Last spring, I published a blog post called “Be Careful What You DON’T Ask For” where I contended that the three primary sources of coverage gaps that lead to claim disputes are:
- Failure to identify and/or quantify exposures;
- Failure to insure or risk manage known exposures; and/or
- Failure to quality control policy deliverables and risk information.
Good agents understand the importance of exposure analysis and properly insuring the insurable (or at least recommending insurance to a reticent prospect or insured). However, all too often we don’t devote adequate attention to making sure that what was ordered was delivered AND, just as important, identifying forms the insurer attached that were NOT requested.
This blog post is devoted to one type of onerous nonstandard endorsement often added to CGL policies. They are particularly common in the construction industry, often from E&S carriers (though not always), but can be found in some form in other industries. For example….
Recently I was asked about a new endorsement on a lessor’s CGL policy the agent had not seen before. It’s common for a landlord’s insurer to require that tenants name the landlord as an additional insured on their CGL policies.
The form was called “Lessors Risk Conditional Endorsement” and it mandated that the lease agreement require certain limits of liability and that the landlord be named as an additional insured on the tenants’ policies. So far, so good. Nothing unusual about this. However, the endorsement said:
“Failure to comply with this condition voids coverage under this policy.” [emphasis added]
The agent was in a panic because the presumption was, if a mistake was made, such as a renewal of a tenant’s CGL policy during the lease with lower limits or an omission of an additional insured endorsement, then the landlord would have no coverage under his own policy. However, the endorsement actually says:
“In order to obtain coverage under this policy, you must include the following requirements in the lease agreement…Failure to comply with this condition voids coverage under this policy.” [emphasis added]
The way I read this language, coverage is voided if the insurance requirements are not included in the lease agreement. It doesn’t say that coverage is voided if the limits and additional insured status are not actually provided. Perhaps the insurer means that, but that’s no what the endorsement says. The agent should verify the intent of the form now, not at claim time.
However, there are endorsements that do exclude coverage if certain insurance requirements are not met. Just requiring them in, for example, a construction contract is not enough to satisfy these forms. The required limits and coverage must be provided.
These endorsements go by different names such as “Special Conditions,” “Conditions of Coverage,” or “Warranty” endorsements. These forms require, for example, a general contractor to contractually require a subcontractor to have a CGL policy that includes certain coverages and limits and names or otherwise covers the general contractor as an additional insured.
If a subcontractor does not have a proper CGL policy, especially if lacking the extension of additional insured status to the general contractor, the general contractor’s own policy:
- Does not cover the claim; or
- Has a large deductible; or
- Results in an additional premium charge for the subcontractor (probably not unreasonable).
While arguably onerous, these endorsements are likely enforceable, as was the case in North American Capacity Ins. Co. v. Claremont Liability Ins. Co., 99 Cal. Rptr. 3d 225, 177 Cal. App. 4th 272 (Aug. 2009).
This is why it is so important to QC policy deliverables to see what unrequested policy forms have been added and, where possible, to negotiate their removal or modification.