Additional Insureds: The Importance of Indemnity and Insurance Provisions in Contracts and Policy Language
Indemnification and insurance provisions are common features of many types of commercial contracts, including construction, engineering, oil and gas, and product distribution contracts. These contractual provisions reflect an effort by parties to contractually allocate risk, and to provide for insurance as a backstop for the contractual allocation of risk.
This contractual allocation of risk and insurance backstop involve three separate components: (1) an indemnification provision; (2) an insurance provision; and (3) an additional insured provision.
Much has been written about the different types of indemnification provisions — how they have been interpreted and restrictions on indemnifying a party for its sole negligence. Thus, this article will focus on contractual insurance provisions and additional insured provisions that may be used as a backstop.
Scope of Additional Insured Coverage: Contractual Provisions and Language of Insurance Policy
Contractual insurance provisions and additional insured language in insurance policies are often viewed as intertwined with indemnification provisions in a contract. In other words, parties may intend that the additional insured’s right to coverage apply to the other party’s indemnification obligations, but not to cover any liability of the additional insured that is beyond the scope of any contractual indemnification provision.
For example, many jurisdictions prohibit indemnification for the indemnitee’s sole negligence, and the parties may assume that the additional insured’s rights only extend to liability arising out of the indemnitor’s negligence and not to the indemnitee’s negligence or even sole negligence To the extent the parties intend for the indemnitee’s rights as an additional insured to be limited to the indemnitor’s obligation to indemnify, it is important for the parties to pay careful attention to both the insurance provisions of the contract as well as any additional insured provisions or endorsements.
While the parties may assume that both merely backstop the indemnification provision, cases in several different jurisdictions — including recent cases in Texas involving the petroleum industry — demonstrate the potential that insurance provisions in a contract and additional insured provisions in a policy, may be interpreted to provide the additional insured with coverage for all of its liability, including liability beyond any contractual indemnification obligation, and extending to the sole negligence of the indemnitee.
Initially, if the parties’ intention is that the additional insured is entitled to coverage for only the indemnitor’s indemnification obligation, this intention should be explicitly stated in the contract’s insurance provision so that the court does not extend the additional insured’s right to coverage beyond its right to indemnification under the contract, including the sole negligence of the indemnitee.
For example, in Shell Oil Co. v. Nat. Union Fire Ins. Co. of Pittsburgh, PA, 44 Cal.App.4th 1633 ( 2nd Dist. 1966), the insured entered into a contract to perform engineering work on a refinery owned by Shell, and agreed in the contract to indemnify Shell excepting liability resulting from Shell’s sole negligence.
Although the insurance provision obligated the contractor to obtain “Comprehensive General Liability Insurance, including product/completed operations coverage and contractual liability coverage for [contractor's] obligations hereunder to defend and/or indemnify Shell”, the contract also provided, “To the fullest extent permitted by law, all insurance policies maintained by [contractor] … shall include Shell and any parties in joint operation with Shell as additional insureds… ”
As a result, the court held that Shell was entitled to coverage as an additional insured for its sole negligence, stating, “There is no textual or practical reason to perceive the broad, plain language of these insurance provisions of the contract as requiring coverage only for [contractor’s] indemnity obligations.”
A similar case is Hartford Acc. and Ind. Co. v. U.S. Natural Resources, Inc., 897 F.Supp. 466 (D. Or. 1995), in which the insured entered into a contract with the additional insured for installation of certain machinery being built for the additional insured. In the contract, the insured agreed to indemnify the additional insured, excluding liability arising out of the additional insured’s sole negligence, and to procure certain insurance.
The insurance obtained by the additional insured contained a broad form comprehensive general liability endorsement that included as an “insured” any organization to whom the “name insured” was obligated to provide insurance pursuant to a written contract. After an employee of the insured was injured, the insured asserted that the additional insured was not entitled to coverage inasmuch as the indemnification provision did not entitle the additional insured to indemnification for its own negligence.
The court, however, rejected any reference to the indemnity provision in limiting the additional insured’s right to coverage, holding that “Nothing in the language of the insurance clause or any other provision of the … contract ties the insurance requirements to the indemnity clause….” Therefore, if the parties to a contract desire to limit the additional insured’s coverage to an obligation to indemnify, the insurance provision should be linked to the indemnity provision, and specifically state that the additional insured’s rights to coverage is limited to any obligation of the other party to indemnify it under the contract.
Additional Insured Provisions/Endorsements May Override Contractual Insurance Limitations
Even if the insurance provision is explicitly limited to any obligation to indemnify, the additional insured may be held to have unlimited rights to coverage beyond any indemnity obligation if the additional insured provision in the policy or endorsement does not limit the additional insured’s rights to coverage.
An example of this can be observed in the recent Texas case: In Re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013). In Deepwater Horizon, the insured, the owner of an off-shore drilling unit, entered into a drilling contract with an oil company in which the insured agreed to maintain certain insurance and to name the oil company “as additional insureds in each of [the insured’s] policies, except Workers' Compensation for liabilities assumed by [the insured] under the terms of this Contract.”
After an explosion aboard the drilling unit, the oil company sought coverage as an additional insured under the insured’s liability insurance policies, and the insurers filed a declaratory judgment action seeking a declaration that they had no obligation to the oil company. Although the policy limited the insured’s obligation to name the oil company as an additional insured to “liabilities assumed by [the insured],” the oil company argued that “the insurance policies alone — and not the indemnities detailed in the Drilling Contract — govern the scope of [the oil company’s] coverage rights as an ‘additional insured.’”
While the lower court held that the contract “required [the insured] to name [the oil company] as an insured only for liabilities [the insured] explicitly assumed under the contract,” the Fifth Circuit Court of Appeals reversed, finding that “[e]ven if the [insurance] clause is construed as the insurers desire, that is, even if it is understood to mean that [the oil company] is an additional insured under [the insured’s] policies only for liabilities [the insured] specifically assumed in the Drilling Contract, … [the] clause was insufficient to limit coverage.”
In holding that the oil company was an additional insured without limitation to any indemnity obligation of the insured, the Fifth Circuit held that “we are bound to look only to the policy itself to determine whether BP is covered in the current case.” See also Evanston Ins. Co. v. Atofina Petrochemicals, Inc., 256 S.W. 3d 660 (Tx. 2008). As a result, if the intent of the parties is to limit the additional insured’s rights to coverage for the indemnity obligations in the contract, the insured should ensure that the policy limits the additional insured’s rights, rather than leaving the additional insured’s rights undefined and giving it the right — at least under Texas law — to recover for liability outside the insured’s indemnity obligation, including, potentially, the additional insured’s sole negligence.
Indemnification and insurance provisions have been, and will continue to be, important tools in managing risks in contracts involving services and products. Where one party agrees to indemnify the other, the parties may only intend that the indemnitee’s right to insurance coverage extend only to the other party’s obligation to indemnify it under the contract. If that is the parties’ intention, it is important that the insured consult legal counsel and determine to what extent the insurance provision and the insurance policy need to specify that the additional insured’s rights extend no further than any indemnify obligation in the contract. It is important to note that such limitations in the contract should only serve to limit the additional insured’s rights and not any rights the insured may have under the policy for its own liability.