Additional Insured and Insured Contract Liability Insurance Coverage for General Contractors

by David M. McLain and Alex M. Nelson

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.1 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.2 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.3

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.4 This underscores the importance of a thorough insurance compliance program for a GC.5

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).

Reproduced by permission. ©2007 Colorado Bar Association, 36 The Colorado Lawyer 45 (Nov. 2007). All rights reserved.

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 indemnify6 -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.7 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.8

A carrier owes to an AI the same duties it owes to its primary insured in evaluating a tender of defense.9 An insurer that seeks to avoid its duty to defend bears a heavy burden.10 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.11 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.12 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.13

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.14 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.15

An insurer can waive coverage defenses that are not timely asserted by reservation of rights.16 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 reservation of rights against an AI must be directed to the AI, not just to the primary named insured.17 Failure of a carrier to state its coverage position to an AI within ninety days of the date of tender is presumptively bad faith in Colorado.18

A carrier has a duty to defend its AI even when it also is defending the named insured.19 In an instance where both a primary named insured and an AI are provided defenses, conflicts of interest in the dispute often require appointment of separate defense counsel.20 Practically speaking, appointment of separate defense counsel also will require appointment of separate claim adjusters within the insurance company, because regular reporting on case status and strategy is required by all carriers.

AI Coverages and Common Exclusions

AI status typically is conferred by an AI endorsement attached to the primary named insured's policy. The two most common forms of endorsement are drafted and regularly revised by the Insurance Services Office, Inc. (ISO) and adopted for use by the carriers. These forms are are "CG 20 09"21 and "CG 20 10."22 The ISO intends that CG 20 09 be used when the primary named insured has no contractual obligation to name an AI, and that CG 20 10 be used when a contractual obligation does exist. Therefore, CG 20 10 is the more typical form, as gratuitous purchase of AI coverage by a subcontractor for its GC rarely occurs. Many CGL and umbrella policies include provisions that automatically grant AI benefits to any person or entity to which the primary named insured is contractually obligated to provide AI coverage.23 Under such policies, further endorsement to the policy to provide the AI status is unnecessary.

When AI coverage is conferred through use of form CG 20 09 or CG 20 10, much of the language in the body of the insurance policy applies equally to the AI as to the primary named insured, because the endorsement has the effect of amending the definition of the "insured" in the policy to include the AI, as well as the named insured. However, endorsements CG 20 09 and CG 20 10 may contain additional coverage exclusions and grants that modify the AI's coverage, in some respects significantly.

Most CGL policies are "occurrence policies," which confer coverage for personal injury or property damage that occurs during the policy period, regardless of when the claim is presented to the insured or carrier.24 This contrasts with "claims made" policies, which cover claims made during the policy period regardless of when the alleged damages occurred. A typical insuring agreement in a CGL policy states that the insurer will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage," if such injury or damage is caused by an "occurrence" that takes place during the policy period.25

Property Damage

In the majority of construction-related lawsuits (defect claims in particular), allegations of property damage-rather than bodily injury-trigger coverage. "Property damage" is defined in CGL policies as "physical injury to tangible property, including all resulting loss of use of that property."26 As a general rule, property damage does not include economic harm.27 Most policies exclude coverage of property damage to the insured's own work or product. Therefore, if a construction defect exists in a contractor's work, some sort of resultant property damage must flow from performance of that bad work for coverage to exist. This is true except if the defective work was performed by a subcontractor on the insured's behalf.28 This is an example of where a GC AI may have much broader coverage under a...

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