Commercial contracts allocate risk
The purposes of commercial contracts can include setting responsibilities among the parties and detailing payment terms. Invariably, commercial contracts are also used to allocate risk. What happens if something goes wrong? What if a third party (a stranger to the contract) gets hurt or sustains property damage during the activity the contract is concerned with? Who is responsible? Whose insurer must respond to claims? There are contract hacks for that.
Indemnity provisions
The most common way to manage risk contractually is through indemnity provisions. These provide for one party to insulate the other from damages, losses, and costs arising from a specified event. Usually, the specified event includes third party claims arising from the insulator’s performance of the contract. Indemnity provisions can be reciprocal. There are endless variations. There is complexity to the operation and interpretation of indemnity provisions beyond the scope of this discussion. In short: if you’re negotiating a commercial contract and there’s no indemnity provision in your favour, maybe get one; if there’s an indemnity provision in a contract to which you’re a party, understand it and what you’ve agreed to.
Insurance adds a shield
Indemnity provisions are fine and good to provide principled paper protection. But, for greater confidence you must know whether your contracting partner has the means to protect you. You want explicit contractual assurance of insurance. Contracts, especially service contracts commonly require one or more of the parties to have various insurance policies. The most frequently required insurance is commercial general liability (“CGL”), usually in an amount of $2,000,000 to $5,000,000. You’ll have added confidence knowing that your contract partner is insured for the types of losses contemplated. But, to take peace of mind up a notch, get your name (or your company’s name) on their policy, as an Additional Insured.
Additional insured status has benefits
Additional Insured provisions are common in commercial contracts. They are usually found in the same section of the contract as the indemnity and insurance provisions. They require the obligated party—the Named Insured—to ensure that its contract counterpart is named as an Additional Insured under the obligated party’s own policy.
This is done by way of an endorsement, like an adding fries to a burger order. The Named Insured must apply to its insurer, usually through their broker, to have the other party so designated. This status enables the Additional Insured to be protected under the other party’s policy. Generally, it allows the Additional Insured to file a claim etc., if they are sued in relation to the Named Insured’s performance of the contract.
But, it is not an open door coverage jamboree for the Additional Insured. Insurers are not in the habit of randomly picking up risk to underwrite. Rather, the wording of the Additional Insured endorsement usually limits coverage to the acts or omissions of the Named Insured while in the performance of their ongoing operations or in connection with the subject project or service.
In most cases, contracts that call for one party to be added as an Additional Insured to the other party’s policy do so because the Additional Insured is retaining the Named Insured to do work which has the potential to create liability for the Additional Insured.
Don’t ignore additional insured provisions in contracts
Additional Insured provisions in contracts frequently get ignored. But whether you’re the ‘adder’ or the ‘addee’ to an insurance policy under your commercial contact with another party, know your rights and obligations. Say your business contracted with a janitorial company, Sally Sweep, to maintain the floors at your store. The contract requires Sally Sweep to name your business as an Additional Insured on its policy. One day, Sally Sweep decides to try out a new floor polish made from banana peels.
A customer slips and falls in your store, gets injured, and claims against your business. If your business is an Additional Insured on Sally Sweep’s policy, it would (theoretically) be entitled to a legal defence and indemnity for any damages awarded against your business. There can be many ‘wrinkles’ to getting insurance coverage, whether one is a Named Insured or Additional Insured. But, in principle Additional Insureds get the benefit of their status (subject to the nature of claim and the facts of a case).
But, what if Sally Sweep failed to add your business as an Additional Insured? Would Sally Sweep’s insurer still have to provide your business with a defence and indemnity since that’s what the contract read? No. In such circumstances, your business would be a stranger to the Sally Sweep’s policy.
There would be no privity of contract and no obligation on that insurer to defend or indemnify your business (Brookstreet v. Economical, 2018 ONSC 80 (CanLII)). Instead, your business would need to bring an application or action in court against Sally Sweep for damages arising from Sally Sweep’s breach of contract for failing to have your business named as an Additional Insured as the contract required.
Your business might be awarded damages against Sally Sweep in line with what it would have cost Sally Sweep’s insurer to defend your business. In the meantime, your business would need to hire its own lawyer to defend the third party’s personal injury claim.
Takeaway
Understanding Additional Insured provisions in commercial contracts is important. They create substantive entitlements or possibly costly obligations depending on a party’s perspective.
If you’re contractually obliged to name the other party as an Additional Insured, take that obligation seriously.
And, if another party is required to name you or your business as and Additional Insured, request a Certificate of Insurance upon signing a contract, and then annually thereafter. This will reflect whether the other party met their obligations.
About the author:
Kris Dixon is a litigator at Soloway Wright LLP with a focus on Construction Litigation, Commercial Litigation and Insurance Law.
He regularly represents contractors and subcontractors in navigating all manner of complex construction disputes.
DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.
