New ISO-CGL Changes Raise Concerns For Additional Insureds and Indemnitors

The whole issue of hold harmless, indemnity, and insurance requirements in contracts is an ongoing battle for risk managers. With the introduction of a new ISO additional insured endorsement and a change in the definition of what constitutes an insured contract, all you thought you might know about the subject is changing. Here is what you must know.


It is assumed by many policyholders that whenever the Insurance Services Office, Inc. (ISO) announces it is “clarifying original intent,” the result will be a reduction in coverage. ISO recently (in December 2003 and in March 2004) announced that it is introducing substantially revised additional insured endorsements as well as-a revised “insured contract” definition. Such changes have the potential to wreak havoc on an already complex and chaotic area of contractual indemnity and additional insured law. While the new ISO endorsements ostensibly are meant to address the insurance industry’s perception that courts have been extending additional insured coverage beyond the drafting intent behind that coverage, the new ISO endorsements also may result in increased litigation-and restricted coverage to additional insureds and indemnitors.

It is common among contracting parties to assess the liability risk of contractual activities and seek the allocation of the economic risk of such liability in advance. Such allocation is most frequently done through a combination of
indemnity provisions and insurance procurement requirements. Subject to certain anti-indemnity statutes and wording requirements, most states allow parties to fully shift liability risk by allowing one party to agree to indemnify another party rather than rely upon the application of common law liability allocation rules. Indemnitors often are more willing to take on such indemnity obligations because the indemnitor relies upon its contractual liability coverage for those “insured contracts.”

However, because even the most well-written indemnification provisions are only as good as the assets that the indemnitor has available to satisfy its obligations, indemnitees frequently require that they also be made additional insureds on the indemnitor’s liability policy. But this indemnity/insurance approach to contractual risk transfer is subject to a maze of statutory restrictions and has generated an enormous amount of widely varying, and frequently irreconcilable, court decisions. Indemnitors, indemnitees, insurers, and the courts have all struggled with the intent behind, and the enforceability of, indemnity provisions. Such a task is made even more difficult where parties have economic incentives to modify their intent and to create ambiguities where none would otherwise exist when large losses occur. Some
courts have been similarly guilty in engaging in result-driven interpretations of indemnity provisions to maximize financial compensation for a victim, despite the parties’ clear mutual contracting intent. These complex interpretation problems have not been limited to contractual indemnity provisions. Contracting parties and their respective insurers also have struggled with the rights of, and scope of
coverage for, additional insureds. As might be expected, the additional insured generally wants to transfer as much of its liability as possible onto the additional
insured carrier and avoid implicating its own coverage. At the same time, the insurer generally wants to construe the additional insured’s coverage
rights as narrowly as possible and to offset its obligations by seeking contribution from the additional insured’s own insurance program.
Outside of construction-related contracts and subject to wording requirements, the majority of states allow parties to broadly shift liability prior to a loss through
indemnity provisions. Further, most courts have construed additional- insured coverage broadly to
encompass not just vicarious or joint negligence, but the additional insured’s sole negligence as well. In response to this majority trend and significant insurance industry exposure, ISO introduced several
new additional insured endorsements and a new “insured contract” definition earlier last year.
Specifically, ISO introduced ten revised additional insured endorsements: CG 2007 01 96 (Engineers, Architects, or Surveyors), CG 20 10 10 01 (Owners,
Lessees,or Contractors as Scheduled),
CG 20 15 11 88 (Vendors), CG 2026 11 85 (Designated Persons or Organizations) CG 20 33 1001 (Automatic Status When Required in Contracts for Owners, Lessees, and Contractors),
CG 203403 97 (Automatic Status When Required in Contracts for Equipment Lessors), and CG 2037 1001 (Completed Operations). Finally, -ISO introduced a new form, CG 242606 04, which seeks to amend the standard ISO-CGL’s “insured contract” definition.

Additional insureds should be wary of the use of the new ISO additional insured endorsements, particularly where their risk management programs rely heavily upon their contractors or vendors being fully responsible for the entire risk associated with a project. Further, additional insureds can expect insurers to become increasingly aggressive in trying to characterize losses as arising from the additional insured’s sole negligence, potentially pitting insureds against each other while an underlying claim is pending. Finally, indemnitors who frequently enter into broad form indemnity agreements must make sure those indemnity obligations remain “insured contracts.”
These new endorsements should cause warning bells to sound for named insureds, additional insureds, indemnitors, and indemnitees alike. While ISO’s intent to limit the insurance industry’s exposures through these endorsements is clear, it is less clear whether these new endorsements will clarify these complex issues or, rather, simply result in more coverage disputes.