Chapter 5 Development of Common Ai Endorsements

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 5 Development of Common AI Endorsements

Patti Potash, Alexandra Rigney, and Jennifer Mindlin

I. Introduction

A. The Insurers Intend the Coverage to Be for the Additional Insured's Vicarious Liability Only

Contracts for services, goods, or use or rental of property, real or personal, pose a risk that one party will have liability for injuries or damages for the acts or conduct of the other party. The exposed party protects itself from this risk by requiring that the other party procure insurance naming it as an additional insured. The expectation is that the additional insured coverage will protect against the exposure created by the relationship.

The insurance industry offers additional insured coverage with the intention that the coverage will be limited to vicarious liability¹ created by the relationship of the additional insured to the named insured. "In the insurance industry, additional insured provisions have a well-established meaning. They are intended to protect parties who are not named insureds from exposure to vicarious liability for acts of the named insured. These provisions are employed in countless situations in the industry, including such simple circumstances as those involving landlord and tenant relations, where the landlord asks or requires the tenant to procure insurance for the landlord for liability resulting from the tenant's activities."² Thus, for insurers, "One of the primary functions of the additional insured endorsement is to protect the additional insured from vicarious liability for acts of the named insured."³

As a result of the intended limitation of coverage to vicarious liability, insurers expect to cover exposure under an additional insured provision for acts or omissions of the named insured but do not expect to have any additional coverage exposure for any independent acts or omissions of the additional insured. For this reason, insurers usually charge a minimal premium to include additional insured coverage in a policy. As noted in Currier v. Penn-Ohio Logistics, "while the total premium for Penn-Ohio's insurance policy was $14,062, Erie charged Penn-Ohio the nominal amount of $30 to include American as an additional insured. This demonstrates the parties did not intend to insure American for its independent acts of negligence."⁴

Despite the insurance industry's intended limited exposure, insurers have struggled to find wording to satisfy the market demands for additional insured coverage while maintaining the intended limited coverage. A few states "have recognized that a common purpose of an additional insured provision is to provide . . . protection from vicarious liability and to provide specialized protection rather than all-encompassing coverage."⁵ The majority of states, however, have broadly interpreted additional insured policy wordings to provide coverage far greater than the expected vicarious liability exposure, albeit newer additional insured policy wordings may be bringing additional insured coverage closer to its intended purpose.

B. The ISO and Manuscripted Additional Insured Forms

Insurers have utilized wordings for their additional insured provisions that they intended to confine the coverage to the additional insured's vicarious liability. ISO, a nonprofit trade association for the insurance industry, develops most of these wordings.⁶ Insurers must subscribe to ISO to utilize its forms in their policies. Admitted insurers will rely upon ISO forms since they have the approval of the states' insurance departments. Non-admitted insurers (Excess & Surplus Lines Insurers) are not confined to using admitted forms and, hence, may utilize ISO forms or manuscripted forms (i.e., forms that they have written).

ISO and manuscripted additional insured forms are found in a variety of types of policies, such as Commercial Property (CP), Commercial Auto (CA), or Commercial General Liability (CGL), and are used for a variety of relationships between the named insured and the additional insured, such as "Owners, Lessees or Contractors" or "Lessors of Leased Equipment." The discussion in this chapter focuses on the additional insured forms available for Commercial General Liability policies and primarily on the Owners/Contractors, Contractors/Subcontractors, and Lessors/Lessees additional insured/named insured relationships.

An additional insured form consists of a Schedule, an Insuring Agreement, and sometimes Exclusions. The Schedule amends the Policy's Who Is Insured provision to indicate who qualifies as an additional insured either by specifically naming the individual or entity that qualifies as an additional insured (ISO 20 10 forms) or by describing a category of individuals or entities that qualify as additional insureds (ISO CG 20 33 forms, commonly referred to as blanket additional insured forms). The Insuring Agreement indicates the intended scope of the coverage for the individual or entities that qualify as additional insureds. The exclusions will limit the scope of the coverage. This discussion focuses on the development of the Insuring Agreement wording in the additional insured forms. Chapter 7 of this book focuses on the exclusions found in additional insured forms.

II. The Additional Insured Insuring Agreement Wordings

The insuring agreement in the additional insured endorsement defines the scope of the coverage. The insurance industry has utilized different additional insured insuring agreement wordings over the years in an attempt to restrict the scope of the additional insured coverage to its intended purpose, to protect the additional insured for its vicarious liability for the named insured's acts or omissions. The insurance industry has had limited success in achieving this purpose due to courts broadly interpreting the insuring agreement wordings and finding coverage for an additional insured beyond vicarious liability. This may be changing with new additional insured insuring agreement wordings that the courts are narrowly interpreting.

A. "Arising out of

For more than twenty years, the Insuring Agreement in the ISO additional insured forms utilized the words "arising out of" to define the scope of additional insured coverage. The first ISO additional insured forms, G115 and G116, provided for coverage "with respect to liability arising out of operations performed for [the additional insured] by or on behalf of [the named insured]."⁷ The 1985 ISO additional insured forms provided coverage "only with respect to liability arising out of: (A) your work for the additional insured or (B) for acts or omissions of the additional insured in connection with their general supervision of 'your work'. . . ."⁸

In 1993, ISO issued additional insured forms providing coverage for liability-arising out of the named insured's work⁹ for the additional insured by or for the named insured. For example, CG 20 10 11 85 "Commercial General Liability Additional Insured—Owners, Lessees or Contractors," provides that "Who is an Insured (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of 'your work' for that insured by or for you."¹⁰

1. The Minority Position—Vicarious Liability

Although ISO utilized the "arising out of" wording for many years, very few states interpreted this wording to require coverage for the intended purpose, that is, an additional insured's vicarious liability. Ohio was one of these few states. For example, in Toledo Edison Co. v. ABC Supply Co., the Ohio Appellate Court found that an additional insured provision providing coverage for liability arising out of the named insured's work does not provide coverage for the additional insured's own negligence.¹¹

The few states that limited the coverage to vicarious liability typically looked beyond the plain meaning of "arising out of" and considered other evidence to determine the intended coverage. For example, in Currier v. Penn-Ohio Logistics, the court held that the additional insured endorsement only provided coverage for the additional insured's vicarious liability, not for its own independent acts of negligence because (1) the wording of the endorsement limited the coverage to situations where the additional insured's liability arises out of its relationship with the named insured, which the court indicated is the "the essence of vicarious liability"; (2) the small amount of premium paid for the additional insured coverage "demonstrates the parties did not intend to insure American for its independent acts of negligence"; (3) the wording of the additional insured provision did not include the terms that additional insured was to be an insured "with respect to its independent acts of negligence"; and (4) the claim against the additional insured was based on its independent acts of negligence.¹² The court explained that "[A]n 'additional insured' provision is intended to protect the additional party from liability for the acts or omissions of the primary insured—that is, [the additional insured] is protected in situations where it is secondarily liable for [the named insured's] conduct. Secondary liability arises when one party is held responsible based solely on its relationship with the responsible actor."¹³

At least one state has utilized its own statute to narrow the additional insured coverage even further than vicarious liability and forbid coverage for the additional insured's own negligence. In Walsh Constr. Co. v. Mut. of Enumclaw, the court found that the prohibition in § 30.140 of the Oregon Revised Statutes prohibiting "direct indemnity" arrangements in construction contracts for a party's own negligence extended to additional insured coverage. The court explained that "[w]hether the shifting allocation of risk was accomplished directly, by requiring the subcontractor itself to indemnify the general contractor for damages, or indirectly, by requiring the subcontractor to purchase...