A recycling facility needed repairs made to its heavy equipment. It engaged a contractor to perform the work and to supervise the facility’s employees who would operate the facility’s overhead cranes during installation of new steel plates.

The contract contained an indemnification clause whereby the contractor agreed to defend and indemnify the facility for any and all liability for injuries or damage to property arising out of the work, except for the sole negligence of the facility or its employees. The contract also required the contractor to maintain Commercial General Liability, Automobile Liability, Workers’ Compensation and Employer’s Liability insurance with specified minimum limits of liability, including the facility owner covered as an Additional Insured under the Commercial General Liability insurance.

The contractor provided the facility with a certificate of insurance showing the required policies, including occurrence-form Commercial General Liability (CGL). The certificate stated that the certificate-holder (the facility owner) was an Additional Insured under the CGL policy. The section of the certificate where extensions or limitations of coverage can be inserted was left blank.

During the course of the repair project, one of the contractor’s employees was severely injured when he was struck by a heavy steel plate that was being moved into position by the facility’s overhead crane operator while under the supervision of the contractor. The injured worker suffered permanent partial disability and brought suit against the facility owner who sought defense and coverage under the contractor’s CGL policy.

The contractor’s CGL insurer, an “A Rated” surplus lines insurer, denied coverage to the facility owner citing language in the policy’s Additional Insured provision and language that precluded insurance for the contractor’s defense and indemnification obligations.

The denial of coverage to the facility owner as an Additional Insured was based upon a limitation to, and an explicit exclusion within, the Additional Insured endorsement. In Additional Insured endorsements (in common use since the early 1990s), coverage afforded to the Additional Insured is limited to claims that result from the negligence of the Named Insured (the contractor). This particular insurer’s endorsement also excluded coverage for “bodily injury directly arising out of or resulting from the negligence of the additional insured”. The insurer asserted that the injury was the result of the sole negligence of the facility’s employee, the crane operator, and therefore there was no coverage.

As for the contractor’s contractual obligation to defend and indemnify the facility owner, the insurer stated that an amendment of the standard ISO policy form language contained in the policy’s Contractor’s Limitation Endorsement precludes coverage and they issued a denial to the contractor and the facility owner.

The standard ISO CGL policy excludes coverage for injury to an employee of the Named Insured, but there is an exception to the exclusion (known as saving language) when there is a contractual obligation in an “insured contract” to indemnify another party for such injury. In this case, the wording in the contractor’s policy was amended by the Contractor’s Limitation Endorsement deleting the saving language from the exclusion and adding in its place an explicit exclusion of any liability for employee injury assumed in a contract or agreement. This left the contractor without insurance to fund its defense and indemnification obligation to the facility owner.

To make matters worse, the Contractor’s Limitation Endorsement also revised and limited the scope of contractual liability coverage under the policy to indemnification obligations contained only in a few specified types of agreements, such as leases of premises, easement agreements, elevator maintenance agreements and agreements to indemnify a municipality. It is doubtful that the contractor was aware of this narrow definition of “insured contract” in its CGL policy.

Lessons Learned

So, what coverage can an Additional Insured count on? Unfortunately, less than it might expect – only vicarious liability coverage and no coverage for claims arising out of its own negligent acts. While it may be possible in some instances to obtain a pre-1990’s version of the Additional Insured endorsement with full coverage granted to the Additional Insured, the drafters of contracts, agreements, and even purchase-orders should recognize the new reality and not assume that a simple requirement that the party being represented be an Additional Insured cannot be relied upon as providing protection to the named party for its own acts.

In addition, it cannot be assumed that there will be insurance to back up an indemnification agreement. And, while it is usual and customary to rely on a certificate of insurance as evidence that the required insurance is in force, a certificate of insurance is issued for information purposes only, and confers no rights on the certificate holder.

Parties relying on agreements that contain insurance requirements should obtain copies of the policies so that the coverage actually available can be reviewed and changes can be requested as necessary. It is worse to be uninformed than to be uninsured.