Additional Insured and Insured Contract Liability Insurance Coverage for General Contractors - November 2007 - Construction Law

JurisdictionColorado,United States
CitationVol. 36 No. 11 Pg. 45
Publication year2007
36 Colo.Law. 45
Colorado Lawyer

2007, November, Pg. 45. Additional Insured and Insured Contract Liability Insurance Coverage for General Contractors - November 2007 - Construction Law

The Colorado Lawyer
November 2007
Vol. 36, No. 11 [Page 45]
Construction Law

Additional Insured and Insured Contract Liability Insurance Coverage for General Contractors
by David M. McLain, Alex M. Nelson

Construction Law articles are sponsored by the CBA Construction Law Section.

Article Editor:

James W. Bain of Benjamin, Bain & Howard, L.L.C., Greenwood Village - (303) 290-6600,

About the Authors:

David M. McLain is a partner at Higgins, Hopkins, McLain & Roswell, LLC. Alex M. Nelson is an associate at that firm. Their practice focuses on representation of general contractors and developers in construction matters, including defense of complex construction defect claims - (303) 987-9870,, The authors thank Clayton Sharkey of IMA of Colorado for his invaluable contributions to this article.

General contractors often obtain liability insurance coverage under the policies of their subcontractors through either additional insured endorsements or by way of insured contracts. Recent Colorado legislation impacts the ability of general contractors to obtain these policy benefits.

Developers, general contractors (GCs), and other construction professionals frequently rely on their commercial general liability (CGL) insurance policies to help resolve construction defect or other claims that arise during or after completion of a construction project. Historically, those entities and their attorneys have looked to their own CGL policies to fund defense of claims and indemnity. Additionally, however, the CGL policies purchased by the project subcontractors often provide developers and GCs with defense and indemnity as additional insureds (AIs) under the policies. This article explores AI CGL coverage in the context of construction claims, including the benefits and shortcomings from the perspective of a developer or GC.

Consideration of AI coverage is timely in Colorado. State Senate Bill (S.B.) 07-087, recently passed by the legislature and signed into law by Governor Bill Ritter, places new, explicit limitations on the extent to which GCs can contract for AI coverage.(fn1) This legislation is part of larger anti-indemnity legislation that will have sweeping effects on risk transfer in Colorado construction matters.

Obtaining Coverage

For an additional (often nominal) fee, a subcontractor can name a GC or developer as an AI under its CGL policy. This commonly is required by construction subcontracts, which often specify policy limits, effective dates, or other important terms of the AI coverage. Some policies contain a "blanket" AI endorsement, which provides AI coverage for any person or entity to whom the primary named insured is contractually bound to provide such coverage. Otherwise, an endorsement is added to the policy that specifically names those persons, entities, or projects that qualify for AI coverage under the policy.

The subcontractor obtains a certificate of insurance from its carrier or agent that demonstrates that the GC or developer has been named as an AI under the policy. The certificate of insurance does not in itself confer any rights under the policy; it merely is an informational document that is subject to the terms of the policy itself, including any AI endorsements that may or may not exist.(fn2) However, if an insurance certificate indicates that a person or entity is an AI under the policy when no corresponding policy endorsement actually exists, and the intended endorsee reasonably relies on the erroneous certificate, equitable estoppel can apply to afford AI coverage.(fn3)

The primary and excess CGL policies of many GCs contain provisions requiring them to obtain certain AI coverage from their subcontractors. If the proper AI coverage is not provided by the subcontractors, the GC's deductible or self-insured retention (SIR) on its own CGL policy can rise, its policy limits may be reduced, and coverage under its primary and excess policies may be taken away entirely.(fn4) This underscores the importance of a thorough insurance compliance program for a GC.(fn5)

Typically, only the construction subcontractors on a project provide AI coverage for the GC and developer. The professional liability insurers of design professionals, such as architects and engineers, generally do not provide AI coverage, because any such coverage would obviate the distinction between CGL coverage (intended to cover risks such as property damage), and professional liability insurance (intended to cover risks such as professional negligence).

Benefits of AI Coverage

The primary benefits sought by any insured under a CGL policy, including an AI, are: (1) payment of defense fees and costs (including attorney fees) in a potentially covered matter by the insurance carrier; and (2) for the carrier to indemnify the insured from and against any liabilities incurred, including judgments or settlements. In Colorado, the duty to defend is broader than duty to indemnify(fn6) - that is, carriers often fund insureds' defenses even when it eventually may be determined that the carrier has no duty under the policy to indemnify by means of satisfying a judgment or settlement.

To trigger a carrier's duty to defend an AI, the AI must put the carrier on notice of a claim or potential claim. A preliminary determination made by the carrier is whether the insured's notice was timely. To decline a tender of defense based on untimely notice, a carrier must determine that the insured delayed unreasonably in providing its notice.(fn7) If an insured has unreasonably delayed notice to an insurer, the insurer may deny policy benefits only if it can prove by a preponderance of the evidence that it was prejudiced by the delay.(fn8)

A carrier owes to an AI the same duties it owes to its primary insured in evaluating a tender of defense.(fn9) An insurer that seeks to avoid its duty to defend bears a heavy burden.(fn10) In determining if a duty to defend exists, an insurer must look to the allegations in the complaint to ascertain whether allegations of a covered liability have been made.(fn11) If the allegations even potentially or arguably come within the policy coverage, or any doubt exists whether a theory of recovery that triggers coverage has been stated, the insurer must accept the defense of the claim.(fn12) If a duty to defend arises, an insurer must defend against all claims alleged in the lawsuit, even if some of those claims would not be covered if alleged individually.(fn13)

The appropriate approach for an insurer who asserts no duty to defend exists is either: (1) to provide a defense to the insured under a reservation of its rights to seek reimbursement; or (2) to seek a declaratory judgment to confirm its coverage position.(fn14) Carriers use declaratory relief actions to obtain a judicial determination of whether a duty to defend exists to avoid paying defense costs and needing to seek reimbursement later.(fn15)

An insurer can waive coverage defenses that are not timely asserted by reservation of rights.(fn16) Often, careless claim adjusters lump together their coverage determinations for the primary named insured and for the AI, and issue just one declination letter or one reservation of rights letter. However, any...

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