A key principle in sound risk management is to transfer risk to the party in the best position to prevent or control exposure to that risk. Often, however, design firms are unaware about how to transfer exposure through contractual indemnification provisions or additional insured status. Despite standard contract language that does both, design firms and their legal and insurance advisors sometimes overlook these specific protections.
Being named as an additional insured on your client’s commercial general liability (CGL) policy and having the client require you to be endorsed as an additional insured on the contractor’s CGL policy can effectively transfer the risk from claims that arise out of acts outside the scope of your professional services. For instance, the standard AIA owner-contractor agreement (B101-2017) not only requires the contractor to indemnify both the client and the client’s design team but also requires the contractor to provide additional insured coverage for the design team on the contractor’s CGL policy.
Why additional insured status matters
The contractual indemnity obligation is vital in covering the costs, losses, and damages to the design firm resulting from the contractor’s negligent performance. The language in AIA document A201-2017, §3.18.1, states:
To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder…
While this protects the design firms from costs, the inclusion of the additional insured status provides an up-front defense of the design firm.
What design firms should do
The inclusion of additional insureds on CGL policies is a standard practice; however, the coverage is often extended to the additional insured through a “blanket additional insured endorsement.” While that provides a benefit to the client, it does not protect the design firm from having to defend itself against injuries or damages caused by the contractor. A blanket endorsement only expands the CGL coverage to those under contract to the policyholder.
In the insurance and bonds exhibit to the AIA’s A101 owner-contractor agreement, the contractor is required to name the architect as an additional insured on its CGL policy. This is accomplished through endorsement CG 20 32 07 04, which is, “Additional Insured – Engineers, Architects or Surveyors Not Engaged by the Named Insured” (“endorsement”). The endorsement amends the CGL policy to include as an additional insured any professionals indicated on the form, but only with respect to liability for “bodily injury, property damage, or personal and advertising injury” caused, in whole or in part, by the contractor’s “acts or omissions” or the “acts or omissions of those acting on the insured’s behalf” in the performance of the contractor’s “ongoing operations performed by the contractor or on the contractor’s behalf.”
Because no CGL policy provides coverage for the professional services provided by the additional insured design professional or the contractor, the additional insured coverage is limited to the acts or omissions of the contractor in its ongoing operations. Use of the endorsement provides specific coverage, but it is only issued if the professionals are contractually required to be added as additional insureds on the contractor’s CGL policy.
Indemnification provisions are often difficult to understand and problematic to apply. Additional insured status endorsed on the contractor’s CGL policy provides a clear level of insurance protection. Firms and their insurance and legal advisors must be vigilant, however, to obtain proof of coverage. Since a certificate of insurance is not actual proof of coverage, the firm should confirm that the endorsement used was the specific CG 20 32 07 04 form.