Issues and case law

Features of the nonstandard blanket endorsement

Possible defense

Introduction

The reason for blanket additional insured endorsements for use with commercial general liability coverage forms is to eliminate the insurer's necessity of having to issue individual endorsements (or in the insurance vernacular, scheduled endorsements). That, in fact, is the only advantage because the needs of additional insureds vary and so too, does the nature of the coverage. In other words, a blanket endorsement is not necessarily suited for all persons or organizations requiring additional insured coverage.

An erroneous point about the blanket additional insured endorsement is that it is broad in scope. That is not true! They can be broad if they are amended to fit the needs of a particular class of risks. These endorsements, however, usually are very limited. Another point about the blanket additional insured endorsement is that it will contain more verbiage than a scheduled endorsement, because underwriters will not be underwriting each additional insured request, and out of necessity, must add provisions such as a professional liability exclusion whether such an exposure exists or not.

Issues and Case Law

Strictly from a construction contractor's perspective, one of the exposures commonly overlooked in covering additional insureds is when a party not in privity with the contracting parties also wants to be covered. An example is a project owner when the contract is made between a general contractor and a subcontractor. The project owner in this instance, in not being one of the contracting parties, is considered not to be in privity with the others. This is important because some endorsements limit coverage solely to parties in privity. An example is the standard ISO blanket additional insured endorsement titled, “Additional Insured—Owners, Lessees Or Contractors—Automatic Status When Required In Construction Agreement With You”, CG 20 33 04 13.

This endorsement is not necessarily limited to owners, lessees or contractors but the title is very telling, because it applies to any one or more persons or organizations who have contracted in a construction-related agreement with the named insured. In other words, this standard ISO endorsement is limited to the party or parties who have contracted (or who are in privity) with the named insured. So, for example, if a general contractor requests additional insured coverage whenever one of its subcontractors retains the services of a sub-subcontractor, this standard ISO endorsement issued in conjunction with a sub-subcontractor's CGL policy will not apply to the general contractor.

The problem here is that the producer, for one, will not know that the standard ISO blanket additional insured endorsement will fall short of the mark. Unless the producer reads the contract between the parties and reads the blanket additional insured endorsement to see exactly what coverage is provided, the producer will confront a coverage issue. What makes matters worse is that such a situation can actually happen.

One such example of this is AB Green Gansevoort, LLC v. Peter Scalamandre & Sons, Inc., 102 A.D.3d 425 (2013). The project owner sought coverage where the contract was between a material supplier and a subcontractor. The additional insured endorsement limited coverage to “when you (material supplier) and such . . . organization have agreed in writing in a contact or agreement that such . . . organization be added as an additional insured on your policy”. Since the project owner was not a party to that contract, it was not an additional insured. Another case is Westfield Insurance Company v. FCL Builders, Inc., 948 N.E.2d 115 (2011), which involved a general contractor who sought additional insured coverage, but failed at that attempt when the contract was between a subcontractor and a sub-subcontractor.

In light of this exposure dealing with so-called “upstream” insureds, ISO is keeping its current blanket additional insured endorsement CG 20 33, but also adding a new blanket endorsement titled, “Additional Insured – Owners, Lessees Or Contractors—Automatic Status For Other Parties When Required In Written Construction Agreement”, CG 20 38 04 13. (The effective date of this endorsement is April 2013 in most jurisdictions.) There is a difference between this new blanket additional insured endorsement and the current one. The difference is in the title and in the subsequent coverage. The CG 20 33 title contains the words “. . . Automatic Status When Required In Construction Agreement With You”, whereas CG 20 38 reads in part “Automatic Status For Other Parties When Required In Written Construction Agreement”. The new endorsement thus applies to other parties and is not limited to contracts with the named insured.

Considering that coverage is otherwise the same between these two endorsements, it probably is a good idea for producers and consultants to request the new blanket additional insured endorsement since it would preclude them from having to read the contract to determine if an upstream party requires additional insured coverage. This suggestion, of course, depends on whether this standard ISO blanket endorsement is even suitable, because it does not include coverage for the products-completed operations hazard.

A shortfall of these two standard blanket additional insured endorsements pertains to the coverage for the additional insured. It could turn out where coverage is limited to something such as the additional insured's vicarious liability since the ISO endorsement's coverage is conditioned on what is required by the contract and is otherwise permitted by law. Surprisingly, many of those desiring additional insured coverage require coverage for no more than what is referred to as a “knock for knock” agreement. In other words, the named insured agrees to protect the additional insured for the named insured's liability and the additional insured agrees to protect the named insured for the additional insured's liability. Viewed from a contractual liability standpoint, this agreement would be a limited contract since no tort liability is being assumed by either of the parties.

