Imagine this scenario: ABC Contractors and XYZ Corp. enter into a construction contract. The contract requires ABC to indemnify XYZ if ABC is negligent and someone sues XYZ as a result. The contract also requires ABC to indemnify XYZ against all claims by ABC’s employees that arise out of the work, even if XYZ is at fault.
This is not uncommon. Most employers have workers compensation insurance. As a general rule, this means that, if the employee is hurt on the job, the employee cannot sue the employer. An employee who is not satisfied with the money he gets from workers compensation insurance will often claim that someone else is at least partially responsible for his or her injuries. For that reason, companies in XYZ’s position often require contractors like ABC to indemnify them, even if XYZ’s negligence caused the accident.
To ensure that ABC will live up to its indemnity obligations, the construction contract also requires ABC to carry $1,000,000 of general liability coverage. ABC actually carries $2,000,000 of general liability insurance. The contract mandates that ABC obtain an endorsement on its liability policy listing XYZ as an “additional named insured.” Excess coverage (often called “umbrella coverage”) is not required, but ABC has a $10,000,000 excess policy that increases the total amount of coverage it has to $12,000,000.
The “additional insured” endorsement on an insurance policy is typically a form that contains boilerplate language setting out the rights of each person who is named as an additional insured on the policy. Insurance Services Office, Inc. (“ISO”) produces most of the form endorsements used with insurance policies, and in 2013 ISO introduced a new form of additional insured endorsement. The new form only requires the insurer to provide the additional insured with the coverage required by the contract. (Incidentally, insurers are not required to use the most recent form of additional insured endorsement. The 2007 form does not contain the breadth-of-coverage language used in the 2013 form.)
In our example, ABC’s policy incorporates the 2013 endorsement. Now assume an ABC employee is hurt on the job, sues XYZ, and gets a $1,500,000 judgment against XYZ. Under all pre-2013 additional insured endorsement forms, it was generally clear that XYZ would have coverage for the full amount of the judgment. In our example, though, ABC’s contract with XYZ only requires ABC to provide $1,000,000 of coverage, so ABC’s GL carrier is only required to pay $1,000,000 of the judgment. And, since the umbrella/excess carrier is not obligated to respond until the underlying $2,000,000 of GL coverage has been exhausted, the umbrella/excess insurance will not cover the remaining $500,000 that XYZ owes the plaintiff, leaving ABC obligated—as a result of its indemnification obligation to XYZ under the construction contract–to pay that portion of the judgment out of its own pocket.
Of course, this is not the only scenario in which you might have a coverage gap, so we encourage you to sit down with your agent and do a thorough review of your insurance to make sure you are covered in every situation.
For more information on this topic, please email Jeff Dickerson at firstname.lastname@example.org or call him at (512) 735-7800.