Let me explain.
The ISO (Insurance Services Office) is one of the largest advisory organizations providing statistical and rating services to the property & casualty industry. They also provide insurance product and coverage forms for use by insurance companies. In 1997, the ISO introduced a series of “automatic” or “blanket” additional insured endorsements. (For the purposes of this blog, the terms “automatic” or “blanket” mean the same thing.) The series evolved over time in an effort to expedite commerce and, in particular, improve contract administration.
Before the ISO got involved, there were manuscript blanket additional insured endorsements offered by individual insurance companies, but only as one-off options. These manuscript endorsements came with no regulatory oversite. The intent of these early blanket additional insured endorsements was to trigger an additional insured coverage grant by using a construction contract that required one party to the contract to provide the other party to the contract additional insured status. In a blanket additional insured endorsement, logic suggests that if the contract was not signed by both parties then the additional insured coverage grant was not triggered, even if the certificate of insurance includes a blanket additional insured endorsement by form number, references a specific endorsement form attached, or just indicates additional insured status.
Blanket Additional Insured Endorsements: The Hidden Risk
At this point, a disclaimer is in order: The real purpose of a blanket additional insured endorsement is to provide additional insured status when required to avoid a breach of contract. However, the scope of additional insurance provided is altogether another matter: ongoing operations vs. completed operations, primary & non-contributory, etc. You get the idea.
In a perfect world, these blanket additional insured endorsements are great because all owners and general contractors would have signed them before any work began. In that same perfect world, all general contractors and all subcontractors and, for that matter, all sub-subcontractors would follow suit. But as we all know, we live in the real world, not a perfect world.
My purpose today is to educate all parties to these construction contracts, including lower tiered sub-subcontractors, that in the effort to reduce contract administration burden and avoid a breach of contract using blanket additional insured endorsements, there actually manifests a hidden risk that all parties need to manage.
Now, after a very unscientific straw poll taken by me of all ongoing work performed at any given time, it seems plausible that between 10 percent and 20 percent of work performed may not have an executed contract in place. If that indeed is the case, there is no additional insured status and no indemnification in place for that work. As you can imagine, performing work without signed construction contracts presents different challenges for owners, general contractors, and all tiers of subcontractors.
To help manage this risk I have a suggestion for your consideration:
Since most general conditions documents are getting similar makeovers to the one the AIA A201 just had, I suggest you take advantage of the change that removes the insurance requirements formerly embedded in the body of the contract to the separate insurance exhibit and to include the indemnification as well. In essence, create a separate insurance and risk transfer contract to be signed prior to the start of the work.
By doing so, you will avoid the hidden risk created if construction begins without a signed contract and all parties will narrow the gap of time and improve the evolution of the transfer of risk. And that’s music to everyone’s ears!
Well music fans, that’s all for today. If this topic is “All On Your Mind” now, give us a call. We’re happy to help.
