June 15, 2009
By Robert Kennaley and Michelle Kunnel
McLauchlin & Associates

Robert KennaleyContractors will often find that their clients (property owners) wish to be added as an additional insured under the contractor’s liability insurance policy, for protection in the event that a claim arises in relation to the contractor’s duties.  When clients are added to the contractor’s policy, they are named as an additional insured. As will be discussed below, they have the right to claim coverage from the contractor’s policy in certain circumstances.  

Contractor liability insurance can generally be divided into two type of policies, the first being errors and omissions insurance (E & O), which generally covers errors in the design and (where applicable) inspection and supervision of the contractor’s work. The second type of insurance is comprehensive general liability (CGL) insurance. This type of policy generally responds to claims by third parties who allege either personal injury or property damage from an accidental occurrence.  

Generally, the CGL policy will not provide the additional insured owner with the full benefits and rights provided to the named insured contractor. Being named as an additional insured also provides comfort to the owner in regards to the existence of the contractor’s liability insurance, as the contractor’s policy cannot be changed or cancelled without notice to the additional insured. An additional insured should be distinguished from an ‘additional named insured,’ which in most cases refers to an affiliate of the contractor who enjoys the same rights and benefits as the insured contractor.   

When a claim arises, which falls within the scope of the contract and thus under the policy, the insurer is generally required to provide two types of coverage, the first being the duty to defend the claim and the second being a duty to indemnify. This entails the duty of the insurer to pay any amounts legally obliged to pay in relation to the claim.  The duty of an insurer to defend is broader than the duty to indemnify. In other words, if your insurer is required to indemnify you, they are also required to defend you. However, if your insurer is required to defend you, it does not necessarily mean they are also required to indemnify you. The duty to indemnify is generally identified at the conclusion of the legal action, while the duty should be determined once a claim is made.

Clearly define scope of work

Although the coverage provided to the additional insured is dependant on the actual terms of the policy, the policy will generally limit the additional insured’s coverage to claims relating to the contract between the contractor and the additional insured and to the operations performed by the contractor. Thus, if  a claim against the owner/additional insured alleges failures which can be attributed to the failures of the contractor under the contract, such a claim would generally fall within coverage and trigger a duty by the insurance company to defend the owner. However, such a policy would generally not protect the owner’s own negligence in regards to an accident which occurred due to circumstances that fell outside of the contractor’s scope of work. It is important that the contract contain clearly-defined terms as to the contractor’s scope of work, in order to reduce ambiguity as to whether the client is covered in the event that a claim is made.

Issues can arise when a claim contains several allegations against an owner, some of which fall within the contractor’s scope of work and some of which relate to the owner’s own negligence. In the recent Ontario case RioCan Real Estate Investment Trust v. Lombard General Insurance Co., (2008) 91 O.R. (3d), in the context of a winter maintenance services contract, the Superior Court of Justice held that when a claim against a property owner contains allegations that fall both within and outside the policy, the additional insured need only demonstrate a slight possibility that the claim could fall within the policy, to trigger the insurer’s duty to defend the entire claim. This duty to defend can only be avoided if the insurer can show that the claim falls entirely outside of the coverage due, for example, to a specific exclusion within the policy.

Conflicts can arise for the insurer when it has a duty to defend the contractor as well as the additional insured owner, as part of the contractor’s defence may involve allegations against the owner. In this case, arrangements are sometimes made for the additional insured to obtain independent counsel, for whom the insurer must often pay.

Ultimately, when a contractor agrees to have a client named as an additional insured, it is advisable that the contract be drafted with well-defined terms outlining the scope of work, as well as well-defined terms outlining the extent to which the policy will respond to claims against the additional insured. This will better ensure that should a claim arise, all affected parties will have a clearer understanding as to the extent to which the additional insured is covered.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America.  He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.