Pitfalls and Perils with Additional Insured Endorsements (INS004) Speakers: Al Haverkamp, CFO, Lucas & Haverkamp Law Firm Armond Sarkis, Corporate Director of Risk Management, Welk Resorts
I. INSURANCE CONCEPTS A. First-Party Policies Property Builders Risk Life Insurance B. Example of First-Party Policy Claim Insured Insurer C. Third-Party Policy CGL D. Example of Third-Party Policy Claim Injured party [lawsuit] Insured Insurer E. Duty to Defend and Duty to Indemnify duty to defend is immediate trigger of duty to defend TAKEAWAY: big difference between duty to defend and duty to indemnify
I. INSURANCE CONCEPTS A. First-Party Policies Property Builders Risk Life Insurance B. Example of First-Party Policy Claim Insured Insurer C. Third-Party Policy CGL D. Example of Third-Party Policy Claim Injured party [lawsuit] Insured Insurer E. Duty to Defend and Duty to Indemnify duty to defend is immediate trigger of duty to defend TAKEAWAY: big difference between duty to defend and duty to indemnify
F. Consequences of Breach of Duty to Defend Abandonment of Insured Insurer waives right to control defense and settlement negotiations Insurer risks by denying defense (a) Bound by Judgment (b) Lid off Policy (c) Uncontested Judgment against insured/covenant not to execute (d) Settlement Presumption (e) Bad Faith & Punitive Damage Exposure
G. Leverage of Defense Obligation What is a real Reservation of Rights letter? I just received a real Reservation of Rights letter, should I be happy? Leverage = Insurer s options are all bad (a) Withdraw from defense (b) Pay for trial/refuse to pay Judgment (c) Pay for trial, Pay Judgment, Sue Insured (d) Pay for defense, Pay Settlement, Sue Insured
II. THE POWER OF ADDITIONAL INSURED ENDORSEMENTS Case Example: Shopping Mall Owner leases space to Supermarket. Supermarket contracts with independent contractor to install shopping cart retention system in mall parking lot. Owner permits Supermarket to proceed with the work provided Supermarket names Owner as an additional insured on Supermarket s policy and signs indemnity agreement. Employee of independent contractor is seriously injured while installing the cart containment system when a bread company delivery truck runs him over. The injured employee sues bread company, Supermarket and Mall Owner. Mall Owner was named as an additional insured on Supermarket s policy. DIAGRAM MALL OWNER INDEMNITY AGREEMENT SUPERMARKET INSURANCE CONTRACT AIG
II. THE POWER OF ADDITIONAL INSURED ENDORSEMENTS Case Example: Shopping Mall Owner leases space to Supermarket. Supermarket contracts with independent contractor to install shopping cart retention system in mall parking lot. Owner permits Supermarket to proceed with the work provided Supermarket names Owner as an additional insured on Supermarket s policy and signs indemnity agreement. Employee of independent contractor is seriously injured while installing the cart containment system when a bread company delivery truck runs him over. The injured employee sues bread company, Supermarket and Mall Owner. Mall Owner was named as an additional insured on Supermarket s policy. DIAGRAM MALL OWNER INDEMNITY AGREEMENT SUPERMARKET INSURANCE CONTRACT AIG
Does Mall Owner have direct contractual relationship with AIG? Does it matter that Mall Owner never paid any premium to AIG? Mall Owner tenders defense to AIG, does AIG have a duty to defend Mall Owner? Are AIG s obligations to Mall Owner dependent on the indemnity agreement between Supermarket and Mall Owner? What if Supermarket is a suspended or dissolved corporation or otherwise defunct? What if Supermarket is in bankruptcy?
III. ADDITIONAL INSURED PITFALLS Certificates vs. Endorsements Self-Insured Retentions Mismatch of Primary & Excess Policies Completed Operations Coverage Hidden Policy Exclusions Policy Limits
III. ADDITIONAL INSURED PITFALLS Certificates vs. Endorsements Self-Insured Retentions Mismatch of Primary & Excess Policies Completed Operations Coverage Hidden Policy Exclusions Policy Limits
Primary Policy: $2 million burning limits Excess Policy: $25 million has a $2 million indemnity only SIR.
DOWNTOWN SAN DIEGO HIGHRISE CONDO Lawsuit # 1: Family Sues for exposure to sewer gas. Primary Policy provides defense. $1 million spent to settle case. $300,000 spent on defense. Lawsuit # 2: HOA Construction Defect Action. Primary Policy provides defense. Primary spends $700,000 on defense and exhausts. Case still pending. Response of Excess: $2 million indemnity only SIR not satisfied. Houston, We Have a Problem!
III. ADDITIONAL INSURED PITFALLS Certificates vs. Endorsements Self-Insured Retentions Mismatch of Primary & Excess Policies Completed Operations Coverage Hidden Policy Exclusions Policy Limits
III. ADDITIONAL INSURED PITFALLS Certificates vs. Endorsements Self-Insured Retentions Mismatch of Primary & Excess Policies Completed Operations Coverage Hidden Policy Exclusions Policy Limits
LEARNING OBJECTIVES Learning Objective 1 Get Certificates & Endorsements & read them Learning Objective 2 Get Declaration page & read it Learning Objective 3 Require Self-Insured Retentions be disclosed If too high, require a financial guarantee of SIR amount Learning Objective 4 Identify the policy form If not satisfactory, require amendment/supplement/endorsement to policy Learning Objective 5 Ask whether there are exclusions which specifically apply to the additional insureds activity Learning Objective 6 Complex Insurance Program / High Risk Activity Get primary & excess policies & read them.