Insurance provisions notes

Many contracts require one party not only to maintain insurance, but also to provide the other party with certificates of insurance, and possibly also with one or more endorsements (such as additional-insured endorsements to give the other party specific rights under the policy. (This is a common approach in services contracts, for example.)

Types of coverage

Insurance-requirement clauses commonly mandate at least the following types of insurance:

Commercial general liability coverage, including bodily injury, personal injury, and property damage liability, along with contractual liability coverage for Insured-Party’s indemnity obligations under the contract, if any. The laundry list of specific perils may not be necessary if an ISO CGL form is used; according to one reference, “Unlike older forms that required endorsements to broaden coverage, the CGL provides very broad coverage that can be narrowed by endorsement. It is a modular policy that can provide several coverages in combinations.” Rupp’s Insurance & Risk Management Glossary, Commercial General Liability (accessed Aug. 22, 2007).
Errors and omissions / professional liability coverage.
Business automobile bodily injury and property damage liability for owned, non-owned and hired automobiles.
Worker’s compensation coverage and employer-liability coverage as required by applicable law (including maritime-related law where applicable) where work is to be performed pursuant to the contract or anywhere else an employee performing such work is normally employed.

Duration of coverage

The time during which coverage must be maintained will sometimes be a matter to be negotiated. In services contracts, it’s not uncommon for coverage to be required at any time services are being performed, at any time the service provider is present at the customer’s premises, and for one- to three years thereafter.

Carrier ratings

Coverage is often required to be maintained with carriers having at least a stated A.M. Best rating.

Occurrence- or claims-made basis?

“The coverage trigger of an occurrence form is bodily injury or property damage that occurs during the policy period.” Chubb Commercial Insurance General Liability Definitions (accessed Aug. 22, 2007). In contrast, “[t]he coverage trigger of a claims-made form is the making of a claim against the insured during the policy period.” Id.

Combined single limit

See generally Leland-West Insurance Company, What is a Combined Single Limit? (accessed Aug. 22, 2007).

Certificates and endorsements: The basics

Customers often want their contractors to provide proof of insurance coverage. A contractor might be able to do this informally by simply emailing a scanned PDF of its file-copy certificate.

But many times the customer (really the customer’s lawyer) will want the proof of insurance to be in the form of one or more original certificates of insurance. These are issued by the insurance carrier(s) and are normally sent directly to the other party, with the other party’s name in the “Certificate holder” box.

For an example of an insurance certificate on an ACORD industry-standard form, see this annotated version from the University of California.

Ordinarily, a plain-vanilla certificate of insurance is purely informational and does not give the certificate holder any rights under the policy. That’s where “endorsements” come in. Two commonly-used endorsements, as seen in the example ACORD certificate cited above, are:

Additional-insured endorsements, discussed in more detail below
Notification endorsements, requiring the insurance carrier to endeavor to give prior notice to the certificate holder before termination or expiration of the policy (it can be difficult or impossible to get a carrier to agree to an absolute obligation to give prior notice).

For a useful overview of certificates of insurance and endorsements, see part II of Additional Insured Endorsements: Recent Efforts to Limit Coverage to the Additional Insured, by Stacy A. Broman and Jenny L. Sautter, 57 Fed’n Def. & Corp. Couns. Q. 77 (2006) (accessed Apr. 14, 2007).

Providing insurance certificates and endorsements can be a low-grade administrative annoyance; it often isn’t a high priority for either party’s operational people. Even if the contract requires the insured to do so, it can sometimes fall through the crack (possibly putting the insured in breach of contract). The Pactix insurance clause postpones the issue by not requiring the insured to provide certificates and endorsements up front, but still giving the other party the right to ask for them later.

Additional-insured endorsements

Contract drafters sometimes appear to be confused about the nature and purpose of additional-insured endorsements. These endorsements commonly arise when a party negotiating a contract is concerned that it might be sued by a third party for acts or omissions by the other party.

For example, a customer hiring a contractor to perform services might be concerned that it could be sued by by one of its own employees who is physically injured by the contractor’s negligence. Or, the customer might fear being sued by a contractor employee who is injured by the customer’s negligence.

Consequently, the customer might negotiate a contract requirement that contractor defend and indemnify the customer against such third-party claims.

But what if the contractor doesn’t have the money to make good on this obligation? That’s where negotiating for an additional-insured endorsement clause comes in: The customer requires the contractor to name the customer as an additional insured on the contractor’s own relevant policies. That way, the odds are greater that at least some money will be available to defend and indemnify the customer from a third-party claim.

