Many contracts, especially in the construction industry, require the lower-tier party to provide additional insured coverage on its commercial general liability (CGL) policy for certain upper-tier parties. This additional insured coverage is generally provided by endorsement to the existing policy.

Typically, an additional insured endorsement: (a) amends the CGL policy to provide that specifically named third parties are additional insureds under the policy; and (b) sets forth the scope of coverage available to the additional insureds. The procedures for ensuring that such third parties will be treated as additional insureds are set forth in the policy and/or its additional insureds endorsements.

A recent Illinois Appellate Court case, however, points out the importance of complying strictly with those procedures.

In Cincinnati Insurance Company v. Gateway Construction Company, Inc., 865 N.E.2d 395 (2007), the First District held that even though the lower-tier sub-subcontractor orally promised to name all the upper-tier parties (the owner, the architect, the general contractor and the immediately superior subcontractor) as additional insureds, the subcontractor and the sub-subcontractor did not get around to reducing this promise to writing until five months after an accident occurred at the job site. The injuries were substantial and resulted in a settlement of $2.5 million. Needless to say, in addition to the original lawsuit for bodily injury, litigation ensued involving the owner, the architect and all the contractors, as well as four different insurance companies. Although the accident occurred in 1990, it was not until 2007 (11 years after the underlying case settled) that the court finally determined who owed what to whom.

The sub-subcontractor’s additional insured endorsement to the policy stated:

[T]he following are Additional Insureds under this policy: All corporations, partnership[s] and or/ [sic] affiliated individuals promised to be added as additional insured[s] under a written contract with the Named Insured.

The sub-subcontractor argued that the policy itself merely required an oral promise to name someone as an additional insured in a written contract at a later date (which is what happened in the Cincinnati Insurance Company case). The sub-subcontractor also argued that the policy language could be construed to mean that the insured must promise, in writing, to add the additional insured. In light of this alternative reading, the sub-subcontractor argued that the policy was ambiguous and must be construed in favor of coverage.

After the trial court disagreed with both interpretations, the appellate court affirmed that decision, holding that “the only reasonable interpretation of [the insurer’s] endorsement is that a promise in writing is required to grant an additional insured coverage under the policy. To hold otherwise would effectively nullify the import of the words ‘under a written contract’ in the endorsement.”

The facts undermined the named insured’s argument. As the court stated:

Here, there was no promise under a written agreement at the time of the accident, and no other documentation confirming additional insured coverage at the time of the accident. Even the original draft agreement between [the subcontractor] and the [sub-subcontractor], dated after the accident, did not provide for additional insured coverage, and the subsequent addendum adding that requirement was not executed until five months after the . . . employee was injured. A certificate of insurance was not issued until March 1990, two months after the accident. Under these circumstances, there is no coverage.

This was an avoidable outcome. A careful reading of the court’s opinion does not suggest any doubt that the oral promise had been made to name the upstream parties as additional insureds. Rather, the court’s concern was for public policy:

Additional, although not alleged here, [the sub-subcontractor’s] interpretation to allow the insured to reduce an oral agreement to writing after the loss has occurred could lead to collusion by the interested parties to create coverage by manufacturing an oral promise after the injury occurs. Thus, [the sub-subcontractor’s] interpretation of [the additional insured] endorsement could lead to a violation of public policy and would be contrary to the intent of the insuring agreement.

The lesson is clear: contracting parties need to reduce their agreements to writing and make sure they understand what their insurance policies require of them. A close working relationship that includes your attorney and your insurance broker is essential to minimize your risk and make certain you have the necessary coverage in place.