Article by: Deborah Ballati, Esq, Dennis Cusack, Esq, William Friedrich, Esq, John Green, Esq, Mary McCutcheon, Esq., David Smith, Insurance & Risk Management Consultant
The concept of Additional Insured status has always been better than the practice: because of carelessness in the issuing process, vague and undefined terms used by carriers, and sometimes unrealistic expectations of insureds (including the want-to-be Additional Insured), confusion and lack of coverage have often turned out to be the order of the day. Now a recent California Court of Appeals case has added yet another wrinkle – and another way that the legitimate expectations of an Additional Insured might be unfulfilled. The case of Gorham v. First Financial Ins. Co., 2006 DJDAR 6683 (filed May 30, 2006), highlights an interesting twist that could impact an entity that expects to be added as an additional insured on another’s CGL policy.
The Additional Insured Minefield
But first a little background. Examples of when this situation arises are property owners and general contractors (who typically are added to sub-contractors’ policies), and landlords of buildings (who are typically added to lessee’s policies). In these cases, the Additional Insured expects that the sub-contractor’s carrier (or the lessee’s carrier) will provide both defense and indemnity coverage for damages arising out of the acts or business pursuits of the policyholder (the sub or the lessee). And, indeed, contracts are written that require the sub-contractor or lessee to indemnify the general contractor or landlord, and add that entity to the sub/lessee’s liability policy through the use of an additional insured endorsement.
It is common for such contracts to require the policyholder to maintain insurance to a certain specification, to provide the Additional Insured with copies of the policy and renewals thereof, and to advise the Additional of any other changes. Throughout the ages, problems have arisen because policyholders (and/or their brokers) often supply just a Certificate of Insurance that lists the owner/general contractor/landlord as an Additional Insured, or worse still, as a "Certificate Holder." The problem is that Certificates of Insurance are fairly meaningless documents – they do not mean anything except that at some point in time, a policy of insurance was issued. Even if the Certificate lists the Additional Insured as being an Additional Insured, unless an endorsement was added to the policy, no coverage exists for that entity. Hence, the informed Additional Insured will insist on a full copy of the policy plus the endorsement. Or at an absolute minimum, a Certificate and a copy of the Additional Insured endorsement. And yet another reason to require a copy of the actual endorsement is to be sure that the correct form has been used – there are dozens of different Additional Insured endorsements in common use.
But What Happens If . . . ?
But what happens if the policyholder doesn’t pay its insurance premium? The carrier, of course, ultimately will cancel the policy. And the California Insurance Code lays down the procedures for an insurer to do that – including notifying the policyholder and others. Case law holds that the statute requires insurers to also notify Additional Named Insureds. This term is not defined anywhere, but has been held to mean Additional Insureds that are named on the policy – and that would include those named via an endorsement. Thus, if the sub-contractor or lessee doesn’t pay his or her premium on time and the insurer cancels the policy, the Additional Insured is notified by the insurer and has the opportunity to make other arrangements. Or, at least that’s how it’s supposed to work.
Unless . . . .
In Gorham, a General Contractor (Gorham) hired a sub called PDC. The contract called for Gorham to be added as an additional insured to PDC’s general liability policy, and the appropriate endorsement was issued by the insurer. PDC financed the policy premium through a finance company (not directly through the insurer), and, as is typical, assigned the rights of cancellation to the finance company in the event that PDC did not make timely payments.
And indeed that is what happened. PDC did not make its payments, and the finance company canceled the policy. However, neither the carrier nor the finance company told Gorham, who – unknowingly – allowed PDC to continue to work on the project without any insurance. Gorham only found out about the cancellation when the nearly inevitable construction defect litigation started, and PDC’s carrier declined to contribute to Gorham’s defense.
Briefly, the Gorham decision holds that while a carrier must tell additional named insureds if the policy is cancelled for non-payment of premium, in this case the insured (in the guise of the finance company) requested cancellation, and thus the normal carrier cancellation provisions of the Insurance Code do not apply.
The standard ISO CGL form does not contain a cancellation provision – just a "when we do not renew" provision, which only requires notice to the "first Named Insured." Property policies have cancellation clauses with notice of cancellation language, but again only refer to the "first Named Insured" or "the person named in the Declarations."
Therefore, the Insurance Code controls. However, as Gorham shows, there is no requirement for an insurer to tell additional insureds (or additional named insureds) in cases where the premium is financed and the finance company is the one canceling the policy because the policyholder didn’t make payments. And that could leave the Additional Insured unknowingly uninsured.
So How Do You Minimize This Risk?
To get around this problem, the Additional Insured endorsement should contain language requiring specific notice to the Additional Insured named on the endorsement if the policy is cancelled for any reason. That, of course, is non-standard language and therefore the Additional Insured needs to specifically require the policyholder to have the carrier add this language to the Additional Insured endorsement. This requirement should be included in the contract between the parties. With the appropriate language added to the endorsement, a carrier who failed to notify an Additional Insured of a policy’s cancellation for any reason would have a difficult time defending a breach of contract action, even if the cancellation was held valid as to the Additional Insured.
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.