UNDERSTANDING WHEN ADDITIONAL INSUREDS ARE COVERED
With construction contracts, a general contractor must be added as an additional insured on the subcontractor's Liability insurance policy. Most contracts require liability coverage because there may be claims arising from completed or ongoing work. This also means that the general contractor runs the risk of facing a lawsuit from the flaws in the subcontractor's work. For this reason, subcontractors need Completed Operations insurance.
In the past several years, the insurance industry took steps to remove completed operations coverage from the policy forms commonly used for additional insureds. The ISO Form CG 20 10 of 1985 offered coverage for the organization or person listed on it. The named party was covered for liabilities arising from their work or work performed for them by someone else. Materials and equipment were also covered. From the wording on the form, the courts decided that additional insureds were covered for any completed operations. However, ISO revised the form in 1993. ISO had never intended to extend this coverage, so the form was changed to offer coverage only for the named insured's ongoing projects. At the same time, Form CG 20 37 was introduced. It provided liability coverage for additional insureds helping with the named insured's operations. However, operations were only covered if they were away from the premises rented or owned by the named insured.
To understand how this works, consider an example scenario. Company A is subcontracted to do electrical work, and Company B is subcontracted to do plumbing work for a new project. Contractors from both companies are working at the general contractor's work site on the same day. While a plumbing worker from Company B is installing parts in a bathroom, the electrical contractor from Company A accidentally drops a tool on the plumbing worker. The Company B employee is injured, so he sues the general contractor and Company A. Company A's CGL policy has the CG 20 10 endorsement with the general contractor listed as an additional insured. Since the injury took place during ongoing operations, the policy will cover the general contractor in the lawsuit filed by the injured worker.
However, if an electrical contractor performs work and leaves without intention of returning, it is the general contractor's responsibility to ensure quality work. If the general contractor accepted it and a fire started because of faulty wiring after the job was done, the building owner could sue the general contractor. Since the electrical contractor's work was finished and approved, the CG 20 10 endorsement would not apply. In order for the general contractor to be covered, the policy would have to include the CG 30 37 endorsement. No losses would be covered by either endorsement if the general contractor was at fault. To qualify for coverage, an incident must be at least partially another party's fault.
Since construction is risky business, it is important for all contractors to discuss their insurance questions with an agent. Contractors must fully understand their contractual obligations and what coverage is available to meet their needs. Our agents are able to provide information about policy terms, costs and additional insured options. It is crucial to have ample coverage before taking on a project where losses are likely to be incurred.