When it comes to a claim involving a party seeking additional insured coverage under the named insured's liability, it is important to remember that not all additional insured coverage is provided by standard ISO provisions. There are a wide variety of additional coverages available and many have strings attached to them.

One type of endorsement growing in popularity makes additional insured coverage contingent on an "insured contract." Many people, including claims personnel, miss the significance of this requirement.

The best way to explain how this requirement results often in a surprise of no coverage is to review what the defined term "insured contract" means and then provide an example of how additional insureds learn that they are without coverage after a claim.

"Insured Contract"—Meaning

The defined term "insured contract" consists of five automatic-types of hold harmless agreements and an additional one referred to as "tort liability" assumptions. The five automatic-types of hold harmless agreements can be categorized (probably best remembered) under the acronym L – E – A – S – E. Each of these is explained as follows:

L — leases. This is where the tenant may be required to hold harmless and indemnify the landlord for any injury occurring on the leased premises

E — easement agreements. These are agreements which permit one party to use the property of another for a specific purpose. An example is use of another's driveway to obtain access into the rear of an adjoining business.

A — agreements required by municipalities, but not involving work for such municipalities. An example is a store with an awning. The city may require a permit and a document holding harmless the city if a member of the public is injured by that awning. The same can apply to sidewalk elevators.

S — sidetrack agreements. Railroads will not install a sidetrack to an entity's warehouse unless the entity agrees to hold harmless and indemnify the railroad for any bodily injury or property damage.

E — elevator maintenance agreements. Buildings with elevators need to be inspected and maintained periodically. Owners in need of this service, when they retain the services of contractors to do this work, usually have to agree to hold harmless and indemnify the service contractors.

The Trips and Traps of Tort Liability Assumed

Tort liability assumed is the sixth of these agreements commonly included with CGL policy provisions. Paraphrasing, this is a type of contract or agreement under which the named insured assumes the tort liability of another party to pay for bodily injury or property damage to another person. Tort liability is further defined to mean a liability that would be imposed by law in the absence of any contract or agreement.

The party who agrees to assume the final consequences of liability is commonly referred to as the "indemnitor." The party who is able to transfer its financial consequences of liability to the indemnitor is commonly referred to as the "indemnitee."

Very often, the indemnitee wants to be held harmless and indemnified for the acts or omissions of the indemnitor which might implicate the indemnitee in a claim or suit. Likewise, the indemnitee will agree to hold harmless and indemnify the indemnitor to the extent that the indemnitee's acts or omissions implicate the indemnitor.

The question here is: Are these the kinds of agreements that can be categorized as tort liability assumed? The answer is no, and the reason is that neither party has assumed the tort liability of the other party.

So, when the indemnitee begins to seek coverage and the hold harmless agreement does not involve any of the five automatic-type contracts, the indemnitee will be without protection. Furthermore, when the additional insured coverage is contingent on an "insured contract," the indemnitee who asked to be an additional insured will also be without protection here.

Other Points to Consider

What claims personnel also have to know about additional insured coverage and contractual liability is whether the tort liability assumed is permitted by law. Many states have anti-indemnity statutes that hold void and unenforceable sole negligence, or both sole and partial negligence.

The statutes of other states may hold void an unenforceable sole or sole and partial negligence, subject to an insurance exception. This means that the laws are not affected by the validity of insurance as, for example, when an indemnitee is able to obtain additional insured coverage. The problem, of course, is whether the additional insured coverage is broad enough to encompass the tort liability assumed.

A great deal is written about anti-indemnity statutes with a common statement being that these statutes hold void and unenforceable sole negligence, or sole and partial negligence. Claims personnel should not believe these kinds of opinions. Since a number of states do not even have anti-indemnity statutes, it behooves claims personnel to check these laws carefully.

Claims personnel also have to check the entire policy carefully, including endorsements. What they may find, for example, is that a CGL policy issued with an additional insured endorsement whose coverage is contingent on an "insured contract" is still not being applicable because of modifications to the definition of "insured contract."

When the 1986 CGL provisions were introduced, contractual liability coverage was on a blanket basis and applied to all five automatic-type agreements (L-E-A-S-E) and tort liability assumed. In 1988, however, the Insurance Services Office (ISO) introduced the contractual liability limitation endorsement, CG 21 39, which had the effect of eliminating all coverage having to do with tort liability assumed, other than what tort liability might have applied with the five automatic-type agreements.

Can you imagine what a surprise a CGL policy with this contractual liability limitation might have been to an additional insured whose coverage was contingent on an "insured contract" where the contract involved tort liability assumed and was otherwise permitted by law?

Some insurers (and ISO) had a change of heart in 2004, when the amendment of insured contract definition endorsement, CG 24 26, was introduced. When this endorsement is issued, sole negligence coverage is reduced to partial fault of the indemnitee. In other words, the bodily injury or property damage must be caused in whole or in part by the indemnitor, if there is to be coverage.

What must be kept mind, however, is whether (1) an anti-indemnity statute is applicable and whether (2) the kind of coverage provided by the modified definition of "insured contract" meets the requirement of the indemnitee and is otherwise permitted by law. In one case where an indemnitee found itself without additional insured coverage is where coverage contingent on an "insured contract" applied solely to the products-completed operations hazard. The claims person missed this point entirely. In other words, the indemnitee had additional insured coverage for ongoing operations, but as soon as those operations were completed, the indemnitee was no longer an additional insured. What is more is that contractual arrangements between the two parties were consummated by handshakes.

What additional insured coverage applies once there is an otherwise enforceable hold harmless and indemnity agreement hinges on what the additional insured endorsements say. Even here, some states will not permit additional insured coverage any broader than the otherwise valid and enforceable hold harmless agreement.

It all boils down to…

Claims personnel have to know their insurer's products.

Sometimes insurers make additional insured coverage contingent on an "insured contract" and do not have the foggiest notion why. Generally, the idea is inherited from what other insurers do.

When additional insured coverage is contingent on the existence of an "insured contract," it is necessary to see if the indemnitee's contract prescribes a contractual assumption that falls within the definition of "insured contract."

When the prescribed contractual assumption does not fall within any of the six contractual agreements within the definition of "insured contract," the indemnitee has neither additional insured nor contractual liability coverage.

When the prescribed contractual assumption falls within the definition of "insured contract," it is necessary to check whether any anti-indemnity statute permits the contract or otherwise holds it to be void and unenforceable. If the latter, there is no additional insured or contractual liability coverage.

When the prescribed contractual assumptions falls within the definition of "insured contract" and is otherwise valid and enforceable, the CGL policy to which the additional insured endorsement is attached needs to be checked to determine: (1) if coverage has been nullified through the issuance of contractual liability limitation endorsement (CG 21 39), or coverage has been reduced with the addition of an amendment of insured contract definition endorsement (CG 24 26).

Today, more so than ever before, the burden of determining whether additional insured and contractual liability coverage exists is on claims personnel who must understand their insurers' products and how coverage applies based on a variety of applicable laws. Unfortunately, the laws differ among states and so, too, do the insurance policy provisions of even the same insurer.