If a blanket additional insured endorsement is desired that provides not only upstream but also products and completed operations coverage, the market will have to be searched, unless producers are licensed with insurers that offer such endorsements. One needs to be careful, however, that the advantage of covering an upstream person or organization and products-completed operations coverage is not offset by some kind of limitation(s). This is especially the case with endorsements for contractors, since insurers are not too keen on providing broad coverages for this particular trade.

Features of the Nonstandard Blanket Endorsement

First of all, it is important to keep in mind that regardless of the additional insured coverage requested, insurers today are making coverage, at least in part, contingent on what is being requested in a written contract or agreement. This means that to the extent an insurer is willing to provide the coverage, that coverage needs to be specifically required in a contract or agreement or the insurer is not likely to provide it. This may break the habit that some people have formed, beginning in the 1980s, of expecting broad additional insured coverage automatically simply by asking for an additional insured endorsement. What some people have failed to realize is that with 33 standard ISO endorsements and an infinite number of nonstandard endorsements, requiring additional insured status without further specificity and expecting that the proper and broadest endorsement will be issued is difficult to comprehend. Many people in this category probably still have in mind the standard ISO additional insured endorsement, CG 20 10 11 85, not realizing that most (not all) insurers no longer provide it.

The particular blanket additional insured endorsement reproduced later in this article (CG 72 46) includes anyone whom the named insured is required to add as an additional insured, which means upstream persons or organizations. The coverage, however, appears to be limited to the partial fault of the additional insured only if such coverage is the subject of the written contract or written agreement. This is the maximum coverage that is offered by CG 20 38. The difference is that if a contract were to prescribe more limited coverage, such as a “knock for knock” agreement, CG 72 46 might not apply. The ISO endorsement, on the other hand, is structured so as to provide coverage for less than partial fault, such as vicarious liability. If this is the case with this nonstandard endorsement, it still requires that the contract be read to determine if this endorsement is an appropriate one.

This nonstandard blanket endorsement, unlike the ISO endorsement, covers the products-completed operations hazard but only if such coverage is prescribed in the written contract or agreement. The same goes for contractual liability coverage. While some jurisdictions permit sole negligence assumptions, the most coverage provided by contractual liability is for partial fault if, in fact, such degree of fault is otherwise permitted by an anti-indemnity statute.

What also is interesting to note is how the insurer with the nonstandard endorsement has repeated the entire other insurance provision of the policy, whereas ISO states in one small section how other insurance is to apply. Without reviewing the policy to which the nonstandard endorsement applies, it is difficult to determine whether it actually is necessary to repeat the entire provisions having to do with other insurance.

Whatever the case may be, the ISO approach appears to be more simplified, referring to the Limits of Insurance provision and then agreeing to pay that amount required by the contract or agreement or what is available, whichever is less.

As is custom and practice, as insurers add endorsements, other insurers pick up on them and introduce identical or similar ones. As time progresses, therefore, it may be possible for there to be a wider selection of blanket additional insured endorsements offering broader coverages than are currently available with the standard ISO ones. One thing for sure is that the standard ISO blanket additional insured endorsement, CG 20 33, is likely to become a dinosaur, because it does not apply to upstream additional insureds, and that status is an unknown unless the contract is read first.

This discussion is limited to blanket additional insured endorsements. This does not mean that the newly introduced ISO blanket endorsement, CG 20 38, and the nonstandard blanket endorsement, CG 72 46, are the only ones that provide coverage for upstream insureds. To the contrary, many endorsements have provided, and continue to provide, additional insured coverage to upstream entities. It is a matter of looking at the endorsements carefully.

Possible Defense

One thing about insurance is that one can never be definitive about coverage, since whether coverage ultimately applies is a question of law for a court to decide. (This, of course, does not preclude insurance agents, consultants and others to suggest what coverages should be obtained.) For example, even though a blanket additional insured endorsement, such as CG 20 33, restricts coverage to parties in privity, it is still possible for coverage to apply to upstream parties when a court, in considering the applicable fact pattern, decides it can be done.

A case in point is Naylor dba Naylor Construction v. Navigators Insurance Company, 2013 WL 990943 (U.S. Dist. Ct. S.D. Ca.), where the sole issue was whether the plaintiff, Naylor, individually, dba Naylor Construction qualified as an additional insured under a non-party's liability insurance policy issued by Gemini Insurance Company. The result was that Gemini's motion was denied because the plaintiff (Naylor) was able to present evidence to enable the jury to find that the plaintiff qualified as an additional insured.

Naylor, a general contractor (GC) retained the services of Coast Contracting & Development, a subcontractor (SC) covered by Gemini Insurance Company (Insurer), which issued two successive CGL policies. Both CGL policies contained a blanket additional insured endorsement (the endorsement) extending coverage to “any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy . . . .” (The “you” referred to the SC.)

