Additional Insureds: How Policy Language Can Create Dramatic Consequences

By John Novaria, Managing Director, Amplify

Underwriters routinely receive requests to add additional insureds to policies. But failure to add insureds correctly can open up insurers to potentially huge losses.

Companies typically need to add additional insureds to allow them to fulfill their obligations with their contractual partners. The requests are commonly associated with coverage for the marine and energy business, but construction and other industries often need to add insureds as well. Those requests can involve commercial general liability, excess and umbrella and other liability policies.

Maritime legal expert Harold “Hal” K. Watson recently conducted an interactive educational webinar on the proper addition of insureds for the American Institute of Marine Underwriters (AIMU). Watson, a partner at Chaffe McCall LLP in Houston, is a former president of the Maritime Law Association of the U.S. and an internationally renowned authority in marine and energy insurance.

Using detailed examples from actual cases — including the Deepwater Horizon disaster — Watson illustrated how policy language surrounding additional insureds can cause claims to go wrong. He offered the audience of underwriters, brokers and claims adjusters practical suggestions for writing policy language in specific ways to prevent problems.

Watson explained how arguably ambiguous policy language became a significant factor in Deepwater Horizon, the offshore drilling rig that in April 2010 blew out, resulting in an explosion that killed 11 crew members and caused billions of dollars in pollution and environmental damage in the Gulf of Mexico. Transocean owned the drilling rig, but it was under contract to BP. Watson noted that the contract between the two companies required Transocean to name BP as an additional insured for some purposes. But there was uncertainty whether or not the insurance policy incorporated the limitations of the drilling contract.

The U.S. Court of Appeals for the Fifth Circuit initially held that the insurance policy did not incorporate the limitations in the contract, but then certified the case to the Texas Supreme Court since Texas law applied. The Texas Supreme Court finally ruled that the insurance policy did incorporate the limitations, but if the Fifth Circuit’s original ruling had stood, BP would have been entitled to all of Transocean’s insurance coverage limits.

Watson explained how wording can be used to avoid situations that essentially give away an insured’s coverage. He also discussed other areas involving risks and exposures including:

  • The distinction and nuances between indemnity clauses and insurance policies.
  • The need for caution when providing broad coverage for additional insureds.
  • How additional insureds come into play in umbrella and excess liability policies, including specialized maritime policies.
  • The effect of anti-indemnity statutes pertaining to oil and gas wells in Texas and Louisiana

AIMU has seen growing interest in its educational offerings as it pivots from live to virtual events. According to AIMU President John Miklus, there were nearly 100 attendees at the “Additional Insureds” webinar and a similar number at another recent webinar on yacht insurance fundamentals.

AIMU’s primary focus is on education of its members and the insurance community at large and continues to deliver its programs using innovative methods. Click here for more information on upcoming classes.

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