Additional Insured Coverage
In large residential development projects, the builder/developer commonly requires all subcontractors to add the builder/developer as an “additional insured”. While protecting the builder/developer (or more accurately its insurer), this is also an opportunity for subcontractors. Court dockets reflect that builders/developers are pursuing third-party claims against subcontractors on a more frequent basis. If the subcontractor satisfies the “additional insured” requirement, then its insurer should provide a defense to the builder/developer and, upon the acceptance of a tender of defense, no basis exists for the builder/developer to bring a third-party action against the subcontractor. When put in the context of potential third-party claims, this provides a potential additional layer of protection.
In a third-party action, the builder/developer almost invariably brings two types of claims against a subcontractor:
- A “pass through” claim, arguing that if builder/developer is liable to the homeowners for the subcontractor’s negligence, then the subcontractor is liable to home builder/developer.
- A contractual indemnity claim on the basis the subcontractor agreed to indemnify and hold the builder/developer harmless.
As noted above, common policy exclusion precludes coverage for liability assumed by contract, and insurers typically invoke that exclusion for claims alleging express contractual indemnification. On the other hand, as a general rule, the common law and insurance policy language provide that if the subcontractor would be liable to the builder/developer—even without the contractual liability provision—then the exclusion does not apply. These claims are not concentric. The insurer will invariably defend under a reservation or rights. Later, conflicts may arise in which valid defenses to the pass-through claim exist but potentially work to the detriment of the insured if it means the only remaining claim is for contractual indemnity and/or a hold harmless agreement.
The best interest of the subcontractor may truly be for its insurer to defend the builder/developer as an additional insured; however, there are two caveats. Ensure the subcontract expressly includes the additional insured language. If it doesn’t, the insurer may successfully avoid coverage. Also, no matter the number of insureds, there is still only one policy limit.
Surplus Lines Versus Admitted Carriers
Unlike the traditional insurance companies that come to mind, surplus lines carriers are those not licensed in the state, referred to as “non-admitted carriers”. Insurance producers must be specifically licensed to place surplus lines insurance and are usually unable to place the risk with an admitted carrier, oftentimes because of adverse loss history.
There are two key things to understand about surplus lines coverage: There is no protection from the state’s guaranty fund if the carrier goes in
solvent, and surplus lines carriers frequently utilize manuscript policies rather than ISO forms. Often, admitted or standard carriers use standardized ISO forms that have been fine-tuned over many years and benefit from the development of case law interpreting that language. Because each surplus lines carrier may utilize its own forms, and even different language from policy to policy, it is imperative to read the entire policy and be on the lookout for
harsh or restrictive terms.
These topics represent just the tip of the iceberg of insurance issues. For any contractor, the key to minimizing out-of-pocket loss is to take a proactive approach with its insurance needs and to not only understand the various terms, exclusions and endorsements, but also the interplay between them. Putting in the time and effort upfront will likely help you avoid unpleasant surprises when the inevitable claim arises.
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