Other People's Policies: How to Evaluate and Enforce an Additional Insured's Rights

By Joshua S. Goodman

Most people engaged in commercial activities want as much protection as possible from future lawsuits. Where there is a contractual relationship between two parties, protection is typically obtained through an indemnity provision: one of the parties agrees to defend and indemnify the other for claims arising out of the contractual relationship. But increasingly, parties that would typically only request indemnity also want to be named as an additional insured on the other party's general liability insurance policy.

Additional insured status can be found in almost any circumstance in which contractual indemnity would be appropriate. A property owner hiring a general contractor to perform construction work can be named as an additional insured on that contractor's general liability policy. A retail store in a shopping center can be named as an additional insured on the policy of the shopping center or common­area manager. That same retailer can also be named as an additional insured on the insurance policies of manufacturers or distributors whose products it sells.

The Advantages of Additional Insured Status

As any attorney who has analyzed a contractual indemnity clause knows, there are frequent disputes over their scope and interpretation. As a practical matter, once a dispute is in litigation, an attorney representing a party who has been requested to defend another party under a contractual indemnity clause will usually deny that tender of defense and assert the need for further investigation. And in truth, the application of the indemnity provision may turn on precisely who did what; facts that will come to light only through lengthy discovery. Moreover, there is generally little downside to refusing to accept a tender of defense, but once it is accepted, it is usually impossible to give the case back.

Insurance coverage, on the other hand, is often quite broad, and carries with it all the rules of interpretation favoring an insured: coverage provisions will be interpreted broadly, exclusions narrowly, and any ambiguities will be interpreted against the insurer. More significantly, under Gray v. Zurich Insurance Co., 65 Cal.2d 263 (1966), there is a duty to defend any time there is a potential for coverage.

The mere possibility that a contractual indemnity provision applies will not ordinarily convince the indemnitor to pick up the tender of defense. That indemnitor will be at least as concerned that the indemnity provision does not apply. Under the same circumstances, however, an insurance company is obligated to undertake the defense of the additional insured, albeit under a reservation of rights.

Furthermore, a judgment establishing that a claim does not fall within the terms of a contractual indemnity provision generally removes any argument that the indemnitor should have defended the indemnitee. On the other hand, even where a judgment establishes that a claim does not fall within the terms of an insuring agreement, the insurance company will still be liable for defense costs if there was a potential for coverage at the time of the tender. (See for example Mullen v. Glens Falls Ins. Co., 73 Cal.App.3d 163 (1977).)

Another advantage of insurance coverage over indemnity is that the insurer faces a significant downside if it wrongfully refuses the tender. Not only will the insurer be liable for the additional insured's defense costs in the underlying case, but it will also be liable for any attorneys fees incurred in obtaining the policy benefits wrongfully withheld. (Brandt v. Superior Court, 37 Cal.3d 813 (1985); but see Burnaby v. Standard Fire Ins. Co., 40 Cal.App.4th 787 (1995).) Under certain circumstances, the insurer may also be liable for punitive damages.

Furthermore, while a party to whom a contractual indemnity tender has been made can respond with a one­sentence rejection, or even with silence, an insurance company is required by the California Administrative Code to respond to a tender promptly, to affirm or deny coverage, and to disclose "all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented."

When denying coverage, an insurance company should set forth the basis for its rejection, citing language from the policy. An additional insured can often force the issue with an insurance company, whereas a mere indemnitee may encounter a brick wall in its attempts to press its contractual indemnity claim.

Failure to Obtain Required Coverage

Where a contract requires that one party (the contractor) have the other party (the owner) named as an additional insured on its general liability policy, the first issue facing the owner's attorney is whether this was done. The owner's attorney should gather and review all documents relating to the obligation to provide additional insured status. Usually this is a contract, but it may be contained in or modified by correspondence. Where property is involved, such as a shopping center, the requirement is often contained in the Covenants, Codes and Restrictions, or ground lease. With large construction projects, the requirement may be contained in a separate book of specifications, or in a separate document containing standard conditions.

In reviewing these documents, the owner's attorney has to determine whether additional insured status was required, precisely what coverage was called for, and whether there was a condition the owner needed to fulfill. Occasionally, a contract will require additional insured status only upon written request by the owner.

The owner's attorney should then gather and review whatever documentation exists concerning the additional insured status. Typically, one of two documents is used to provide additional insured status: a Certificate of Insurance or a policy endorsement.

