United States: The Most Common Yet Most Misunderstood Risk Management Technique - Being an Additional Insured

By Bill Locke

Business owners, service providers and users are by definition in multiparty relations in every aspect of their business, whether as or with their landlord, tenant, contractor, supplier, or customer. The purpose of this article is to afford you with practical knowledge as to the most common risk management technique, being listed as an additional insured on another person’s liability insurance policy, so that you may also avoid the most common mistake in employing this technique. For instance, if you are contemplating leasing space in a to-be-built multi-tenant project (e.g., an office building or a shopping center), the endeavor upon which you are about to embark will involve a complex relationship of numerous parties.

In this common scenario, in addition to landlord and tenant, there are many other parties involved in the landlord/tenant relationship: on behalf of the landlord there are its lender, building contractor, architect, engineer, and project service providers (management company, security guard service, and maintenance service); and on behalf of the tenant there are its tenant-finish out contractor, space planner, architect, and engineer. Each of these persons typically has its own commercial general liability insurance ("CGL") policy protecting it against liability for bodily and personal injuries arising out of its negligence. Each person has negotiated with its insurance carrier the coverages, limits and deductibles of its CGL policy and the consequent premium. Each of the persons in this hypothetical will additionally seek to protect itself from liability for injuries arising out of its relationship with each of the other persons – whether due to the work, operations, acts or omissions of each of the other persons or due to their presence on your property. Among the many risk management techniques you might employ in the hypothetical situation (insurance, indemnity, releases, waivers, disclaimers, exculpations and limitations of liability), the most common is to require one or more of the other parties to list you as an additional insured on the other party’s CGL policy. An additional insured endorsement is equivalent to an insurance policy written for the additional insured. The endorsement specifies its coverage and is subject to the limits of the named insured’s policy. It results in the additional insured being provided by the named insured’s insurance carrier a defense to claims by injured third parties due to injuries arising out of the covered aspects of the relationship. Issuance of CGL additional insured endorsements is routine and cheap! It works to shift to the other party’s CGL insurance the risk of loss due to injuries occurring due to the other person’s operations or presence at the premises. The strongest rationale for this request is the perceived fairness of making the other person’s insurance carrier responsible for the increased exposure to loss created for the additional insured due to the insured’s operations. The cost is nominal or significantly less than the premium previously paid by the named insured for its policy.

Unfortunately, although this is the most common risk management technique, it is also the most commonly misunderstood, even by professionals in the field—risk managers, insurance agents and lawyers. The most common errors are the following.

• Playing Russian Roulette with Your Insurance. The common error is in failing to specify the coverage terms to be contained in the additional insured endorsement. Parties commonly cover the additional insured requirement by specifying: "______ (the named insured) will cause its CGL insurer to list ______ as an additional insured on its CGL policy." For example, a landlord may specify in the lease that the tenant and the tenant’s contractors will cause each of their CGL insurers to list the landlord and its lender, management company and contractors as additional insureds on the tenant’s and the tenant’s contractors’ CGL policies; a tenant may specify in its contract with its tenant-finish out contractor that the contractor shall cause its CGL insurer to list the tenant, its landlord, and the landlord’s lender, management company and contractors as additional insureds on the tenant-finish out contractor’s CGL policy; the tenant’s contractor may specify in its subcontract with its subcontractors that the subcontractors list the contractor as an additional insured on the subcontractor’s CGL policy. Unfortunately, in each of these cases, the person desiring protection as an additional insured has by the wording of its insurance clause left it up to the other party’s insurance carrier to define the scope of the coverage to be provided. This is equivalent to letting the fox determine how, when, and if to protect the chicken.

This mistake has been made because there is no commonly accepted definition of what it is to be an "additional insured."

