Understanding Additional Insured Endorsements in Construction Contracts

In the construction industry, contracts define relationships, responsibilities, and expectations among contractors, subcontractors, and owners. One of the most important yet often misunderstood elements in these contracts is the Additional Insured (AI) Endorsement, which provides extended insurance coverage and is important in managing risk for all parties involved in a construction project.

What is an Additional Insured Endorsement?

An AI endorsement is an add-on to an insurance policy that extends certain coverage to a third party (such as a contractor or project owner) who is not the primary policyholder. In construction, it typically involves contractors adding project owners or other parties as "additional insureds" on their liability policies, providing those parties some level of protection if claims arise from the contractor's operations.

Why Do Construction Contracts Require Additional Insured Endorsements?

Before 1985, indemnity agreements were the primary method of risk transfer. In these agreements, a contractor would agree to indemnify (i.e., cover costs for) another party if a claim or loss occurred. However, without a dedicated insurance endorsement, this setup left gaps, as contractors often ended up with hefty legal costs that were not reimbursed.

The introduction of the AI endorsement in 1985 transformed this approach, allowing contractors to provide coverage to project owners through endorsements like the CG 20 10 11/85. This particular endorsement offered broad coverage, including for completed operations, which made it highly desirable for construction contracts. However, as construction risks evolved, newer versions of AI endorsements gradually narrowed coverage, meaning contractors and project owners now must carefully select the proper endorsement to suit their needs.

Types of Additional Insured Endorsements

• ISO Forms: These standardized forms, such as the CG 20 10 and CG 20 37, are widely accepted and have been tested in court. They offer a more predictable scope of coverage, so they're often preferred. For example, the CG 20 10 endorsement provides AI coverage for ongoing operations, while the CG 20 37 is often used to cover completed operations.
• Manuscript Forms: These are custom endorsements created by insurance carriers. While they may look similar to ISO forms, they often differ in coverage specifics. For example, some manuscript forms only provide AI status if the primary insured (e.g., a subcontractor) is 100% liable, which may not adequately protect the project owner in most real-world scenarios.
• Project-Specific Endorsements: For large, complex projects, additional insureds may need coverage tailored to their specific requirements. These endorsements often include extended completed operations coverage, which is essential for larger developments to address liability even after the project's completion.

Key Components to Understand in AI Endorsements

• Indemnification vs. Additional Insured: Indemnity clauses and AI endorsements work hand-in-hand but are not interchangeable. Indemnity agreements obligate one party to compensate another for certain losses, while AI endorsements provide direct insurance coverage. Together, they create a "belt-and-suspenders" approach, offering both direct coverage and financial backing.
• Privity of Contract: This concept addresses which parties have a direct contractual relationship. Some AI endorsements require direct contractual privity, meaning that the endorsement only applies to the party directly in contract with the insured. This limitation is important because it could leave additional parties without coverage if they lack a direct contract with the insured.

Tips for Ensuring Adequate Coverage

• Specify Endorsement Details in Contracts: Construction contracts should specify which AI endorsement version and addition date are required. This can make a significant difference in the breadth of coverage. For instance, the 2001 versions of the CG 20 10 and CG 20 37 forms are generally more restrictive than the 1985 version.
• Consider Both Ongoing and Completed Operations: Ensure that the AI endorsement includes both ongoing and completed operations, especially for long-term construction projects. Completed operations coverage is crucial for claims that may arise years after the project is finished.
• Request Proof and Review of Endorsements: Along with a certificate of insurance, contractors should request a copy of the actual endorsement. This review helps verify that the coverage aligns with contract requirements and meets the specified endorsement version and terms.
• Implement Robust Contract and Certificate Management: Effective tracking of contracts, insurance certificates, and AI endorsements is essential. Regular audits help ensure that all parties remain in compliance throughout the project's lifecycle.

Additional insured endorsements are a cornerstone of risk management in construction, but their complexity requires careful consideration. Ensuring you have the proper AI endorsement not only protects your project but also enhances your ability to manage risk effectively. A well-crafted contract, aligned with the correct endorsements, provides peace of mind and helps avoid costly disputes, making it an essential part of any construction insurance strategy.