Changes to Standard CGL Insurance Forms Impact Coverage for the Construction Industry

October 18, 2016 Firm News

A Laurie & Brennan article featured in the Construction Law Corner Fall 2013 eNewsletter.

by Carolyn L. Morehouse

In April 2013, the Insurance Services Office, Inc. (“ISO”) released new Commercial General Liability Insurance (“CGL”) forms and endorsements that alter the scope of CGL insurance coverage.   Some of the changes to the forms affect additional insured (“AI”), coverage for “insured contracts,” the scope of the professional liability exclusion, and the rules governing claims where “other insurance” is available.   These revisions are of particular interest to the construction industry, which uses insurance and contractual indemnification to manage and transfer risks inherent in construction projects.   The ISO changes narrow and limit coverage in several important ways, expand coverage in others, and seek to clarify existing policy language.   Contractors, subcontractors, and project owners should review any recently-issued CGL policies or AI coverage carefully with their insurance agents and counsel, and confirm the scope of coverage being afforded using the new forms.

ISO Makes Three Major Changes to Endorsements for Additional Insureds

ISO made four significant changes to the AI forms and endorsements, which may limit the scope of coverage available to additional insureds: (a) limiting the amount of coverage to the amount contractually required (or the amount of the policy, whichever is less); (b) limiting the scope of coverage to that which is contractually required; (c) providing coverage “only to the extent permitted by law”; and (d) clarifying that AI coverage does not require a direct contract between the named insured and the additional insured.

  1. The Limits of AI Coverage May Be Reduced
    The 2013 revisions may reduce AI coverage limits.   Prior to the 2013 revisions, ISO’s AI endorsements typically afforded the same limits of coverage to additional insureds as those applicable to the named insured, unless it was expressly limited by other endorsements.   ISO’s revised language now limits AI coverage to the lesser of: (1) the amount required by contract; or (2) the policy limits identified on the declarations page.   With this potential reduction in coverage, it is critical for named and additional insureds to ensure that the policy limits set forth on the declarations page is equal to or greater than the amount of additional insurance required by the contract.
  2. The Scope of AI Coverage is Also Limited to What the Contract Requires
    The 2013 ISO revisions also limit the scope of insurance coverage.   ISO’s policy language, prior to the 2013 revisions, afforded coverage to additional insureds for liability “caused in whole in or part” by the acts or omissions of the named insured.   The 2013 revisions add the following policy language:

    If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.

    This change limits the scope of AI coverage where the contract requiring AI coverage specifies a narrower scope of coverage rather than the broader scope of coverage afforded to the named insured.

  3. Additional Insured Coverage is Provided to the Extent Permitted by Law
    ISO has revised its AI endorsements to clarify that “[t]he insurance afforded to such additional insured only applies to the extent provided by law.”   This change is in response to address the unintended application of state anti-indemnity laws to limit insurance coverage for additional insured entities.   At least forty-five states have construction anti-indemnity statutes, which prohibit a party from being indemnified for its own negligence, in whole or in part.   The statutes modify or invalidate contractual indemnification provisions which purport to indemnify a party for its sole or concurrent negligence.   Some courts have applied anti-indemnity statutes to contractual insurance requirements, finding that the contractual indemnity and insurance provisions are so inextricably tied to one another that the anti-indemnity statute renders them both void.

    The ISO amendment is expected to function as a “savings clause,” ensuring that anti-indemnity statutes are not improperly applied to prohibit AI coverage, even if the claim arises from the named insured’s own negligence.   The new language clarifies the parties’ mutual intent that the AI coverage is not intended to indemnify the named insured for its own negligence.   This change appears intended to ensure that the new AI endorsements will be enforced, and not found to violate anti-indemnity statutes.

  4. Revisions Clarifying that No Direct Contractual Relationship is Required For AI Coverage
    Another change to the AI policy language is intended to clarify that the named insured need not have a direct contractual relationship (i.e., privity of contract) with the additional insured).   The change is particularly important to the construction industry, which frequently uses AI coverage to transfer risk, even where the entities do not have a direct contractual relationship.   For example, project owners typically require all subcontractors to name them as an additional insured, even in the absence of a direct contractual relationship between the owner and the subcontractors.   As a result, in their respective contracts with the general contractors, subcontractors typically agree to name the project owner and its consultants, as an additional insured on its insurance policies.

