Problems arising from additional insureds endorsements.

• Author: Hamilton, Thomas M.

PROBLEMS that result from the naming of additional insureds on commercial general liability insurance policies are becoming increasingly common in construction and other types of litigation. For example, a general contractor in a construction project requires a subcontractor to provide coverage as an additional insured on the subcontractor's CGL policy. The requirement arises because the general contractor has over-all responsibility for the operations at the construction site but little actual involvement in the activities of the subcontractor. By this means, the general contractor passes the cost of the additional insurance to the subcontractor because of the subcontractor's active involvement in the operation.

What is the effectiveness of the additional insured endorsement on the insurer's duty to defend, on aggregate policy limits and the severability clause, and on the "other insurance" clause when the additional insured is covered by a primary CGL policy of its own?

WHEN AND HOW EFFECTIVE

The process of providing coverage to an additional insured can break down in several ways, leaving the additional insured with a serious question of whether coverage is afforded under the policy.

1. Agent's Authority

   An indemnitor's (named insured's) agent could issue a certificate of insurance listing the indemnitee (additional insured) as an additional insured. However, a certificate of insurance can be misleading in several ways and provide the indemnitee with a false sense of security causing the belief that its expectations of coverage are met.

   Common problems with certificates of insurance include the possibility that certificates issued by agents contain errors describing coverage afforded by policies and the possibility that the certificates fail to reveal special limitations applicable to the coverages afforded.

   Communication breakdowns between named insureds, additional insureds, agents and insurers can result in a failure to comply with the insurance requirements in the contract between the indemnitor and indemnitee.

   Finally, the certificate of insurance issued by the agent may directly conflict with a coverage limitation in the policy contract. If this situation occurs, the insurer will enforce the policy provision and ignore the certificate since, as a general rule, certificates do not govern coverage. For instance, in S.L.A. Property Management v. Angelina Casualty Co.(1) the certificate of insurance listed one entity as an additional insured and the insurance contract itself listed a different entity. The Eighth Circuit ruled the contract language prevailed over the certificate language because the certificate "served merely as evidence of the insurance" and did not constitute part of the contract of insurance.

   The same result was reached by the Wisconsin Supreme Court in Mercado v. Mitchell.(2) But in Bonner County v. Panhandle Rodeo Association(3) the Idaho Supreme Court held that the language in the certificate controlled over the policy exclusions because the additional insured never received a copy of the policy. The certificate, policy and endorsements all provided coverage for written indemnity agreements, and the indemnity agreement between the insured and additional insured stated the insured would indemnify the additional insured for the situation which was excluded by the policy.

   Thus, the additional insured cannot solely rely on the certificate of insurance issued by the agent for protection. It is possible the agent exceeded its authority when issuing the certificate owing to error or miscommunication. The insurer will enforce actual policy language over assertions made in the certificate if a conflict arises.

2. Insurer Not Notified

   Another factor complicating the problems with certificates occurs when the agent fails to notify the insurer of the existence of an additional insured. The agent may have the authority to add an additional insured but forget to follow up with the insurer to make sure that an endoresement is issued. An indemnitor may insist it asked the broker to add the indemnitee as an additional insured on its CGL policy, but the insurer denies receiving either an endorsement request or the required additional premium.

   The insurer commonly uses the following language on the certificate to negate coverage: "This certificate does not amend, extend or alter coverage afforded by the policies below."(4) Several courts have held that this disclaimer language means the certificate language does not control over the actual policy provision.

   In Lezak & Levy v. Illinois Employers Insurance Co.(5) a meat wholesaler contracted to store cartons of meat with a freezing and storage company. As part of the contract, the storage company agreed to name the meat wholesaler as an additional insured on the storage company's policy covering loss of personal property in the cold storage facility. A certificate of insurance to that effect was issued. Later the wholesaler discovered that 637 cartons of meat had spoiled because of a breakdown of cooling equipment and machinery. The wholesaler's claim for coverage under the policy was denied by the insurer because the policy language specifically excluded coverage for losses caused by failure or breakdown of machinery and failure of the cooling system.

   The Illinois Appellate Court rejected the wholesaler's argument that the certificate constituted a separate contract of insurance between the additional insured/wholesaler and the insurer which provided broader coverage as required by the indemnity agreement, because the certificate expressly stated that the terms of the policy controlled.

   However, if the certificate does not contain language on its face indicating it does not modify the policy, the rights suggested by the certificate may control over inconsistent policy language. In J. M. Corbett Co. v. Insurance Company of North America(6) an additional insured contractor received from its subcontractor a certificate of insurance which included the contracted-for indemnity agreement language on the face of the certificate. The Illinois Appellate Court held the indemnity agreement language on the certificate created a separate contract between the insurer and the additional insured providing broader coverage...