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Somebody Moved Your Cheese – Did You Notice?
As of April 2013 Attorneys, NOT INSURANCE AGENTS, will determine what protection their clients receive as an “Additional Insured”. In short, they will receive NO protection unless the contract or agreement containing the additional insured requirement qualifies and quantifies the request. This is a major change.
As a consultant who advises attorneys on drafting and litigating indemnification, risk transfer and insurance related agreements, the changing insurance landscape as of April 2013 poses great challenges. For litigators, seminal cases most likely don’t exist. For business lawyers, current contracts most likely are useless. Since insurance is typically the funding mechanism that backs many types of contracts and agreements, getting it right is critical.
Prior to April of 2013, coverage and limits provided an additional insured were the same as an insured, subject to endorsement language. All an attorney had to do was insert a requirement in a commercial contract (e.g.; lease, rental, subcontract agreement) that their client be added as an Additional Insured on the indemnitor’s insurance policy and that was it. The additional insured would automatically receive all the coverage and limits in the Commercial General Liability Policy (CGL) due an insured, subject to any limiting conditions in the endorsement.
So what happened in 2013 that changed everything? The Insurance Services Office (ISO), one of the largest suppliers of insurance policy forms and endorsements to the insurance industry changed the language of most “Additional Insured” endorsements. This change now mandates that that the contract or agreement stipulate the “type” of coverage and “limits” of insurance required. If nothing is stipulated, most likely nothing will be provided.
Insurance companies that do not subscribe to ISO have been incorporating such requirements into their additional insured endorsements for several years. However, this is the first major step by ISO in this direction.
The ISO CGL allows an additional insured to be protected by up to four of the five types of coverage. They are bodily injury, property damage, personal injury and advertising injury. The fifth coverage, medical payment, is typically excluded by the CGL for both indemnitees and additional insureds.
There are also up to four limits ($) of insurance available to an additional insured. They are occurrence limit, general aggregate limit, products/completed operations aggregate limit and personal and advertising injury limit.
While the requirements for additional insured coverage is clear, it is unclear if indemnification language in a contract or agreement will carry forward to the Additional Insured request. When properly worded, I believe it can and will, but caution needs to be exercised when drafting the indemnification and insurance sections of a contract or agreement.
The CGL policy does allow for both indemnification and additional insured coverage. If, for example coverage is not available to an indemnitee because of a law or statute, it is possible that they may still receive protection as an insured through the additional insured endorsement. This is called the “Belt and Suspenders” theory. If one fails the other picks up.
Another new provision in the additional insured endorsement states that the insurance afforded to an additional insured only applies to the extent permitted by law. This change is consistent with a number of jurisdictions that have passed anti indemnity statutes and their desire to block coverage for indemnitees trying to bypass such statutes by becoming an additional insured on an indemnitor’s insurance policy.
Prior to the ISO change, when an indemnitee was added as an additional insured they became an insured, effectively bypassing anti-indemnity statutes. By inserting “to the extent permitted by law” in the additional insured endorsement, ISO’s intent is to negate coverage and yield to anti-indemnification statutes.
Attorneys who draft contracts and those who defend and litigate them will need to seek CLE on the subject in order to be brought up to speed on this changing landscape. Since the codes in most states allow attorneys to consult on insurance related matters as part of their practice of law (e.g.: Indiana IC 27-1-15.6-23 (a)(1); Michigan MCL 500.1232), will drafting agreements that fail to protect their client be considered a professional error? An interesting point to ponder…