    The 2004 version of an AI endorsement (ISO CG 20 33 07 04) provided AI coverage when “you [the named insured] and such person [the party seeking AI coverage] have agreed in writing in a contract or agreement.”   Some courts have interpreted this policy language to require a direct contract between the named insured and the additional insured for the AI coverage to apply.   See, e.g., Westfield Ins. Co. v.   FCL Builders, Inc., 407 Ill.App.3d 730, 732 (1st Dist. 2011).   A new 2013 endorsement, ISO Form CG 20 38 04 13, provides automatic (or “blanket”) AI coverage to any party the named insured is contractually obligated to name as an additional insured.   Specifically, the new 2013 endorsement extends AI coverage to:

    • Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy; and
    • Any other person or organization you are required to add as an additional insured under the contract or agreement described in Paragraph 1 above.     (emphasis added)

This change is intended to clarify that a named insured can obtain AI coverage for a third-party, if it is contractually obligated to do so, even if the named insured does not have a direct contract with that third-party.

A Revised Definition of “Insured Contract” Reduces the Scope of Coverage

Another reduction in coverage stems from ISO’s revision to the definition of “insured contract.”   ISO’s standard policy language excludes CGL coverage for contractual liability claims made against the insured, including claims for contractual indemnification and breach of contract claims.   However, it contains an exception to this exclusion for liability arising from an “insured contract.”   An insured contract is one where the promisor agrees to assume the tort liability of another.   ISO has revised the definition of “insured contract” to limit the exception to circumstances where bodily injury or property damage “is caused in whole or in part” by the insured or those acting on the insured’s behalf.   This revision may reduce the scope of coverage available in cases involving construction.   Under the 2013 revisions, coverage is only provided if the insured is at least partially responsible for the tort, and it has agreed to indemnify another for that liability.

A Broader Professional Services Exclusion May Reduce to the Scope of Coverage

The ISO revisions may further limit coverage through an expanded exclusion for claims arising from “professional services.”   CGL policies generally exclude coverage for claims arising from professional negligence, which are properly covered under a professional liability policy.   In its 2013 revisions, ISO has broadened its definition of “professional services” to include “hiring, employment, training, supervision, and monitoring of others by [the] insured.”   CG 22 79 04 13.   Professional services continue to exclude “services within construction means, methods, techniques, sequences and procedures employed by [the insured] in connection with [its] operations in [its] capacity as a construction contractor.”   Courts will be called upon to interpret this new policy language, particularly where contractors undertake an expansive design or supervisory role in design-build or similar construction projects.   How the courts will interpret the new language remains uncertain.

Endorsement Modifying “Other Insurance” Clauses

ISO’s revision of “other insurance” does not reduce coverage, but clarifies existing policy language.   ISO’s form CG 20 01 04 13 is a new, optional endorsement providing that the insurance coverage will be primary and non-contributory with other insurance available to the additional insured; provided that: (1) the additional insured is a named insured on another policy; and (2) a written contract requires the named insured’s policy to be primary and to not seek contribution from other insurance available to the additional insured.   This form clarifies that the AI coverage is primary over the additional insured’s own policies (on which it is a named insured).   In the construction industry, this is a common contractual requirement for providing AI coverage.   ISO claims that this new endorsement is consistent with existing policy language regarding priority of coverage, but notes that it was created because this policy language was frequently requested by insureds.

ISO also removed language regarding the policy priority, which required the additional insured to be added by attachment of an endorsement.   Under the 2004 policy language, CGL insurance is excess over any primary insurance “for which you have been added as an AI by attachment of an endorsement.”   The 2013 revisions deleted the “by attachment of an endorsement” requirement.   This avoids any confusion or priority disputes where AI coverage is provided through the general policy provisions, and not by attachment of an endorsement.

Conclusion

ISO issued the new forms on April 1, 2013, and insurers have already begun to adopt those changes.   Because the revised forms may significantly narrow the scope of coverage, it is important that construction firms carefully review any new CGL policies that may afford them coverage, either as a named insured or an additional insured.   In addition, because AI coverage is now defined, in part, by the scope and limits required by insurance contract requirements, it imperative that insured parties confirm their AI coverage and any AI coverage they procure for others, is adequate and complies with any contractual requirements.   Finally, as with any new form policy language, we can expect some uncertainty as the courts interpret and apply the new language.

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