Additional Insured and Hold Harmless Agreements Pose Problems

Complying with the additional insured requirements imposed on their insureds and reading the hold harmless agreements those insureds have signed increases the agita of insurance agents and brokers. But, as we reach for the antacid, we want to remember that achieving additional insured status and being indemnified by contractors are vital risk management techniques for all businesses. Risk management theory dictates that the one closest to the exposure should be the one who should bear the risk. That encourages those with the most control to minimize the exposure. Properly handled, they reduce the overall cost of risk by avoiding expensive litigation between the parties as to who is at fault. Many insurers strongly recommend that their insureds obtain additional status and indemnification agreements from all contractors that work for them. In fact, some insurers make it a policy condition. By the way, this is a very dangerous provision. You can’t be certain that the policy shown in a certificate is actually in force and that its terms provide the desired coverage.

Recent NY appellate level decisions highlight problems in obtaining additional status and demonstrate the importance of indemnification agreements. Before we discuss the decisions, let’s look at some Q&As I recently sent my clients to see why these two protections are important for businesses.

Q.Why does my firm need to be named as an additional insured on contractor’s policies?

A. Being named as an additional insured, protects your insurance record. Insurance companies look at the claims that you’ve incurred when deciding if and what to quote. Yours claims record is the key factor driving your premiums.

Q. Do we still need to be named as an additional insured if the contractor has insurance? When he’s at fault he’ll be covered by his insurance. A. Yes. When you’re named as an additional insured your insurance company can turn the matter over to the contractor’s insurer on day one. The expense of defending you is charged to the contractor’s insurance, not yours. Otherwise, even if the claim involves your contractor’s sole liability, your insurer will incur legal fees and other costs. to get the decision; those expenses will be charged to your record. If you and the contractor are jointly liable, a well-drafted contract, combined with additional insured status, can put even your defense expense and your share of the settlement on the contractor’s insurer.

Q. Is it enough to have a certificate from the contractor showing our firm as an additional insured on his policy?

A. Unfortunately no, it’s not enough. New York law (and the law in most other states) is clear that unless the policy has been amended, it doesn’t matter what the certificate says. That’s written right on the certificate.

Q. How can I tell if the contractor’s policy names us as an additional insured?

A. Demand a copy of the endorsement to the contractor’s policy. That’s not as onerous as it sounds. Most contractors’ insurance policies include automatic additional insured status for customers when it’s required by the contract between the parties.  Getting a copy of that endorsement isn’t an unreasonable requirement.

Q. Since we’re named as additional insureds on the contractor’s policy, do we also need an indemnification/ hold harmless agreement from the contractor?

A. Yes, an indemnification/hold harmless is another way to improve your protection. It’s broader than insurance and it’s effective in areas where additional insured status doesn’t work. For example, additional insured status won’t help when you’re dragged into Åò240 & Åò241 labor law claims, which are a major problem in New York. Here are the cases that triggered this discussion:

Failure To Sign Construction Agreement Dooms Additional Insured Status The Appellate Division just affirmed the Supreme Court, New York County, decision that Hard Rock CafeÅL International was not an additional insured under an insurance policy issued to its contractor, Regions Facility Services. The Court explained that Regions’ policy provided coverage to additional insureds when Regions agreed, in writing, that another entity should be added as an additional insured. The construction agreement requiring that Hard Rock be named as an additional insured was not signed by either Regions or Hard Rock, and the work authorization was signed only by Regions even though it included a signature line for Hard Rock. Accordingly, the court concluded that Hard Rock was not entitled to additional insured status, apparently because no contract was in effect.1

Direction, Supervision or Control Not Necessary to Impose Liability on Building Owner Where There is a Dangerous Worksite Condition Present This is a NY Labor Law Åò 240(1) case. An elevator contractor’s employee fell into an elevator shaft while repairing the elevator in an insured’s building. The employee successfully sued the building owner even though it was conceded that the building owner did not exercise direction, supervision or control of the work. The court held that constructive knowledge of the defect was sufficient (constructive knowledge is what you should know even if you don’t actually know it.)

To be protected by the contractor’s insurance, a well-drafted hold harmless agreement was needed. The landlord’s claim for contractual indemnification failed because the indemnity clause was too vague.2

Be proactive. Tell your clients to be sure that they’re named as additional insureds on their contractor’s policies and that their attorney has drafted strong indemnification and insurance requirements for the contract. Then when you receive a copy of an onerous contract provision that one of your insureds has signed, you may take it in stride knowing that it’s just part of the risk management process.

26 October 10, 2011 / INSURANCE ADVOCATE 1 Adapted from Hurwitz & Fine “Coverage Pointers.” The case is: Cusumano v. Extell Rock, 2011 N. Slip Op. 05935 (1st Dep’t July 14, 2011).] 2 Adapted from Hurwitz & Fine “Coverage Pointers.” The case is Cordeiro v TS Midtown Holdings, Appellate Division, First Department