Building responsibility: contractors can avoid potential pitfalls by using additional insured endorsements as a means of risk transfer.

Construction projects typically have multiple businesses working together in a dynamic environment. Owner, architect, engineer, general contractors and multiple tiers of subcontractors usually delineate and transfer responsibilities, duties and rights via contracts. The two primary means of transferring these in construction contracts are indemnification clauses and requirements for additional insured status.

The breadth of enforceable indemnification clauses in construction contracts varies greatly by state. Each contractor should obtain local legal counsel for review of indemnity agreements that the contractor originates, and those it is asked to sign. This article focuses on the additional insured risk-transfer mechanism and offers a few suggestions to help insurance agents and insureds navigate an often intricate "maze" of coverage approaches and avoid potential pitfalls.

Beginning with the standard coverage, consider that 20 years ago, when Insurance Services Office introduced additional insured endorsement CG2010 1185, coverage was provided for entities scheduled on the endorsement in connection with a specific project. Over time, as courts broadly interpreted coverage provided by this endorsement, ISO amended the additional insured wording in an attempt to provide the coverage for only the additional insureds' vicarious or contributory negligence. Noting the trend, in its circular announcing the current ISO additional insured endorsement last year (CG2010 0704), ISO stated: "Because the phrase 'arising out of' has been interpreted broadly by some courts, we are revising several of the additional insured endorsements to add specific language to provide an additional insured with coverage for their vicarious or contributory negligence only. A major effect of that wording will be to prevent any alleged coverage for the additional insured's sole negligence."

Because of recent changes in the ISO endorsements and some insurer's proprietary forms as well, agents can assist their clients who may be required to sign construction contracts obligating them to provide "additional insured" coverage. Conversely, when your insured subs work to other contractors, each sub is expected to not only complete its work competently but also assume responsibility for all claims arising out of the sub's work. Your client should require that it be named as an additional insured on each sub's liability policies.

Other key points to stress include:

* Insured contractor uses written contract reviewed by legal counsel. Be sure the sub has agreed to provide additional insured coverage to your contractor in a written contract.

* Insured contractor's insurance procurement clause meets certain requirements. The sub's liability policies should include your client, the general contractor and the project's owner as additional insureds along with any other entities for which your insured is required to provide additional insured status, such as an architect, engineer or a municipality. Moreover, verify that the sub's additional insured coverage is primary and not contributing with your client contractor's own insurance, and require the sub to maintain completed operations coverage for any additional insureds for the length of the state's statute of repose, if the project is residential or includes EIFS, prohibit the use of a residential or EIFS exclusion in the sub's general liability and umbrella policies.

* Lower tier contractor receives assistance in understanding insurance requirements in the proposed contract or bid specifications. Compare coverage in the higher tier contractor's insurance procurement clause to coverage provided in your insured's additional insured endorsement. You and your insured would not want to agree to provide the higher tier contractor with broader protection via additional insured endorsement than your client must provide via the contractual indemnification clause. Help your insured evaluate project income in relation to the costs incurred to provide insurance to all the various additional insureds.

A few common pitfalls can be avoided by making sure that construction subcontracts are signed in order to trigger blanket additional insured coverage in the event of a claim. In addition, don't assume a sub's general liability coverage includes the additional insured endorsement simply because the subcontractor is on the job. In other instances, the endorsement on the sub's policy may not provide coverage for the additional insureds for products-completed operations hazard, or is proprietary and applies only on an excess basis. This means the contractor's general liability coverage may share with additional insured coverage on sub's policy.

Construction is a complex business--work is often dangerous and the interrelationships on job sites complicated with relationships shared and delegated among many constituents. As an agent, your insurance expertise and risk-management skills are needed each time your construction clients enter into contracts.

Contributor Todd Bateson is president of St. Paul Travelers Construction Insurance. He can be reached at [e-mail].