IMPACT OF 2013 ISO CGL ADDITIONAL INSURED ENDORSEMENTS UPON CONSTRUCTION-RELATED RISKS

In April 2013, the Insurance Services Office ("ISO") made significant changes to its Commercial General Liability coverage forms which will have a significant impact upon the scope and breadth of Additional Insured ("AI") coverage afforded under commercial agreements, particularly in the construction industry. The new 2013 ISO AI endorsements are designed to align more closely with typical terms in commercial contracts that require parties to obtain additional insured coverage and varying changes in state laws and policies governing contractual risk transfer and indemnification obligations.

The new terms in ISO's 2013 AI endorsements will impact a number of commercial industries and the extent of coverage afforded in the following three ways:

1. The breadth of Additional Insured coverage afforded will be restricted to the extent permitted by law;
2. The scope of Additional Insured coverage will be limited to the extent of coverage required by contract; and
3. The Limits of Insurance will be confined by the amount of insurance required by the governing contract or agreement.

Breadth of Additional Insured Coverage Restricted to the Extent Permitted by Law

For the past few years, several states, including California, have enacted aggressive laws which limit the scope of risk transfer and permissible indemnity in construction and commercial contracts. Going further, many states have also prohibited contracting parties from sidestepping these anti-indemnity laws by requiring broad additional insured coverage as a condition in the contract.

While courts would not enforce an additional insured endorsement that ran counter to its anti-indemnity laws, the 2013 changes to the AI endorsement seek to make it clear that the reach of additional insured coverage will not extend beyond the varying anti-indemnity laws enacted in several states. As such, the 2013 endorsement adopts language that "[t]he insurance afforded to such additional insured only applies to the extent permitted by law."

The Scope of Additional Insured Coverage Limited to Extent of Coverage Required by Contract

Historically, contractual terms requiring additional insured insured coverage were written to benefit the "upstream" contractual party (i.e. owners, developers and general contractors) and vary as to their terms from simple (i.e. "add ________ as an Additional Insured") to more complex (i.e. "add ________ as an Additional Insured for Lot # _____ and for ongoing operations only). With the varying terms utilized in underlying commercial and construction agreements, the 2013 ISO language seeks to track with the terms of these agreements by limiting insurance coverage afforded such additional insured to "that which is required by contract or agreement to provide for such additional insured." This seemingly insurer driven language attempts to ensure that the scope of additional insured coverage will not be broader than the scope of additional insured coverage agreed to by the parties in the underlying contract.

Limit of Insurance Confined to Amount of Insurance Required by the Contract

As with the scope of coverage discussed above, the 2013 ISO AI endorsement changes also attempt to restrict an insurance carrier providing AI coverage from providing greater Limits of Liability to the additional insured than required by the underlying contract. The new ISO language states that the most the insurance carrier will pay on behalf of the additional insured is the amount of insurance "required by the contract or agreement."

In the past, an insurance carrier with a $5M in primary policy limits may have been required to afford $5M in coverage to an additional insured under a broadly worded AI endorsement even though the underlying contract only entitled the additional insured to $1M in additional insured coverage.

If the underlying contract is silent as to the limits of available coverage for additional insureds, the ISO 2013 form restricts the limits of coverage to the amount "available under the applicable Limits of Insurance shown in the Declarations."