The GC filed this action filed this action maintaining that he was wrongfully denied coverage as an additional insured on the SC's policy in connection with litigation relating to a construction project. The insurer moved for summary judgment. Its sole argument was that the GC failed to present evidence of a written contract or agreement between the GC and the SC that would satisfy the endorsement wording.

The court started its analysis with the language of the blanket endorsement which read: “A. Section II—Who Is An Insured is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. . . .”

Neither party disputed the core requirement that a party seeking additional insured status must have entered into a written contract or agreement with the insured for coverage. The sole dispute was whether the SC and GC satisfied that requirement. The insurer contended that no evidence of a contract or agreement existed. It submitted three bid sheets and a change order, which the SC's chief executive identified as his company's contracts with the GC. None of these documents stated that the SC would name the GC as an additional insured. In fact, they did not mention insurance at all.

The GC countered that other writings, namely a letter and facsimile, formed the requisite agreement. The GC explained that in mid-2004, the developer on the project told him what he would need from the subcontractors. The GC copied those requirements into a letter, and “sometime on or after June 23, 2004″, his letter “was provided to the SC and other subcontractors”.

The GC's letter was attached as evidence. It, however, did not mention the SC by name; in fact, it contained no salutation line at all, and the name and address of the developer appeared in the space typically reserved for the recipient's address. In the body, the GC directed the recipient to “[p]lease supply” current contact information, and listed several items “required for initial invoice”, including a completed and signed W-9, a copy of a general contractor's license, and a “copy of the General Liability Policy naming the GC and developer as additional insured”. The GC stated in his declaration that this information “was requested in order for Coast (SC) to be allowed to work on the project and be paid”.

The GC further declared that the SC, through its insurance broker, sent him a fax. Although he “was provided with a Certificate of Insurance and Additional Insured Endorsement”, he could only locate the third page of the fax. The certificate of insurance referenced by the GC identified Naylor Construction as a certificate holder and it explained that the “Certificate Holder is named Additional Insured . . . , per attached form . . . .”

Having reviewed the submissions of the parties, the court concluded that the insurer was not entitled to summary judgment.

The endorsement, it said, expressly required a written contract or agreement. Although the words “contract” and “agreement” are often used interchangeably, the court explained, an agreement has a wider meaning and contains no implication that legal consequences are or are not produced. The court cited here the case of Stevens v. Dillon, 168 P.2d 492 (1946), which held that an agreement is “a manifestation of mutual assent by two or more persons to one another”. From the court's point of view, there was at least a genuine issue of fact as to whether the GC and SC exchanged the letter and facsimile in a manner evincing the parties' mutual assent to add the GC as an additional insured, thereby satisfying the written agreement requirement.

The insurer asserted that the letter could not be part of a nonexistent contract in writing between the SC and GC, because it was merely a letter from the GC to the developer. But from the court's perspective, there was reason to question that characterization. Although the developer's name and contact information, the court explained, appeared in the space typically reserved for a recipient's address, the GC introduced evidence that created a material factual dispute about whether the GC did, in fact, send the letter to the SC. For instance, the GC submitted copies of the SC's contractor's license and W-9, two documents specifically requested in the letter and found in the GC's job file. The GC also submitted evidence that a different subcontractor had a copy of the letter, which suggested a wider dissemination than the insurer had contended.

The court also was not persuaded by the insurer's argument that the certificate of insurance could not be a part of a written agreement. The insurer cited Empire Fire & Marine Insurance Company v. Bell, 64 Cal. Rptr.2d 749 (1977) for the proposition that, under California law, a certificate of insurance is “merely evidence that a policy has been issued”. The Insurer noted that this certificate was covered with disclaimers declaring that it was “issued as a matter of information only, confers no rights upon the certificate holder, does not amend, extend or alter the coverage afforded by the policies below”, and so on.

The court, however, stated that were it to view the certificate in a vacuum, it would agree that, as a matter of law, the certificate does not constitute a written agreement to make the GC an additional insured. But the court was not viewing the certificate in a vacuum. The GC presented evidence, the court explained, that he requested from the SC a copy of the general liability policy naming Naylor Construction and 1320 Summit Avenue, LLC as additional insured, and that he subsequently received both the certificate and endorsement. The GC was not asserting that the certificate overrode the policy, said the court; he was asserting, instead, that the parties' written exchange evinced their intent of compliance with it.

The GC's evidence may have been thin, said the court, but viewing it in the light most favorable to the GC, the court concluded that there was at least a factual dispute as to the GC's status as an additional insured.

Of course, one court case does not mean that other similar issues will be resolved in the same way. However, the fact that there is such a favorable decision for an additional insured can still be viewed as a definite plus, since other courts deciding on a first impression basis now have something to ponder before making their own decisions.