Liability insurance is expensive. I am required in contracts to carry a Commercial General Liability (“CGL”) policy. The contracts typically require the owners of the projects to be named as additional insureds and that the owners be indemnified, held harmless, and defended. My broker tells me I have an endorsement that generically addresses the additional insured. He also tells me to resist the language for indemnification, hold harmless, and defend. When I do, I lose the contracts. How can the latter part be insured in a CGL policy?
Dear Value Shopper,
Lots to unpack here because it could be you are not even getting the coverage you are already buying. To be fair, the following information is being shared without actually reading your insurance policy. This is a dangerous pursuit as guideline number one of any insurance situation is to read the full policy. The second guideline is to know what state is relevant to the insurance contract. Absent knowing these things, my response is broad and could change with more details.
Three issues need to be unpacked. First, the generic endorsement listing owners of projects as additional insureds. Second, the CGL’s treatment of indemnification. Finally, resisting indemnification could be a bad thing in the insurance contract. To address these issues, I am using Insurance Services Office, Inc. Commercial General Liability coverage form CG 00 01 04 13. This may not be the coverage form you have but it is easy to check. A forms listing accompanies most declaration pages.
First, the generic endorsement listing owners of projects as additional insureds. These endorsements can be very diverse in what causes the promise under the policy to be triggered. Attention needs to be paid to how the owner qualifies as an additional insured. For example, is the owner an additional insured to the extent as required by an “insured contract”? Is the owner an additional insured for ongoing operations, completed operations, or both? Is the full policy limit available to the additional insured or is it limited to an amount in an insured contract? You might be surprised at how many other pitfalls can occur in generic endorsements listing a project owner as an additional insured. Depending on the endorsement, the burden of knowing how to trigger the policy could be shifted to the attorney who drafted the project contracts. It can be the case that an appropriate specialist in insurance coverage did not address the risk transfer mechanisms happening in the insurance programs. Generally speaking, I am not a fan of generic endorsements because they leave too much room for error. I recommend that if you do business with several consistent companies, you have them named specifically by endorsement and review the terms of the endorsement to ensure the risk is transferred to the insurance company. After all, that is what you are buying.
Second, the CGL’s treatment of indemnification, hold harmless, and defense. At least two ways exist for a CGL policy to provide coverage. The first is to meet the definition of an “insured” (which includes additional insureds) and the second is for the first Named Insured to assume the liability in an “insured contract.” An “insured contract” can be defined to include “that part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party… .” Importantly, the amounts paid by the insurance policy to defend, hold harmless, or indemnify erode the policy limit for the coverage available. This contrasts with how the policy could treat the additional insured.
Finally, resisting indemnification could be a bad thing in the insurance contract. Think of listing a party as an additional insured as the belt and agreeing to indemnification as the suspenders. Assuming the contract between the parties is compliant with the terms or conditions in the insurance policy you are then getting the insurance coverage you are already buying. Failure to have the correct terms in the contract with the project owner in this case means the insurance company may not be obligated to you or the owner.
When purchasing insurance coverage, it is likely the price is connected to revenue and the number of projects performed in the year. These numbers correlate to the potential exposure of the insurance company. If your company is not reviewing how the risk of loss is transferred to the insurance company, they are not likely to get the value out of the coverage at the time of a claim.
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