An additional-insured endorsement might take the form of a specific line item on the certificate of insurance, as in this example from the University of California (scroll down to the bottom of page 2). Or, the endorsement might take the form of a separate document.

Whose insurance coverage is primary?

Some insurance clauses require additional-insurance endorsements to contain primary-insurance language. This is something that a customer will usually press for: The customer wants to spend the contractor’s insurance coverage first, so that its claims history with its own carrier, and thus its premium expenses, will be less likely to take a hit from such a claim.

Customers may want the primary-insurance statement to be included in the endorsement document provided by the insurance carrier, not just in the contract clause between the parties. Otherwise, a court might not enforce it; the general but not unanimous rule has been that, even though a contract might state which insurance carrier has primary responsibility, such a statement isn’t binding on the carrier without the carrier’s agreement. See generally Joseph P. Postel, How Does an Extrinsic Contract Impact Additional Insured Coverage? (2003) (reviews several court cases in which primary- versus excess coverage was disputed; accessed Apr. 14, 2007); Can an Indemnity Agreement Determine Who’s Primary and Who’s Excess? (2002) (accessed Apr. 14, 2007).

This problem can be handled — and the risk of expensive satellite litigation over insurance coverage reduced — by expressly requiring the primary-insurance language to be included in the additional-insurance endorsement, as in the University of California example certificate (scroll down to the bottom of page 2).

Additional-insured endorsements and E&O policies: Not a good fit?

Some parties might seek additional-insured coverage under the named insured’s professional liability / E&O policy. Their reasoning might be that, if the named insured is negligent in performing services, the additional insureds want to be able to make a claim directly to the carrier, instead of having to go to court.

An E&O claim by an additional insured against a primary insured, however, might well be blocked by the “insured versus insured” exclusion found in many such policies. See generally Tennant Risk Services, Who is an Insured - Professional Liability (2000) (accessed Apr. 14, 2007).

Moreover, there seems to be some opinion in the insurance bar that it’s inappropriate and even dangerous for an E&O policy to name customers or other professionals as additional insureds. See generally J. Kent Holland, Jr., Why Project Owners Aren’t Made Additional Insureds Under a Design Professional’s Errors and Omissions Policy, ConstructionRisk.com Report, March 2007 (accessed Aug. 24, 2007).

Exclusion of completed operations?

An additional-insured endorsement might not cover the insured’s completed operations, for example, a contractor’s work on a completed project. See generally Thelen Reid Brown Raysman & Steiner LLP, Your Additional Insured Endorsements: How Coverage May Be Narrowing (2005) (accessed Apr. 14, 2007) (scroll down to "Ongoing Operations").

Exclusion of additional insured’s own negligence?

It’s possible that a customer’s own negligence might not be covered by an additional-insured endorsement. In 2004, an Oregon court held in 2004 that under that state’s statutes, an additional-insured endorsement in an insurance policy did not cover the additional insured’s alleged negligence. The court upheld a summary judgment that the insurance company did not have a duty to defend the additional insured. See John W. Ralls, Oregon Court Voids Subcontract’s Insurance Provision Because It Would Cover General Contractor’s Own Negligence (2004) (accessed Apr. 14, 2007).

(See also the the express-negligence rule applicable in some jurisdictions, under which a contractual indemnity will not extend to the indemnified party’s own negligence unless the indemnity language is explicit on that point (and it may need to be conspicuous as well). See generally, e.g., Statement on Legal Opinions Regarding Indemnification and Exculpation Provisions Under Texas Law, Legal Opinions Committee of the Business Law Section of the State Bar of Texas (2006) (accessed Apr. 14, 2007).)

Subrogation waiver

“A waiver of subrogation clause is placed in the … contract to minimize lawsuits and claims among the parties. The result is that the risk of loss is agreed among the parties to lie with the insurers, and the cost of the insurance coverage is contractually allocated among the parties as they may agree. The risk, once assigned to the insurers by the parties, is determined to stop there, without allowing the insurer to seek redress from the party ‘at fault.’” Kenneth A. Slavens, What is Subrogation . . . and Why Is My Contract Waiving It? (2000; accessed Aug. 22, 2007) (emphasis added); see also the Wikipedia article on Subrogation.

Subcontractor insurance

An optional clause requires Insured-Party to make sure its subcontractors carry insurance. This would normally be requested by, for example, an end-customer of a contractor, to make sure that subcontractors also carry insurance. But it might also be in the contractor’s interest to require its subcontractors to carry their own insurance (and to name the contractor as an additional insured).

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