Pitfalls of Additional Insured Endorsements, Part Two

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Many additional insured endorsements contain limitations or exclusions that that are easy to overlook. Such limitations include sole negligence exclusions and provisions that restrict coverage to "ongoing operations." These were addressed in a previous article. This article will explain three other limitations that may appear in additional insured endorsements.

Extent Provided by Law

Some additional insured endorsements contain a provision stating that the additional insured is covered "only to the extent provided by law." This limitation is typically found in endorsements used by contractors to insure "upstream parties" like general contractors and project owners.

 It is also included in some endorsements used to insure architects, engineers and surveyors. The "law" referred to in this provision means anti-indemnity statutes.

Anti-indemnity statutes are laws intended to protect subcontractors from harsh contract provisions that might otherwise be imposed by upstream parties. These laws limit the amount of liability that can be transferred from one party to another via a contract.

Anti-indemnity laws vary from state to state. Many prohibit contracts that require one party to assume liability for negligence committed solely by another. Some laws also prohibit contracts that obligate one party to purchase insurance covering another party's sole negligence.

Suppose that Elite Electric, a subcontractor, has entered into a contract with Busy Builders, a general contractor, to do electrical wiring in a building Busy is constructing. Via the contract, Elite has promised to insure Busy against any claims that arise out of Elite's work for Busy--even if the claims arise from negligence committed solely by Busy.

Elite has insured Busy under an additional insured endorsement that covers Busy "only to the extent provided by law."

Busy Builders operates in a state that prohibits contracts obligating one party to insure party against the latter's sole negligence. An employee of Elite Electric is injured at the job site and sues Busy Builders for bodily injury.

The worker alleges that his injury occurred because Busy failed to maintain a safe workplace. The lawsuit is based on negligence committed by Busy only. Thus, if Busy seeks coverage for the claim under the additional insured endorsement, the claim may not be covered.

No Broader Coverage

Another provision found in additional insured endorsements applies when the policyholder is obligated under a contract to insure the additional insured. It states that the additional insured will be provided no broader coverage than is required by the contract. That is, if the policy provides broader coverage than is required by the contract, the terms of the contract will apply.

For example, suppose a contract states that Elite Electric must insure Busy Builders against certain types of claims alleging bodily injury or property damage. The contract does not require Elite to insure Busy against personal and advertising injury claims. Busy Builders is later sued for slander by a third party because of acts committed by Elite Electric. Even though Elite's general liability policy covers slander under Personal and Advertising Injury Liability, the slander claim against Busy may not be covered. Personal and Advertising Injury Liability coverage is not required by the contract.

No Greater Limits

Some additional insured endorsements contain a provision that restricts the limits provided to the additional insured. This provision may apply when one party is covering another as an additional insured to satisfy a contractual requirement. The provision states that the most the insurer will pay for a claim against the additional insured is the lesser of:

For example, suppose that a contract requires Elite Electric to insure Busy Builders under Elite's liability policy. The contract stipulates that Elite must provide $500,000 for both the Each Occurrence and the General Aggregate limit.

Elite's liability policy includes $1 million for each of these limits. A suit covered by the additional insured endorsement is filed against Busy Builders. The claimant seeks $750,000 in compensatory damages, but Elite Electric's liability insurer pays only $500,000. The contract requires Elite to provide only $500,000, so the insurer will not pay more than that amount.