Why carry your own insurance when you can have the tenant (or landlord) name you as an additional insured under its own commercial general liability policy? After all, isn’t it obvious that if the insured (tenant or landlord) has good coverage, adding your own name in “addition” to that of the policy holder must mean that you have the same coverage as that policy holder. NOT!
At this point, we’ll repeat a frequent Ruminations refrain: “Carry your own insurance.” Here are more reasons why that remains good, solid advice.
[Today, as we commonly do, our examples derive from the most common set of insurance forms, those promulgated by the Insurance Services Office, Inc., a company that provides a whole bunch of services to that industry. For short, it is known as ISO and its forms are known as “ISO” forms.]
There are two sets of limiting factors that restrict the coverage an “additional insured” will enjoy under someone else’s liability insurance policy. The first arises out of the definition of an “additional insured.” Whoever an insured might be according to the definition of an “insured” in the underlying liability insurance policy, the endorsements that provide coverage for an “additional insured” tell us the following:
Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:
1. Your acts or omissions; or
2. The acts or omissions of those acting on your behalf;
in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.
One pedestrian word in the cited policy text has a tremendous impact. That word is “Your.” “You” and “Your” refer to the actual policy holder, not to the additional insured. So, if the landlord is an additional insured on its tenant’s policy, the words, “Your acts or omissions” means the acts or omissions of the tenant. The landlord, though an additional insured on its tenant’s policy, has coverage only if the claim is caused by its tenant’s acts or omissions. Otherwise, the landlord is on its own.
Another significant limitation arises out of the policy’s phrasing: “caused in whole or in part.” Here’s a good drafting tip for leases and other agreements. There’s a world of difference between claims “arising out of” and “claims caused, in whole or in part.” The later phraseology is much narrower. The insurance industry understands that and that’s why it abandoned “arising out of” in 2004 in favor of “caused” by. Perhaps, we should do the same and be write what we mean and not think these kinds of “formulations” are all the same.
Can Ruminations succinctly bring home the “difference” between the two phrases? Yes, we can. Si podemos. Under current ISO Additional Insured Endorsements, the landlord would NOT have coverage for its own negligence because its own negligence would not have been “caused in whole or in part, by the tenant’s (“Your”) acts or omissions.” Under the “old” (before 2004) formulation, the landlord could have argued that its own negligence “arose” out of the tenant’s operations or work at the property. Try that now.
And, that’s not all. In 2013, ISO did a major overhaul to all of its additional insureds endorsements. Here’s what they now say:
1. The insurance afforded to such additional insured only applies to the extent permitted by law; and
2. 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.
The first limitation (1) basically says that if applicable law doesn’t permit a contracting party to indemnify the other contracting party under a particular circumstance, the additional insured won’t have coverage under the policy even though that technically would not have been “indemnification.” So, getting named as an additional insured will no longer be an end-run around anti-indemnification laws.
The second limitation (2) is more direct. One easily explained effect is that regardless of the amount of coverage the policy holder is carrying, the additional insured will only be covered for the lesser of the policy amount or the amount required under the lease or other agreement. Said simply, if a tenant has a $10 million policy and its lease requires only $2 million, the landlord, as an additional insured, gets only $2 million of coverage.
There is also a second aspect of the second limitation, one that requires a look at the underlying lease or other contract. On its face, the language added by the ISO in 2013 says that those documents will define the conditions under which the policy will cover the “additional insured.” Frankly, that’s unclear. There hasn’t (yet) been a lot of court scrutiny of this limitation, but what we’ve seen is courts looking at the indemnification provisions within the lease or other agreement and limiting the scope of an additional insured’s coverage to the scope of those indemnification provisions. That doesn’t “feel” right, but you’ve been warned.
Look at the second limitation (2) again. What if a lease only calls for the landlord (or, the tenant) to be named as an additional insured, but says nothing more? For what claims will the “additional insured” be covered? Does that make any of us think that we need to spell out the scope of such coverage? Should our leases and other agreements say that the “additional insured” must be afforded coverage as broad as if the lease or other agreement had expressly covered the claim against the additional insured? At the same time, perhaps our agreements should require that the additional insured be covered for the greater of the minimum amount called for by the agreement or the insured’s actual policy limit?
It has been three years since ISO changed its additional insured endorsements. When will we begin to see our leases and other agreements change to reflect those changes? The ISO changes invited us to change our forms when they said that coverage would be limited by the text of our agreements, yet our forms don’t seem to have responded to that challenge.
Here are two parting thoughts:
Classically, we thought that, but for a few specific exceptions, an additional insured is treated as if it had its own policy even though it isn’t really the policy holder. That doesn’t seem so true anymore. Second, and a very big second, insurers using the basic ISO commercial general liability policy form aren’t obligated to use the ISO additional insured endorsements and are now writing their own, adding even further limitations. So, a landlord (or a tenant) with additional insured status on the other’s policy has no idea how much coverage it is getting. Basically, it may be an “additional insured” in name, though not in “fact.” This probably means that our leases and other agreements need to define what it means to be an additional insured, whether by reference to a particular ISO endorsement (a known coverage definition) or by tailored text.