An agent insures a contractor who is being required to sign a contract containing the following wording: "General Liability and Auto Liability policies shall contain a provision that any breach by Contractor of any warranty, covenant, or representation in any of the policies shall not prejudice any claim by the additional insureds."
Q: I have inquired with two attorneys regarding this language, and neither have been able to help. Have you seen this language in a construction contract? What’s your opinion regarding this requirement?
Response 1: In general, the separation of insureds clause provides that the additional insured's coverage is separate from the named insured. But I’d be reluctant to say there is not "any warranty, covenant or representation" by the named insured that would affect the additional insured's coverage.
Response 2: I've seen it—they're effectively requesting coverage similar to what a mortgage clause provides. I've never seen a policy form that will expressly grant an additional insured more coverage than the named insured.
Response 3: No, I haven't seen it, and it would appear to make obtaining coverage impossible. It sounds more like what a lender demands and receives on a first-party property policy—the lender's loss payable.
Response 4: I have not seen this requirement, and I don’t believe it’s reasonable. It seeks to impose on the insurer the obligation to “safeguard” the policy for the additional insured, even if the policy is otherwise void through the acts of the named insured. If the contractor fails to secure the appropriate, agreed-upon insurance, the remedy against that insurer is usually a claim for breach of contract against the contractor—not a claim against the insurer to perform on a policy that is otherwise void and unenforceable.
Response 5: I’ve seen this requirement. It’s similar to some lenders’ mortgage forms, where the lender has the right to receive the loss payment—even if the insured fails to comply with certain terms of the policy or a loss results from the insured's wrongful acts.
In some instances, the separation of insureds clause (formerly known as “severability of interests”) may protect an additional insured when the named insured may not be protected. Insurers are typically unwilling to make that statement if they include warranties in the policy to protect the insurer when the insured breaches the warranties, allowing for denial or rescission of coverage in some instances.
Note that small accounts in the substandard markets are more likely to have warranty issues than large premium accounts where underwriters are more flexible.
Response 6: I know of a contractor that operates in many states and was performing work for a large national company. Their insurance requirements contained breach of warranty language, and the policy’s warranty clause was invoked following a six-figure loss. The contractor was required to pay all damages out of pocket, lost their bonding capacity and subsequently barred from working for the national company—which represented half their workload.
Response 7: I would ask for clarification of the intent. This requirement could be interpreted in several ways. Does it refer to the application submitted to the carrier? For instance, if the insured misrepresents something in the application and coverage is denied, such misrepresentation does not preclude protection for the additional insured, because information in the application is a representation. If this is the case, the separation of insureds wording might satisfy the requirement.
Alternatively, is the upper tier trying to protect against a coverage denial because the insured did not comply with the carrier’s underwriting guidelines? Some carriers may place restrictions on coverage if the insured fails to do something.
Consider a policy provision that states, “this policy shall not apply to operations performed by contractors unless the insured (1) has received a written agreement from all contractors holding the insured harmless from all liabilities incurred by the hired contractor and (2) has obtained certificates of insurance from every contractor indicating that the contractor will maintain similar coverage as provided by this policy." If the insured fails to meet these requirements, the carrier may deny any claim arising out of actions subject to this covenant or warranty.
Or do they mean something else? Before contracting, the lower tier needs to understand what the contract means. If the upper tier won’t or can’t clarify their intent, the contractor should ask them to remove the requirement. Valid contracts require all parties to understand the agreement.
Second, who must attest to this? It sounds like the insured is supposed to, but they have already asked you. If it’s your agency, put your errors & omissions carrier on notice.
Response 8: Obtain a copy of the contract and allow underwriting to weigh in with their opinion. I would also have the client's legal counsel prepare a letter outlining the issue presented as not insurable. You are not legal counsel and should not offer legal advice. It sounds like an attorney wrote this agreement without full comprehension of the long-term effects of the language.
Response 9: Under ISO's language, coverage for an additional insured is based on the named insured being partially at fault. If the named insured has no coverage, there is no coverage for the additional insured. Therefore, this language does not amend the additional insured endorsements.
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