By J. Christopher Bennington
In an effort to spread the cost of construction defect litigation, many carriers for general contractors and subcontractors have begun requiring their named insureds to obtain “additional insured” coverage from the named insureds’ subcontractors. For example, the policy issued to a general contractor may demand that the general require his or her electrician, plumber and other subcontractors to have the general named as an additional insured on each of the policies issued to those subcontractors. In this way, there are likely to be several policies covering the general contractor against any given claim, which can dramatically reduce the exposure for the general contractor’s own liability carrier.
The requirement to procure additional insured status under subcontractor policies is normally added by way of an endorsement to the main policy form. The provision may be included in what appears to be an innocuous form that covers a variety of topics, but it can have a devastating impact on the insured’s coverage.
Such provisions normally require that the subcontractor’s policy include limits of liability at least as large as the limits provided by the named insured’s own policy. There may also be other specific requirements about the form and nature of the additional insured coverage required. For example, subcontractor carriers issuing additional insured endorsements often issue endorsements that provide only “ongoing operations” coverage, which ostensibly ends when the subcontractor has finished his or her work on the project. The named insured’s carrier may actually require that the subcontractor carrier provide “completed operations” coverage which applies to losses developing after the subcontractor has finished work and left the site.
The requirement for additional insured coverage can be enforced by the carrier in a number of ways. Some carriers provide that the insured’s coverage remains in effect, but that the carrier has the right to audit and rerate the policy to charge extra premium after the fact if the insured does not obtain the required additional insured coverage on each project.
Other policies provide that the limits of insurance available to the insured are reduced if the additional insured coverage is not obtained. Kring & Chung recently handled a matter in which the carrier maintained that coverage was reduced from $1 million to $50,000 because the insured had allegedly failed to obtain additional insured coverage from all of its subcontractors.
It can be even worse. Some carriers have taken the position that obtaining additional insured coverage is a policy warranty, and that failure to obtain the additional insured coverage may void coverage altogether for a given claim, or even allow for rescission of the policy itself . Kring & Chung has also had to deal with at least one case where the carrier claimed the right to rescind its policies because the insured failed to obtain additional insured coverage from two subcontractors on one small project.
This has become a critical issue for our construction clients. It is essential that anyone engaged in construction be familiar with the terms of their liability policies and take steps to insure that they have satisfied any additional insured coverage requirements. This process should be taken as seriously as maintaining worker’s compensation coverage or any other element of the client’s insurance portfolio.
In order to protect against potential loss of coverage, we recommend that our clients do the following:
- Discuss with your agent or broker during the application process if there is going to be any requirement that you obtain additional insured coverage from your subcontractors;
- Obtain complete copies of all your policies, not just renewal notices or declaration pages, so that you know exactly how much coverage and what types of coverage are required;
- Review your subcontracts to make sure that they require the subcontractor to provide the specific limits and types of coverage demanded by your own carrier; and
- Obtain certificates of insurance and additional insured endorsements from each subcontractor working on each of your projects.
At Kring & Chung we can assist you with any necessary policy reviews to determine the additional insured coverages that you must obtain. We can also help you amend your subcontracts to require the necessary coverage from your subcontractors. We look forward to speaking with you about this or any other insurance or construction issues.