Additionally Insured or Held Harmful?

A common practice when a businesses or public entity contracts with another is to require that the other party name the business or public entity as an additional insured on its commercial general liability (CGL) insurance policy in an attempt to transfer the risk. Another common practice is to use a hold harmless or indemnification clause in a contract between the parties as part of this transfer of risk. Quite often, both approaches are used jointly, just to be sure, and to accommodate the inherent weakness of an unsecured indemnification agreement.

The parties expect their CGL policies will support the transfers outlined in the contract between them. However, use of the additional insured approach and the hold harmless clause approach without some other modifications to the CGL policy can result in the risk being ineffectively transferred or not transferred at all, contrary to the expectations of the parties.

Since additional insureds should, and generally do, have their own insurance, it is possible that the "Other Insurance" clauses of both the named insured's insurance policy and the additional insured's own insurance policy will be activated in the event of a claim. Further, there are possibilities for subrogation actions against negligent parties in spite of their status as an insured party. Both instances will give rise to results that were not intended by either party and are beyond the goals of the parties to a contract.

There are two basic types of Other Insurance clauses found in the typical CGL policy: primary and excess. The purpose of the primary clause is to make it clear that the policy is intended to apply to all covered claims, and that if other valid and collectible coverage with a primary Other Insurance clause is available, the policy will still apply, but will share in the loss. The excess clause distances its policy from other available insurance. One can view this as a passive transfer of financial responsibility to the primary insurer paralleling the transfer of financial responsibility between two contracting parties.

If the adjuster finds that one CGL policy has a primary Other Insurance clause and the other an excess Other Insurance provision, the policy with the primary provision will apply without any sharing of the loss until the limits of liability are exhausted, regardless of what the parties originally intended. The insurance policies dictate which insurer pays and how much-not the contract between the two insureds.

Thus, if the Other Insurance clauses in the two parties' policies are not compatible, it is possible the wrong party's insurance will pay, in part or in whole, a result which will not reflect the intent of both insureds as expressed and required in their transfer provisions. If the wrong party's insurance policy pays, it appears the hold harmless provision is violated, as the indemnitee was not held "harmless" by the indemnitor, also a result not intended by the parties.

The conflict of Other Insurance clauses can be avoided if the provisions are coordinated, but rarely does either party know what type of provision is contained in the other party's CGL policy. One might assume that the provisions have been made compatible to protect the insureds' best interests and contractual agreements, but the reality is that such provisions frequently are not altered.

There are four possible combinations of Other Insurance clauses.

1. Both primary
2. Idemnitee excess, indemnitor primary
3. Indemnitee primary, indemnitor excess
4. Both excess

Combination 3. results in the exact opposite of the intent of the parties-the wrong party's CGL policy pays first. Combinations 1. and 4. result in a loss sharing based on equivalent provisions. Only Combination 2. reflects the contracting parties' intent. Without any coordination of Other Insurance clauses, the expected results, as intended by the contracting parties, are achieved in only one-fourth of the possible combinations.

Until recently, there was no standardized solution to this dilemma. The typical solution was to endorse the additional insured's own CGL policy, by a manuscripted endorsement, with an excess Other Insurance provision. This approach suffered from the following three weaknesses.

• Some insurers refused to use such endorsements as they were not filed or court-tested.
• If both CGL policies had equivalent excess other insurance provisions, both applied to the same loss.
• Neither party knew what provision the other policy had.

The recommended approach is to structure the relationship of additional insureds through the Other Insurance clause to avoid unexpected conflicts of those provisions. The critical wording in the additional insured's own CGL, provided either by a manuscript endorsement, the Insurance Services Office, Inc. (ISO), endorsements CG 00 55 03 97 (occurrence) and CG 00 56 03 97 (claims-made), or as built into the 1999 edition ISO CGL forms, is a contingent excess clause.

For example, the Other Insurance clause in the 1998 editions of the ISO CGL policy (both occurrence or claims-made) include the conditional wording.

[this insurance is excess of other insurance...]

• 4. that is valid and collectible insurance available to you as an additional insured under a policy issued to:
  • a. a contractor performing work for you;
  • b. a tenant renting or leasing land or premises from you;
  • c. a lessee of equipment owned by you; or
  • d. the operator of an oil or gas lease in which you have a nonoperating working interest.

This wording avoids the possible conflict and sharing required by equivalent Other Insurance clauses, as the language states the additional insured status arises out of some type of contractual arrangement, e.g., construction agreement, lease, or service contract.

Manuscript wording that approximates this ISO endorsement will achieve the same result when the standard ISO endorsement is not available. Beware, however, of manuscript endorsement wording that simply states "available to you as an additional insured under another party's policy." This type of wording creates a conflict between Other Insurance clauses when the two parties agree to name each other as additional insureds.

Obtaining additional insured status and coordinating the Other Insurance clauses does not successfully transfer the risk with certainty as long as a subrogation possibility exists. Subrogation is the process of exercising the right of recovery against a third party for damages paid out by the insurer on behalf of an insured. As is commonly believed and supported by case law in many jurisdictions, an insurance company cannot subrogate against its named insured, as the named insured is a party to the insurance contract, not a third party. In many of those same jurisdictions, an additional insured, a party on the policy but not a party to the insurance contract (i.e., a third party), has the same protection given to the named insured.

In some jurisdictions, however, an additional insured who contributes to the loss that the insurer must pay could be held to be no different than a completely unrelated third party for purposes of subrogation. Further, the possibility of case law being overturned in those jurisdictions that bar subrogation against additional insureds cannot be overlooked.

Since any such subrogation action would draw the party who attempted to transfer his risk to another party directly back into a position of risk, this result would clearly not be what the parties intended when the original contract, including the hold harmless agreement, was inked. To avoid this possibility, however remote as it might be, the party desiring additional insured status must obtain a pre-loss waiver of subrogation. Further, the CGL policy should be endorsed to include CG 24 04, "Waiver of Transfer of Right of Recovery Against Others To Us," to avoid claims delays and difficulties.

Whenever one party does not fulfill its obligations under the contract, the possibility of litigation arises. Not providing additional insured status when such is required by the contract can give rise to a breach of contract action. Having additional insured status makes the additional insured a target for subrogation when he thinks he is protected, and, when a hold harmless agreement applies, creates another possible breach of contract. The use of non-insurance transfers and insurance transfers must be carefully thought out and executed if the intent of both parties is to be realized and delays in claims settlement or other legal unpleasantness avoided.