By Donald S. Malecki, CPCU

Producers, as well as consultants and risk managers, need to tread carefully when arranging insurance, since virtually every business today is affected by the construction business and these Additional Insured endorsements.

There's a great deal of dialogue these days over the proposed changes by the Insurance Services Office (ISO) to some of its Additional Insured endorsements. To be precise, of the 29 standard Additional Insured endorsements currently in use, 10 are in the process of being amended, because their wording can potentially give additional insureds coverage against their sole negligence.

With one exception dealing with Vendors endorsement, CG 20 15, the Additional Insured endorsements viewed by ISO as being the troublesome ones requiring change deal primarily with construction-related risks. The endorsements in this latter category of risks are:

* Engineers, Architects or Surveyors, CG 20 07, and CG 20 31 for use with the Owners and Contractors Protective Liability coverage part

* Engineers, Architects or Surveyors Not Engaged by the Named Insured, CG 20 32

* Owners, Lessees or Contractors, Scheduled Person or Organization, CG 20 10

* Owners, Lessees or Contractors Automatic Status When Required In Construction Agreement With You, CG 20 33

* Designated Person or Organization, CG 20 26

* Lessor of Leased Equipment, CG 20 28; Lessor of Leased Equipment Automatic Status When Required In Construction Agreement With You, CG 20 34

* Owners, Lessees or Contractors Completed Operations, CG 20 37

Point and counterpoint

To be quite frank about it, many insurers that have issued (sometimes reluctantly) the types of endorsements to be replaced have disliked the idea of having to cover additional insureds against their sole fault and on a primary basis, in many instances when their own named insureds haven't even been named in a claim or suit.

What is even more disconcerting to these insurers is that the individuals or organizations comprising these additional insureds often are precluded by statute from transferring their financial consequences of sole fault under indemnification agreements. The question posed by these insurers therefore is: If individuals or organizations (indemnitees) are precluded by statute from transferring the financial consequences of their fault under indemnification agreements to indemnitors, why should broader coverage be provided to them as additional insureds?

While some of the points raised by insurers may be legitimate concerns at times, not all persons or entities who have the bargaining power to transfer the financial consequences of their liability always do so, even when it is permissible to do so by law--and there are many states that have no restrictions on the degree of fault to be transferred. Surprisingly, many indemnitees in this category simply want to be protected against the "eye-for-an-eye" exposure; that is, only when indemnitees are named in a suit because of what indemnitors do or fail to do on the job that generates claims wherein indemnitees also are named.

However, what indemnitees have come to learn over the years is that when an employee of an indemnitor, for example, is injured on the job and finds that workers compensation benefits are inadequate, the employee is likely to file suit seeking damages against the indemnitee. Given that workers compensation is the exclusive remedy against the employer, the injured employee very often will allege that the indemnitee was solely at fault for those injuries. This type of scenario commonly involves employees of subcontractors who file their claims against general contractors and/or project owners.

The common defense of the general contractor and/or project owner is to turn to the subcontractor and ask for protection based on contractual liability coverage and/or additional insured endorsement agreed to be provided by the subcontractor. Traditionally, insurers have been providing additional insureds with cover against their sole fault in these situations, and often on a primary basis.

Whether the allegations of injured employees against others actually are true is something that usually cannot be determined until these matters are litigated to their conclusion. At the very least, the targets of these suits should obtain defense, assuming the proper additional insured coverage is in place, or should be reimbursed for their defense costs, if contractual liability coverage is applicable instead of additional insured status.

Whatever the outcome may be, it is the intention of many insurers today to avoid having to pay damages on behalf of individuals or organizations in those situations where they are found to be solely to blame for the damages alleged, whether they involve injuries to persons or property damage.

The end is not near

Whether the desired results of these proposed changes by ISO will actually materialize is something that undoubtedly will take time to see. Rest assured, however, that insurers of independently filed forms and those involved in the excess and surplus lines market will have their own versions. In fact, some insurers do issue more restrictive additional insured endorsements.

On the other hand, some insurers are likely to view this development as an opportunity to continue to accommodate the needs of their insureds and offer the protection requested at a price commensurate with the exposure.

Producers, as well as consultants and risk managers, need to tread carefully when arranging insurance, since virtually every business today is affected by the construction business and these additional insured endorsements. Whether the clients are indemnitees who are seeking to obtain both contractual liability coverage and additional insured status, or indemnitors who are being required to comply with contract specifications mandating certain coverages, producers and others must be cognizant of what their clients seek or are required to deliver.

ISO's proposed changes are likely to be viewed by some producers as a welcome development, particularly those who serve clients, such as subcontractors, who must comply with contractual terms requiring broad hold harmless agreements and/or additional insured status consisting of sole fault coverage on a primary basis.

It is not going to be a simple matter, however. Part of the reason is that many indemnitees are likely to continue to request the same broad protection they have been enjoying over the years. Indemnitees in this category have come to learn that if their contracts specifically require the equivalent of endorsement CG 20 10 with an edition date of 11-85, some insurers of blanket additional insured endorsements will provide this additional insured status--for an additional premium, of course.

Should that capability disappear, indemnitors will have to fulfill those requirements. Should that not be possible, the contractual terms will have to be changed or the indemnitors and others may be confronted with suits for having failed to procure the required coverages.

Complicating matters is that the ISO Additional Insured endorsements being amended retain their current numbers. For example, Additional Insured--Owners, Lessees or Contractors, CG 20 10 with a 1985 edition date offered sole fault coverage for both ongoing and completed operations coverages. Both the 1993 and 1997 editions offered sole fault coverage but limited solely for ongoing operations. The 2001 edition of this endorsement was introduced to strengthen the intent to limit coverage to ongoing operations, since completed operations coverage is possible in certain fact patterns. The latest 2004 edition is intended to limit primary coverage for ongoing operations to less than sole negligence of the additional insured.

Whether insurers will necessarily issue the latest edition of CG 20 10, or something more limited or broader in scope, remains to be seen. It, however, will be challenging times for producers and others who must keep pace with what insurers are willing to do. It does not matter whether they serve the indemnitors who are being required to obtain broad additional insured endorsements, or they serve the indemnitees who are seeking these broad endorsements. *

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.