There are two basic types of additional insured endorsements – those issued on endorsement forms prepared by the Insurance Services Office, Inc. (known as "ISO"), the largest nationwide insurance advisory organization, which provides insurance forms for over 3000 national insurance issuers, and "manuscripted" endorsements – forms prepared by insurance issuers that vary from ISO’s forms. ISO forms have been tailored to address the most common circumstances where one party requires that it be listed as an additional insured on another person’s CGL policy. Even with ISO forms there are a variety of endorsement forms available for the most common business relationships, thus allowing each party to specify the nature of coverage required. When a party fails to specify more than it be listed generically as an "additional insured," it has opened the door to the other party’s insurer picking between the available ISO forms or issuing a manuscripted form that effectively eliminates or conditions coverage for the additional insured.

For instance, the following are three most frequently used ISO endorsement forms:

The above form is an endorsement to be added to the named insured’s CGL policy to specify by Schedule certain person(s) as additional insured(s) on the named insured’s CGL policy (e.g., to specify a landlord and/or tenant as an additional insured on a tenant’s contractor’s CGL policy). Note that this form specifies covered occurrences ("liability arising out of the named insured’s ongoing operations performed for that insured") and certain exclusions from coverage ("occurrences arising after all work on the project has been completed").

The above form is an endorsement to be added to the named insured tenant’s CGL policy to specify by Schedule certain person(s) as additional insured(s) (e.g., to specify the landlord and its management company as an additional insured on the tenant’s CGL policy). Note that this form specifies the covered occurrences ("liability arising out of the named insured’s ownership, maintenance or use of premises leased to the named insured") and certain exclusions from coverage ("occurrences arising after cessation of the tenancy and structural alterations, new construction or demolition operations performed by or on behalf of the additional insured").

The above form is an endorsement to be added to the named insured’s CGL policy to specify certain person(s) as additional insureds on the named insured’s CGL policy (e.g., to specify landlord and its lender, manager and contractors as additional insureds on the tenant’s CGL policy; to specify a tenant as an additional insured on a landlord’s CGL policy). Note that this endorsement form specifies covered occurrences ("liability arising out of the named insured’s operations or premises owned by or rented to the named insured") but does not have exclusions from coverage as do the first two ISO forms.

The following insurance language is found in a manuscripted additional insurance endorsement issued by AIG:

Note that the language in the ISO and the AIG endorsements are very similar, in that each specifies a covered relationship, status or activity: the named insured’s operations (ISO form); the additional insured’s operations (AIG form); the ownership or use by or the rental to the named insured of premises (ISO form). But also note that the AIG endorsement limits the additional insured’s protection under the named insured’s CGL policy by excluding from coverage liabilities arising out of "any negligent acts committed by the additional insured." The AIG exclusion effectively eliminates from insurance coverage all liabilities for which the additional insured would wish to be listed as an additional insured on the named insured’s policy! It is possible to craft an endorsement form to meet your particular risk management goals, including "manuscripting" any of the ISO forms and even manuscripting the AIG form to exclude the exclusions or to extend or tailor the coverage. In circumstances where premises are not within the exclusive use of one party or are maintained by one person but used by another person (e.g., parking garages, common area facilities) it may make more sense to tailor the additional insured endorsement to exclude from the insurance protection afforded by the endorsement such common facilities or facilities maintained by others. Unfortunately, due to lack of understanding, parties may resort to the "one size fits all" rationale, and list as an additional insured persons which reasoned fairness would indicate should rely on their own CGL insurance as opposed to being listed on your CGL insurance as an additional insured. This is more so the case where a tenant has been required to list the landlord as an additional insured on the tenant’s CGL policy, but the tenant is being additionally billed for the landlord’s CGL insurance as part of common area expense pass-through.

Conclusion. The lesson learned: Your best protection is to be knowledgeable about your risk management choices – if protection is desired by being listed as an additional insured on another’s CGL policy, you should specify the scope of additional coverage required, and not merely provide that you are to be listed an "additional insured."

BILL LOCKE is an attorney, Board Certified in Commercial Real Estate Law, and is a shareholder with the firm of Graves, Dougherty, Hearon & Moody, P.C. He represents commercial business owners and commercial project developers in buying, selling and developing commercial projects.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.