need to be specified and confirmed.

If one traces the history of additional insured status, one will note that it was with the introduction of the first standard general liability policy in 1941 that the additional insured concept was born, at least on a standard basis. Back then, most insurers (stock and mutual) used standard policies.

Insurers at that time expressed the view that additional insureds were to be covered solely for their vicarious liability. In other words, they were to be covered only for liability imputed to them because of the acts or omissions of the named insureds. No coverage was to apply in any case where liability was attributed to the additional insured.

This intent, of course, never became reality. With insurers vying for this then lucrative business, additional insured coverage grew by leaps and bounds. Contractual liability coverage, which predated additional insured status by about a decade, also was growing in scope. In fact, at one time additional insured status served as a backstop against an otherwise void and unenforceable hold harmless agreement.

In actuality, what additional insureds received as coverage often was broader in scope than what indemnitees actually sought to transfer under their hold harmless agreements, or what states permitted to be assumed by contract under their statutes relating to construction work. Those days are gone!

Where we're heading

Some insurers have come to the conclusion that they have apparently been giving away the store. Why, they ask, should we grant additional insured status that is broader than the liability that is being transferred, or can be legally transferred by contract? There is some merit to this question, if indemnitees do not require coverage against their sole fault in situations where they are otherwise permitted to legally do so, or where state statutes preclude indemnitees from transferring their sole fault consequences to indemnitors.

However, some 13 states have no statutes precluding sole fault assumptions of indemnitees, and another 12 states disallow sole fault assumptions, except when insurance is obtained for those assumptions. This means that approximately half of the states permit so-called "freedom of contract" in allowing indemnitors to assume the sole fault of indemnitees.

The next significant change on the horizon involves a major revision of standard ISO endorsements that will limit additional insured status to what was intended more than 60 years ago. Thus, when the next set of CGL policy changes is introduced next year, the best additional insureds can obtain, at least under standard endorsements, will be coverage for their vicarious liability. Any fault attributed to the additional insureds will not be covered.

This change can present a problem to indemnitees in those states where sole fault assumptions of liability are permitted and, in fact, attempted. In these jurisdictions, contractual liability coverage may have to respond in lieu of additional insured status. An added problem is that defense costs in relation to contractual liability are within limits under the ISO CGL policy, unless a host of conditions are met, as opposed to being in addition to limits when additional insured status applies.

To say there may be some turmoil in the insurance industry as a result of these impending changes is an understatement. What agents and brokers will need to do, first of all, is decide whether they wish to cater to the construction business market. If they do, they then need to keep current with what insurers are doing. It is a relatively simple matter to determine whether a given insurer is serious about being a provider of protection to those involved in the construction industry. The carrier's endorsements are the best indicators.

If insurers are not serious about writing construction-related risks, agents and brokers must start looking elsewhere for insurers that are more accommodating of these types of risks. Judging from what some insurers will do, there are some good markets for construction-related risks, as well as opportunities for peace of mind for named insureds, additional insureds, and the agents and brokers who serve them. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.