In the course of business, companies enter into many different contracts. Typically, a company that desires to provide services for another company will need to sign a contract that requires protection for third-party claims that result from its work, acts or omissions. These contracts generally require two types of protection from the party that will perform the work or service: a promise to defend and indemnify against claims (contractual indemnification) and a promise to obtain insurance coverage (additional insured coverage). These protections are similar but have important distinctions. This article will explain the basic differences between these two types of contractual protections and the tenders that result from each.
The first major difference between a contractual indemnification tender and an additional insured tender is found by looking at the provisions in a contract or agreement that create each obligation. To illustrate this, take a scenario where Acme Company enters into a contract with Big Box Store to provide janitorial services. Among other provisions, the contract between Acme and Big Box is likely to contain both an indemnification section and an insurance section.
In the indemnification section, Acme promises to defend and indemnify Big Box against certain claims from third-parties: “Acme agrees to defend, indemnify and hold Big Box harmless from all claims arising out of bodily injury and/or property damage caused solely by Acme’s work.” This is commonly referred to as a contractual indemnification clause. Notably, this promise from Acme to Big Box does not involve insurance. By virtue of the agreement between them, Acme is in contractual privity with Big Box and has an obligation to defend and indemnify Big Box regardless of whether Acme obtains insurance coverage, or the loss is covered by insurance.
In the insurance section, Acme promises to obtain insurance policy(ies) in which Big Box is named as an ‘additional insured’: “Acme shall obtain commercial general liability insurance with limits of $1M per occurrence, and Big Box shall be included as an additional insured on a primary and non-contributory basis.” Unlike Acme’s contractual indemnification promise, this ‘additional insured’ promise from Acme does involve insurance. Acme must obtain an insurance policy that meets the contractual requirements.
To accommodate this ‘additional insured’ requirement, Acme should seek an insurance policy containing an Additional Insured Endorsement that either specifically names Big Box as an additional insured or applies on a blanket basis to any entity that Acme is required by contract to name as an additional insured. In this example, the Additional Insured Endorsement will modify the policy to add Big Box as an additional insured, but the coverage provided to Big Box will typically be limited to damages for which Big Box has liability because of something that Acme did or did not do. For example, the Additional Insured Endorsement might read: “The Policy is amended to include [Big Box] as an additional insured, but only with respect to liability for ‘bodily injury’ or ‘property damage’ caused, in whole or in part, by [Acme’s] acts or omissions in the performance of [Acme’s] ongoing operations for [Big Box].”
If Big Box is accepted as an additional insured on Acme’s policy, Big Box may have rights and duties with respect to the insurer similar to what the insurer would owe to Acme as its named insured, but limited to the coverage provided in the additional insured endorsement. However, in this scenario, the policy only covers Big Box’s liability for damages caused by Acme.
The second major difference between a contractual indemnification and an additional insured tender is how each is analyzed and responded to. To illustrate this, assume that a slip-and-fall accident occurred at Big Box’s property because Acme’s employees were emptying garbage cans and left a banana peel on the ground, resulting in an injury claim against Big Box. Big Box then sends a letter to Acme, its insurer, or both, that contains the following:
“A claimant was injured on our property and filed the enclosed lawsuit against us. We’ve determined that the injury was caused by Acme’s employees. Our subcontract with Acme contains an indemnification provision requiring Acme to indemnify us for any injury claims caused by Acme’s work. In addition, the subcontract’s insurance provision requires Acme to add us to its commercial general liability policy as an additional insured. Therefore, we tender the lawsuit to Acme and its insurance company for defense and indemnification as both a contractual indemnitee and as an additional insured.”
While Big Box simply wants a defense to the lawsuit and indemnification for any damages awarded for the claimant’s injury, this tender may elicit two separate analyses and responses.
Acme has the obligation to respond to the contractual indemnification tender, and does so based on its determination of whether the facts of the accident trigger the indemnification obligations contained in the contract, which require Acme to defend Big Box for injury claims caused solely by Acme’s work. In analyzing the tender, Acme may conduct an investigation that reveals facts not alleged in the lawsuit pleading. If Acme’s investigation reveals the accident was not caused ‘solely’ by Acme (for instance, if Big Box was also allegedly negligent in some manner that caused the claimant’s injury), then Acme may choose to deny the tender. However, Acme may determine that the accident was solely its fault, accept Big Box’s tender, and begin providing Big Box with a defense. Acme’s decision, either to accept or deny, can be communicated by Acme in a letter to Big Box.
If Acme accepts the contractual tender, then it may seek insurance coverage for the damages (loss and expense) that it incurs in defending and indemnifying Big Box. Normally, a Commercial General Liability policy would exclude coverage for liability assumed in a contract, but Acme’s policy likely contains an exception that makes the Contractual Liability exclusion inapplicable to liability assumed in an ‘insured contract.’ An ‘insured contract is sometimes defined as one pertaining to the insured’s business in which it assumes the tort liability of another to pay for injuries to a third-party. Of course, depending on the facts of the accident, other conditions and exclusions within the policy may apply.
Acme’s insurer may separately respond to the additional insured tender based on its determination of 1) whether the contract between Acme and Big Box make Big Box an additional insured under the policy and 2) whether the lawsuit contains allegations that would make Big Box liable for damages caused by Acme’s acts or omissions, such that it determines that additional insured coverage is available for Big Box. Unlike Acme, which can conduct an investigation that considers facts not alleged in the lawsuit pleading, in some jurisdictions, Acme’s insurer may be limited to the allegations in the pleading when determining if it owes Big Box a defense as an additional insured. This is known as the ‘four corners’ rule, referring to the facts alleged within the four corners of the complaint. Other jurisdictions may allow a more expansive analysis.
Depending on the jurisdiction, a simple letter responding to Big Box’s tender may not suffice. If the insurer determines that it should defend Big Box under a reservation of rights (in which it reserves the right to deny additional insured coverage if facts later reveal that Acme’s work did not cause Big Box’s liability, or if those facts trigger a policy exclusion or other relevant condition), or that it should deny Big Box’s tender outright, then the insurer generally will look to the rules of the applicable jurisdiction to guide its response to Big Box. For instance, a particular jurisdiction may specify a certain number of days in which the insurer must respond to the tender, or the insurer may determine that it needs to file a declaratory judgment action along with its denial or acceptance of the tender under reservation.
Understanding the differences between contractual indemnification and additional insured tenders is necessary to guide businesses and insurers in properly analyzing and responding. A contractual indemnification provision obligates the contracting party to defend and indemnify the tendering party based on the contract terms, regardless of the availability of insurance. Additional insured coverage may, in appropriate factual scenarios, obligate an insurer to provide coverage to a company that is not a party to the insurance policy, so long as the insured is required by contract to obtain additional insured coverage for that party (and does so) and the underlying facts or allegations trigger additional insured coverage. Despite these differences, both types of tenders may require guidance from qualified legal counsel on jurisdictional requirements for responding in order to preserve rights or defenses under the contract or insurance policy.