The main purpose of a Certificate of Insurance is to provide evidence to a particular person (the certificate holder) that someone else has insurance, and to ensure that the policy is not canceled without prior notification to the certificate holder. This prevents a person from purchasing insurance that he is required to have for himself, and then canceling it after providing evidence of that insurance.

In keeping with its main purpose, the Certificate of Insurance form states at the top that it does not afford any coverage to the certificate holder. Therefore, it is essential that there be some language on the certificate that specifically states that the certificate holder is an additional insured. A party that is required to be named as an additional insured may believe this was done merely because it is provided with a certificate. Without specific language on the form establishing coverage, however, the certificate holder has no rights under the policy.

If the owner's attorney determines that the required additional insured coverage was not obtained, or is narrower than what was required to be obtained, the owner may have a claim against the contractor for breach of contract. The insurance company can be sued for not providing the coverage it was obligated to provide. If the contractor never asked the insurance company to provide additional insured coverage for the owner, the owner probably only has a claim against the contractor, as the party having the contractual obligation to obtain that insurance coverage.

When faced with the failure to obtain the proper insurance coverage, the owner's attorney should consider cross­complaining against the contractor for breach of contract, and conducting discovery on this claim. Usually, focused sets of special interrogatories and requests for production of documents, together with one or two depositions, will be sufficient to establish that the contractor failed to fulfill a contractual obligation, and that it has no compelling defense to this claim.

Scope of Coverage

Once it has been established that the owner was named as an additional insured, the owner's attorney must determine what coverage was provided, and whether that coverage was what was called for in the contract (or other relevant documents).

Typically, additional insured coverage is required only for claims relating to the parties' contractual relationship. With a retailer and a common­area manager, the insurance coverage required will usually be limited to "claims arising in, on or about the common area." The common­area manager may have far broader coverage under its own policy, but the coverage required to be afforded to the retailer would be limited to common­area claims. Similarly, a general contractor will usually have coverage under its general liability policy for all its projects, whereas an owner named as an additional insured will only have coverage with respect to its particular project.

Often an insurance company will attempt to limit an additional insured's coverage with a phrase such as "but only with respect to the acts or omissions of the named insured." With such a phrase, the insurance company is attempting to exclude coverage for claims arising out of the negligence of the additional insured, even if that negligence related to the subject matter of the additional insured's contract with the named insured. Such a phrase significantly limits the scope of coverage, and creates issues that cannot be resolved at the outset of a lawsuit.

However, even where the scope of coverage has been limited, there will generally be at least a potential for coverage, and therefore a duty to defend. After all, the additional insured may be found liable to the plaintiff for the acts of the named insured, and this possibility should compel the insurance company to defend the additional insured under a reservation of rights.

A typical example would be an accident in the parking lot of a shopping center, in front of one particular store. The plaintiff will probably sue both the store and the shopping center itself (which is generally the same as the common­area manager). If the insurance afforded to the store under the shopping center's policy provides coverage for accidents "occurring in, on or about the common area," then the store should be covered under that policy, even if the accident arose out of the negligence of the store's employees. If, however, the store is only covered for the acts or omissions of the shopping center, then the store may not be covered depending on whose negligence caused the plaintiff's injury. In either case, however, the potential that the plaintiff's injury was caused by the shopping center's negligence should entitle the store to a defense under the shopping center's general liability policy.

As discussed above, if additional insured coverage was obtained, but is more restrictive than the coverage that should have been obtained, a claim for breach of contract may lie against the party with the contractual obligation to obtain the insurance. Therefore, it is essential to review not only the insurance documents showing the coverage afforded, but also the contract documents showing what insurance coverage should have been afforded.

Waiver and Estoppel

One issue that often arises where the required coverage was not obtained in whole or in part is whether the party entitled to the coverage ­­ the owner ­­ has waived that right, or is estopped from making a claim for coverage. This usually arises when the owner has received documentation, either a Certificate of Insurance or a policy endorsement, reflecting the coverage that was obtained, and does not complain.

Whether no coverage or simply narrower coverage was obtained, the contractor will argue that the owner's inaction after being made aware of the facts bars any claim. Estoppel is probably the stronger argument, since waiver requires a voluntary relinquishment of a known right: Mere inaction should not establish a waiver. (Some contracts even contain a clause that the failure to insist upon performance of a particular contractual obligation does not constitute a waiver of the right to do so at a later time.)

