United States: Choose Your Friends Carefully ... Or At Least Insure Them

Reprinted with Permission of the King County Bar Association.

As part of the cost of doing business, companies are often obligated to extend their insurance to other entities. The entity extending coverage is the "named insured" and the party added to the policy is an "additional insured."

The named insured, or policyholder, refers to the individual or company (including related business entities) actually named or referenced in the policy. An additional insured is an unrelated entity to which the named insured extends its insurance coverage.

This sounds simple enough; however, there are a few questions to consider: Why do parties enter into this type of relationship; what language is necessary in the policy to include an additional insured; what is the scope of coverage provided to an additional insured; and what are possible limitations to coverage for an additional insured?

In many industries, a party executing a contract to provide or procure some sort of service or benefit will request to be named an additional insured under the policy of the other contracting party. For instance, in the construction industry, as a condition for obtaining work on a project, a subcontractor may be required to list the general contractor, owner or architect as additional insureds.

The relationship is generally the result of unequal bargaining power between the named insured and the entity requesting the benefit of the named insured's coverage. An additional insured leverages its superior bargaining position to gain the benefit of insurance instead of incurring the often-substantial cost of purchasing its own insurance.

Coverage for additional insureds is typically seen in commercial general liability, automotive, and environmental liability policies. Coverage for an additional insured is created by an endorsement to the insurance policy. The endorsement will govern the scope of insurance provided to the additional insured under the policy.

For many years, policies used standard form language created by the Insurance Services Office, Inc. ("ISO"), an industry-supported organization responsible for developing standard insurance policies. The pre-2004 ISO endorsement provided:

The "arising out of" language has been interpreted broadly by courts to provide coverage to additional insureds. For instance, the Washington Court of Appeals held that an insurer owed a duty to defend a fuel supplier, under the additional insured endorsement to a fuel distributor's policy, for a claim against the supplier by a person assaulted at a fuel service station.²

In Equilon Enterprises, Powell-Christensen, a wholesale distributor of fuel, contracted with Shell to purchase and distribute fuel to various service stations and to display Shell signs at the service stations. The contract required that Shell be named as an additional insured under Powell-Christensen's policy.³ The additional insured endorsement provided coverage to Shell for liability arising out of Powell-Christensen's operations or premises. In the underlying suit, a teenager alleged that he was assaulted at one of the Shell-signed stations supplied by Powell-Christensen and that no employees at the station contacted the police during the attack.

The insurance company denied coverage and refused to defend Shell in the suit, arguing that the injuries did not arise out of Powell-Christensen's operations as a fuel distributor because its operations did not include security at the station. The Court of Appeals disagreed, reasoning that the policy named Shell as an additional insured for liability arising out of all of Powell-Christensen's operations, not solely injuries arising out of its fuel-distributing operations.

The victim alleged that Shell was liable under principles of agency, and the agency relationship was based on the presence of Shell signs. Therefore, the court found that liability did arise out of Powell-Christensen's operations, which included contracting with stations to provide fuel and the use of Shell signs. The Equilon court surveyed cases throughout the country, concluding that the phrase "arising out of" only required a causal connection between the injuries or liability and the named insured's operations.⁴

Another way insurers attempt to limit additional insured coverage is to limit coverage to only the named insured's "ongoing operations." This phrase has been interpreted to mean that coverage is only provided to the additional insured for liability that arises while the named insured's work is still in progress.⁵

For instance, in Hartford Insurance Company, the Washington Court of Appeals held that a condominium developer was not an additional insured under the policy of one of its subcontractors. The condominium developer settled a construction defect lawsuit brought by the condominium association. The ongoing operations provision limited additional insured coverage to property damage arising out of the subcontractor's work in progress. Because the project had already been completed and turned over to the condominium association at the time the alleged property damage occurred, the court held that there was no coverage for the developer under the additional insured endorsement.⁶

In 2004, the ISO modified the standard, additional-insured language. The modified endorsement provides:

The "arising out of" language, which had been broadly interpreted by courts as providing coverage to additional insureds, is removed from the 2004 revision, potentially limiting coverage available to additional insureds.

The purpose of the additional insured provision is to provide an additional insured with similar protection and coverage afforded to the named insured. Some courts have rejected attempts by insurers to provide different coverage to additional insureds than afforded the named insured.

One insurer argued in a Pennsylvania case that the term "you" in an exception to a policy exclusion only applied to the named insured, thus the additional insured's claim was precluded.⁷ The court rejected this argument reasoning that the term "you" was ambiguous and if the insurer wanted to exclude this particular coverage for additional insureds, but not named insureds, it should have explicitly excluded additional insureds.⁸

If such hurdles are overcome, the benefits of coverage to an additional insured can be great. An additional insured gets to recover against policies other than its own, the coverage is often broader than the protection it could receive under an indemnity agreement, and the additional insured is afforded the full coverage of an insured, which includes the duty to defend.

An additional insured should, however, be aware of several issues. First, the limits in the policy will likely be shared by the named insured and several other entities, thus the limits can become quickly exhausted. Second, an additional insured may have less influence over its own defense since it is not working with its chosen carrier.

For the named insured, affording coverage to an additional insured increases the potential for loss, and such claims and losses will be reflected in the named insured's future available coverage and premiums.

It goes without saying that both the named insured and additional insured should carefully review the policies to determine the extent of coverage. An additional insured should obtain copies of the policy prior to contracting for coverage with the named insured, as opposed to waiting until after the loss occurs to undertake a review.

Footnotes

^{1. ISO Form CG 20 26 11 85; Equilon Enter. LLC v. Great Am. Alliance Ins. Co., 132 Wn. App. 430 (2006).}

^{2. Equilon, 132 Wn. App. at 434.}

^{3. Id.}

^{4. Id. at 437.}

^{5. Hartford Ins. Co. v. Ohio Cas. Ins. Co., 145 Wn. App. 765 (2008).}

^{6. Id. Prior to the decision in Hartford, Judge Richard Martinez of the U.S. District Court, Western District of Washington, looking to the common and ordinary meaning of "ongoing" and "operations," reasoned that the "alleged liability for property damage arises from the ongoing operations performed by the subcontractors. While the property damage may not have occurred during those ongoing operations, the alleged liability did." Valley Ins. Co. v. Wellington Cheswick, LLC, 2006 WL 3030282 (W.D. Wash. 2006). Judge Martinez subsequently vacated this ruling when he later found that Valley did not have standing to pursue its third-party contribution claims against other insurers and dismissed the action.}

^{7. Harsco Corp. v. Scottsdale Ins. Co., No. 49D12-1001-PL-002227 (Pa. Super. Ct. April 26, 2011).}

^{8. Id.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.