Additional Insured coverage and endorsements are at the center of many construction insurance contract disagreements, misunderstandings, and costly lawsuits in the construction industry. Additional Insured endorsements are usually worded in fairly broad terms and often include conditional limitations on coverage. They also often contain assertions that they will be excess to other insurance policies (the "Other" Insurance problem). When these assertions conflict with opposite provisions in other policies, disputes can arise based on the responsibility of an insured in causing an incident, and the liabilities of their respective insurance companies.
The AI endorsement has a huge impact on the priority of construction insurance coverage available and how that coverage is used up (“exhausted”). When coverage is provided by multiple insurers, the standard terms of insurance policies are written using a concept of “horizontal exhaustion.” Under this concept, all Commercial General Liability policies that provide coverage to the upstream parties must be exhausted completely before coverage is triggered under the first excess policy.
Upstream vs. Downstream Views
Additional Insured endorsements give project owners, general contractors and other upstream parties such as first-tier subcontractors some degree of coverage under the Commercial General Liability (CGL) policies that downstream parties carry. The upstream parties use that coverage to finance at least a portion of the liability they risk whenever they construct a project.
On the downstream end, subcontractors often oppose additional insured endorsements, claiming that these endorsements are easily abused. For example, the downstream party’s insurance carrier has a duty to defend the additional insured, and as a result, that carrier may have to defend every count of a broad multi-count complaint filed against an upstream party even if there is only one count qualifying for coverage under the downstream party’s policy.
Subcontractors also note that construction defects are often difficult to trace, and that several different defects may simultaneously contribute to any property damage that a project suffers. Upstream parties respond that expensive multiparty litigation would be necessary to properly allocate the responsibility for every construction defect and jobsite injury with the precision that subcontractors downstream prefer.
In the end, there simply is no way to ensure that all construction risks will always be transferred smoothly in the way that all parties intend. Ideally, general contractors and construction managers would carefully read every line of any subcontractor’s policy of insurance under which they wish to be named an Additional Insured. And every subcontractor would spend the time to make sure it’s protected by assuring that the insurance requirements of its subcontract’s insurance specifications and the policy it purchases are in sync.
General Contractors can protect their own limits by adding endorsements to their policies providing that the Additional Insured coverage is primary, and by carefully reviewing both their policies and the Additional Insured Endorsements of subcontractors’ policies. Risk Managers are best served by knowing the likely insurance carrier positions and understanding priority of construction coverage, litigation, and anti-subrogation issues as interpreted in their jurisdiction.
Getting clear early in the game is crucial. It’s best to seek guidance and clarification from your construction insurance provider. Clarifying these dicey contractual issues is a worthwhile time investment to maximize your insurance protection.