Estoppel is based on reasonable detrimental reliance. There is probably a detriment, since the required coverage could have been obtained before the underlying claim arose, but not afterwards. However, often the contractor cannot establish that this detriment resulted from its reliance on the owner's inaction. Usually, it is more of a clerical error than an intentional omission. Even if the contractor did rely on the owner's inaction, it is probably not reasonable for one party to breach its contractual obligation in reliance on the other party's failure to catch that breach until it became important.

Other Insurance

Another issue that frequently arises in these circumstances is whether the owner has other insurance that applies to the loss at issue. A self­insured company is in a much stronger position to argue for coverage as an additional insured, and its attorney should make sure to highlight the absence of other insurance in any tender letter to an insurance company. A self­insured company has to pay its attorneys fees (and any judgment) out of its own pocket, and without other insurance there are no issues of apportionment or of which insurance is primary.

Where the owner has other insurance that covers the entire loss at issue and the contractor failed to obtain additional insured coverage, that owner may not have suffered any damages as a result of the contractor's failure. The owner's attorney should argue that any other insurance is a collateral source, and does not reduce the contractor's liability for failing to obtain the required coverage. However, in Mid­Century Ins. Co. v. Hutsel, 10 Cal.App.3d 1065, 1069 (1970), the court stated (in what is probably dicta) that the owner and driver of an automobile involved in an accident suffered no damages as a result of an insurance agent's negligent failure to procure insurance, if they were covered by another policy with limits sufficient to cover the entire loss.

Enforcing an Additional Insured's Rights

Even where the required coverage is purchased, the additional insured frequently does not receive the benefits to which it is entitled. A surprising percentage of the time, an insurer receiving a claim from an additional insured will treat that claim as one for contractual indemnity, and not as a tender by an insured person. If the insurer does not accept the tender unconditionally, it should either accept under a reservation of rights, or decline it with a detailed letter explaining the basis of its position. It is surprisingly rare, however, to receive such a response. More typically, the insurance company will either ignore the claim, or reject it based upon vague claims of negligence by the additional insured.

To ensure a proper response to a tender, the attorney for the additional insured should do a number of things. First of all, any contractual indemnity claim should be dealt with separately, and should be directed to the party owing the contractual indemnity, or to that party's attorney. The tender under the additional insured endorsement should be made directly to the insurance company, and not through counsel for the named insured.

In a typical case, a plaintiff sues the owner and the contractor. The contractor has agreed to defend and indemnify the owner, and to have the owner named as an additional insured on the contractor's general liability policy. The owner's attorney will then tender the case to the contractor's attorney, citing both the contractual indemnity provision and the additional insured requirement. Even where the contractor's attorney has been retained by the very same insurance company that is supposed to insure the owner, the tender under the insurance policy should also be made directly to that insurance company. The contractor has no obligation to defend the owner under the insurance policy, and the owner's attorney should not rely on the contractor's attorney to relay an insurance claim to the carrier.

The tender letter to the insurance company should specifically refer to the fact that a tender is being made by an additional insured under the terms of an insurance policy for policy benefits. It should also state that a defense under the policy is owed to the additional insured since there is at least a potential for coverage. Since an insurance company is required to respond to any claim for policy benefits, a specific request for a written response should always be made.

Even after a letter making all these points, an appropriate response from the insurance company may not be forthcoming. If repeated letters are ignored, the next step is to prepare a complaint for bad faith, breach of contract, and declaratory relief. This can either be done contemporaneously with the underlying litigation, or after the underlying litigation has been resolved. In either case, it must be done as a separate action. The insurer cannot be brought into the underlying litigation on a claim for policy benefits.

It is often only necessary to send the insurance company a courtesy copy of the complaint before it is filed. The fact that the insurance company has been named as a direct defendant in a bad faith lawsuit is frequently sufficient to get the insurer to analyze the claim properly. If the courtesy copy is not sufficient, filing and serving the complaint will at least guarantee that the insurance company will have counsel look at the claim. When the insurer hires outside counsel to defend it, a bad faith action starts to cost money.

Where an insurer has simply ignored a tender from an additional insured that it should at least have defended under a reservation of rights, the entire matter is usually resolved promptly once the insurer hires counsel. On rare occasions (or more frequently if the claim for coverage is thin), it may be necessary to serve lengthy and detailed special interrogatories, to request the entire claims file, and to notice the depositions of the claims handlers. This generally does the trick. When forced to hire counsel to defend a coverage suit, especially where the insurer never properly declined the case, and where it had an obvious duty to defend, the insurer will generally pay most if not all of the claim.

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