Does Your "Additional Insured" Endorsement Cover "Completed Operations?"
The owner or contractor who seeks an additional insured endorsement generally anticipates it will receive coverage for claims that arise during the project and for construction defect claims that arise after substantial completion. Not all endorsements provide both types of coverage. The ISO 20 10 11 85 endorsement form provides coverage for liability "arising out of" the insured's work. This endorsement provides broad coverage to the additional insured. It covers claims because of the additional insured's activities or the insured's activities.
Most importantly, this endorsement form provides "completed operations" coverage. Completed operations coverage is critical in most construction defect cases. It provides coverage for claims that arise after the work has been completed so long as the claim arises during the policy period.
A common misconception is that completed operations coverage provides coverage for completed work after the policy period and acts a "tail" to the policy period. This is incorrect. Completed operations coverage provides coverage after completion of the work but only during the policy period. If the damage occurs after that policy period, there still may be coverage under a later policy that also has completed operations coverage.
Largely because of exposure to completed operations coverage, the ISO 20 10 endorsement form was revised in October 1993. The ISO 20 10 10 93 endorsement form provides additional insured coverage "arising out of [the insured's] ongoing operations." The ISO 20 10 form was further revised in March 1997. The ISO 20 10 03 97 form continued the "arising out of [the insured's] ongoing operations." Despite the insurance industry's intent, the difference in the plain meaning between the 1985 and the 1993/1997 forms was less than clear. Accordingly, some courts have found the 1993/1997 language to be ambiguous.
In October 2001, the ISO released a new and significantly revised version of the 20 10 form. The ISO 20 10 10 01 endorsement form provides coverage for "ongoing operations" but now includes a lengthy exclusion for "bodily injury" or "property damages" that arise after (1) "All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed; or (2) That portion of "your work" out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project." This exclusion would seem to totally eliminate completed operations coverage from this additional insured endorsement. The 20 10 10 01 endorsement now essentially provides coverage only for claims that arise during the actual construction process.
In addition to the ISO forms, some insurance companies use their own additional insured forms. Although these forms may be modeled on ISO forms, they must be carefully scrutinized to determine the coverage they offer.
The ISO also has developed an endorsement that automatically provides additional insured status to any party when such status is required by contract. This form, ISO 20 33, first was issued in March 1997 and was revised in July 1998 and in October 2001. The 1997 and 1998 forms provide coverage for liability arising out of "ongoing operations." As noted above, the intent of this phase is to exclude "completed operations" coverage. The 2001 form more clearly excludes completed operations from additional insured coverage.
The ISO also offers form "20 09" for "additional insured" coverage. The 20 09 form also has been repeatedly revised in an attempt to exclude "completed operations" coverage. The 20 09 form has an additional disadvantage. This form excludes contractual liability coverage, which is essential when the additional insured assumes liability under an indemnity agreement that is commonly used in construction contracts.
Importance of Understanding Coverage
Insurance companies sometimes require that contractors and subcontractors impose the same additional insured and indemnity requirements downstream on their subcontractors as they are required to provide upstream to owners or contractors. Failure to do so can provide a basis for the insurer to deny coverage under the contractor's or subcontractor's own policy.
Completed operations coverage in an insured's own policy and in additional insured endorsements is an essential protection against construction defect claims. It is critical that each insured be aware of what coverage is available under its own policy. Further, owners and contractors should ensure that additional insured coverage obtained from others includes completed operations coverage. Downstream contracts should specify that additional insured coverage must be provided on an ISO 20 10 11 85 or equivalent endorsement. This form of coverage still is available although it may require payment of an additional premium. Further, the ISO has developed the 20 37 10 01 endorsement, which adds completed operations coverage to the 20 10 10 01 additional insured endorsement. The endorsements provided by contractors and subcontractors then should be carefully reviewed to ensure that the required completed operations coverage is provided.