Additional insured endorsements still an issue

IT HAS BEEN common in construction for a long time — as long as this lawyer can remember anyway — that contractors were required to show their customers that they carried liability insurance and to include the customer as an "additional insured" under that liability insurance policy.

The logic was that if the customer (say, the property owner) got sued because a guest fell in a hole left open by the contractor, it was only fair that the contractor's insurer should defend that lawsuit. Contractors and their insurers routinely provided this additional insured coverage with little controversy.

In recent years, however, lawyers drafting contracts for customers have been asking for broader protection for their clients, to the point where the additional insured endorsement has often taken on a whole new meaning — that is, that the contractor's insurer must defend the customer and the customer's lender, architect, engineer, officers, owners, employees, etc., against what the contractor allegedly did wrong, even if there is no reason to believe that the contractor was at fault in any way. In effect, the contractor's insurer became the customer's insurer to the point where the customer didn't need any insurance of its own.

Contractors often weren't in a position to fight this, as the contract terms were presented in a take-it-or-leave-it fashion. What has helped to re-level the playing field here are the active efforts of insurance companies and contractors' associations. Insurance companies have found that the cost of providing an expanded defense and paying the additional claims against owners have really hurt their bottom lines and, being pretty bottom-line oriented, the insurers have taken action in two ways.

First, they are refusing to issue additional insured endorsements that go beyond covering the "derivative" or passive role of the additional defendant. In the simplest legal terms I can put it, this means that if the customer is sued because a plaintiff was hurt on its property, but the entire responsibility for the site was within the control of the contractor, the insurer will still defend. If, however, the lawsuit alleges that the owner knew of a dangerous situation and did nothing to alert the contractor to it — that the owner did something independent of the contractor that contributed to the damage — the insurer would not defend or pay that claim.

Second, the insurers along with contractors' advocacy organizations, are working to get laws passed in more states that make broad additional insured endorsements illegal. In states such as Oregon, which have a statute prohibiting any contractual requirement "to indemnify another against liability for damages ... caused in whole or in part by the negligence of the indemnitee," it has been held by courts that the contractor does not have to defend a lawsuit unless the suit says that the contractor did something wrong. Walsh Construction Co. v. Mutual of Enumclaw, 104 P.3d 1146 (2005).

Unfortunately, the law in Oregon is not the law everywhere. California recently ruled that it didn't think North Carolina's anti-indemnification statute prevented requiring an insurance company to provide broad anti-indemnity language, and there are still many states with no anti-indemnification statutes at all. So, there are many states where such strong contract language requiring additional insured coverage will be enforceable.

Which leads to the real current dilemma for contractors: What do you do when your construction contract requires you to provide insurance coverage that you can't buy? Many contracts (including all standard form ones) require the contractor to provide " contractual liability" coverage, meaning insurance coverage for all the parts of the contract where the contractor has agreed to indemnify the other party. If the contractor signs such a contract, or one that specifically calls for broad additional insured coverage, or both, the contractor will be in breach of contract if he doesn't provide the insurance. If the customer ends up having to defend a claim or pay to settle it because the contractor's insurance won't step up, the contractor could be liable to reimburse his customer for all his loss or expense.

The only way for now to avoid this mess is to not agree to provide insurance coverage that you can't get. For public work, this means bringing the problem to the owner's attention before the bid date so that the bidding requirements can be changed. For private work, it means negotiating with the customer to delete the requirement, or offering to add it only for an additional fee, assuming that your insurer will sell it to you.

It is not a pretty set of options, and certainly efforts to solve the problem through clear and unequivocal legislation would be the best way to assure contractors peace of mind so that they can instead focus on all the other problems involved in getting their job done.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., telephone 816/ 421- 4800, e-mail to susan. [email protected]