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Additional Insured Coverage: Know Your Limitations

Mon, 12/17/2018 - 10:10 -- admin25

by Ashley Mason and Samantha Halpern Sheehan

Commercial contracts frequently require additional insured coverage as a means to transfer the risk of liability in the event of an accident.  As additional insured endorsements are not all created equal, it is critical to understand the scope of coverage provided, which depends, in large part, on the policy language.  The Texas Supreme Court, however, has also made clear that the scope of additional insured coverage may also be limited by the terms of the underlying contract.  Thus, understanding additional insured coverage requires close examination of the contract, the additional insured endorsement, and “other insurance” provisions—diligence that parties rarely undertake until a claim results.

Additional insured coverage is often granted through blanket endorsements that provide coverage where required by contract or agreement.  Other additional insured endorsements specifically identify the person or entity by name.  Insurance Services Office (ISO) forms commonly provide the industry standard for policy language.  However, certain insurers use their own endorsements with language that deviates from the ISO forms.

The language of an additional insured endorsement is critical to the scope of coverage.  Over time, ISO forms have changed to require varying degrees of causation to trigger additional insured coverage.  For example, the 2001 ISO forms extended broad coverage for liability “arising out of” the named insured’s acts or omissions.  The 2004 ISO forms, however, removed the “arising out of” language and limited coverage to damage “caused in whole or in part by” the named insured’s acts or omissions.  Whereas “arising out of” has been interpreted as covering liability that would not have occurred “but for” the named insured’s negligence, the “caused in whole or in part by” language narrows coverage to liability proximately caused by the named insured’s negligence. 

The 2013 ISO forms maintained the “caused in whole or in part by” language but added language that may require analysis of the controlling state’s law on anti-indemnity and the underlying contract to determine the scope of coverage.  Specifically, the 2013 endorsements restrict additional insured coverage to the extent permitted by law.  Further, the 2013 endorsements provide that to the extent additional insured coverage is provide by contract or agreement, the insurance afforded to the additional insured will not be broader than that which the named insured is required to provide to the additional insured by contract or agreement.  Similarly, other endorsements state that the insurer will pay the amount required by contract or agreement or the amount available under the applicable limits of insurance, whichever is less.  As the 2013 ISO forms are intended to align the scope of additional insured coverage with the underlying contract, it is even more critical that the contract clearly set forth the additional insured requirements contemplated by the parties. 

While the focus of this article has been largely on the impact of policy language, the contract language itself is still important, as it may include additional requirements and/or limitations on additional insured coverage.  For example, the contract may limit coverage to ongoing operations, to the scope of that party’s indemnity obligations, or only require that the insured maintain additional insured coverage for a certain number of years.  Thus, careful review of the underlying contract is a crucial first step.

Even after additional insured status is confirmed, a secondary—albeit often litigated—question may arise with respect to how the risk should be allocated between the party’s own liability policy and the policy under which it is an additional insured.  The language of the “other insurance” clauses generally control which policy affords primary coverage; however, as mentioned above, the additional insured endorsement may incorporate the terms of the underlying contract.  Further, where the “other insurance” clauses conflict, pro rata apportionment among the policies may be necessary.  In determining whether a conflict exists, the Texas Supreme Court established that courts must evaluate the impact that the “other insurance” provisions would have on the insured’s coverage when read together.  As a matter of public policy, Texas courts construe “other insurance” clauses to avoid gaps in coverage.  However, if the parties intend that the additional insured coverage be primary and non-contributory, such terms should be clearly delineated in the underlying contract and by endorsement in the named insured’s policy to avoid litigation over priority of coverage.

In sum, it is essential to review the additional insured endorsements procured
before a claim arises.  Moreover, if additional insured coverage is provided where required by a written contract or agreement, the parties should be mindful of limitations and/or requirements in the contract that also restrict coverage.

Ashley Mason is a partner, and Samantha Halpern Sheehan is an associate at Thompson, Coe, Cousins & Irons, LLP’s Dallas office.  They can be reached at amason@thompsoncoe.com and shalpern@thompsoncoe.com, respectively.

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