Many contracts require the contracting parties to have each other named on their respective third party liability policies as ‘Additional Insureds’, but what does this mean in reality; what is it meant to achieve; and does it always achieve what it’s meant to?
In absence of a specific definition of Additional Insured in either the contract or the insurance policy, the legal definition is likely to differ depending on jurisdiction.
One law firm’s commentary on the potential vagueness of contracts simply demanding someone is named an Additional Insured was to liken it to going into a restaurant and asking for ‘some food’ - you just don’t know what you will get!
Some contracts may specify that the Additional Insured status is to be limited to the extent of any indemnity given to the party to be named as an Additional Insured by the Named Insured of the policy, or limited to liability of the proposed Additional Insured that has been assumed by the Named Insured.
In other words the intent is, where one party agrees to indemnify the other party for their actions and/or assumes their liability, to back such indemnity up (in the event that for any reason they are unable to later rely on such indemnity/assumption of liability from the indemnifying party), they will be able to claim on the indemnifying party’s insurances.
Unless a contract states that one party is to insure the other party as a ‘Named Insured’ or ‘Co-insured’ it is unlikely the intent is to provide insurance for the liability retained or assumed by the Additional Insured themselves (as this should be covered by their own insurance policy in their own name).
However, some contracts may make one party responsible to insure both parties to the contract – for example in a Joint Operating Agreement (JOA), however for the purposes of this article we will only look at where the contract calls for ‘Additional Insureds’.
What can go wrong?
Contracts are usually constructed so that there is one provision covering contractual indemnities, and then a separate provision dealing with insurance requirements under the contract (i.e. who is obligated to purchase what type and what level of insurance relating to the contract).
For example, under an offshore drilling contract (between an oil and gas field operator and a drilling contractor), it is common for the operator to be responsible for, and to hold harmless and indemnify the contractor for, the risks of the well getting out of control and for resulting pollution from the well.
The drilling contractor will then take responsibility for, and hold harmless and indemnify the operator for, pollution from the contractor’s rig.
There will likely be a separate insurance provision requiring each party to take out third party liability coverage, and to name each other as Additional Insureds (securing a waiver of subrogation from their insurers).
If there is no specific linkage in the contract between the indemnity provisions and the insurance requirements provision, this can lead to potential disputes.
In the Deepwater Horizon case, broadly speaking, under the drilling contract BP had agreed to indemnify Transocean for pollution from the well, and Transocean had agreed to indemnify BP for pollution from the rig.
In a separate insurance provision, Transocean were required to name BP on their policy as an Additional Insured. Transocean’s policy was endorsed to say something broadly along the lines of “BP are included hereunder as an Additional Insured”.
BP decided this should mean that they were covered under Transocean’s policy on the same basis that Transocean were – i.e. for any negligence of their own, not just for negligence of Transocean that Transocean were indemnifying them for.
Transocean and their insurers contested this, and in the first instance BP won, with the trial court stating that the policy had to be read in isolation to the contract, and as there was no definition or restriction on the Additional Insured endorsement, that BP should be granted unfettered access to the policy to cover them for their negligence including that which they had agreed to indemnify Transocean for.
The case was appealed and the Appeal Court themselves referred the case to the Texas Supreme Court, who overturned the original decision stating that the contract and the policy needed to be read in conjunction, and in their view the intent of the contract was only to cover BP under Transocean’s policy to the extent of the indemnities granted by Transocean, and not for BP’s own negligence retained under the contract.
Following this case, in order to further clarify their intent in providing Additional Insured coverage, many third party liability underwriters amended their policies by adding a definition of Additional Insured that limited their access to the policy to the extent required by any indemnity given by the Named Insured under written contract.
Whilst this (in the US at least) potentially closes the door on making the Named Insured’s insurance policy open to negligence retained by the Additional Insured under contract, it can still cause problems where a court decides that the contract requires the Named Insured to secure wider coverage for the Additional Insured.
In a recent case before the US courts, a particular contract was considered to be sufficiently different to the contract in the Deepwater Horizon BP v Transocean case, so as not to have to follow that Texas Supreme Court decision, and a ruling was passed down stating that despite the indemnity provision, and as there was no language in the particular contract suggesting that the parties intended the scope of the indemnity provision to govern the scope of the insurance provision, and because the contract provided that the contractor “shall” provide insurance coverage and “shall” pay the applicable deductible (without further qualification), that the insurance obligation was not deemed tied to the scope of the liability under the indemnity provision.
If the losing party in that case had a third party liability policy that limited coverage for Additional Insureds to the indemnity assumed by the Named Insured, there would have been no cover for the Additional Insured, and the Named Insured may have been held in breach of contract (with possible associated damages for lack of insurance).
Other issues to consider
Insurable interest remains paramount
Additional Insured status on a first party policy is probably pointless as the policy can only pay someone with an insurable interest in the property, which will not arise under a standard knock-for-knock contract.
However many package polices will contain an Additional Insured clause in the General Conditions ‘where required by written contract.’
What this is probably trying to achieve is to have these ‘Additional Insureds’ granted a waiver of subrogation (which is likely to be required under contract) which typically follows the Additional Insured clause, sometimes incorporated into it, but it could be granted on its own.
The Additional Insured provisions typically exist in US packages, where elsewhere there is often just a stand-alone waiver of subrogation clause.
However, a lender may have an interest in a first party property policy and therefore may benefit form being an Additional Insured but this is usually catered for by a loss payee provision (where a loss is payable directly to the lender, and not to the Insured).
The policy needs to be capable of providing cover to the liability of the Additional Insured.
In a recent court case the issue of Additional Insured status hinged on the fact that the very nature of the insurance policy was limited to a clearly defined party and could therefore not apply to an Additional Insured who was not one of those parties.
In this instance a charterer’s liability policy was deemed not to be extendable to anyone else (who is not the charterer) whether as additional insured, or co-insured, or a named insured, as they still would not be a charterer and the scope of the policy was limited to charterer’s liability.
An alternative option
In order to avoid confusion as to the extent of coverage provided to an ‘Additional Insured’ some insurers and insureds (for example UK insureds seeking cover in the UK insurance market) use the phrase ‘Indemnity to Principal’ (‘Principal’ in contract law being the party that a contractor has a contract in place with) in both their contracts and the insurance policy, which specifically states that the party being named on another parties insurance policy is being provided insurance coverage no broader than the indemnities provided to him by the main policy holder (i.e. they, the principal to the contract, are not insured under the other parties policy for liability that they are assuming or retaining – as that should be covered by a policy taken out by the Principal).
Other common Insurance Provisions within contracts to be considered
In addition to the usual Additional Insured and Waiver of Subrogation requirements within contracts, the following provisions may also be contained within insurance requirements of a contract that should be carefully reviewed to ensure the insurance policies in question are compliant:
- A minimum security rating for insurers
- Insurers to be licensed a certain territory
- Maximum deductible or retentions
- Minimum limits
- Notice of cancellation to be provided to the Additional Insured
- Primary cover (the coverage available to the Additional Insured shall be primary to any other valid and collectible insurance they may have access to)
- The actions or inaction of another Insured will not invalidate the cover of an Additional Insured (a non-vitiation or innocent Insured clause)
- Additional Insured shall not be liable for any unpaid premiums
We recommend that contracting parties are clear in their contracts as to exactly what is require by each party, and if the intent is to link Additional Insured status to the indemnitees that there is a clear link in the contract and in the insurance policies.
For more articles like this, download our
TALK TO AN EXPERT
If you would like to talk about any of the issues raised in this article, please contact John Cooper, Managing Director -Technical on +44 (0)203 394 0464.