A common misconception among condominium boards and managers is that, when a contractor furnishes a Certificate of Insurance (“COI”) which lists the association as being an Additional Insured, that COI is all that is needed for the association to obtain protection under the contractor’s policy. In most instances this belief is incorrect and creates a false sense of security for boards and their managers. Potentially disastrous financial and liability exposures also exist where an association assumed a loss would be covered by a contractor’s policy, but the policy was never formally modified to add the association as Additional Insured.
...Once this contractual obligation is in place, however, many associations simply ask for a COI to confirm the association has been listed. That COI, however, is often not worth the paper it is printed on unless the addition as Additional Insured is done through a written endorsement to the policy itself.
Being named Additional Insured on someone else’s policy confers certain rights and protections you otherwise would not be entitled to. Simply put, when you become an Additional Insured on another’s policy you enjoy the same insurance protections as the original policy holder. In the context of hiring someone to perform work and/or provides services on your property, in the event a loss occurs (e.g. someone is injured or property is damaged as a result of the work or services provided), you may file a claim on that contractor or vendor’s policy through your status as Additional Insured.
The typical situation where a condominium association finds itself in need of being added as Additional Insured is when a contractor is hired to perform repairs or other work on common areas. In that circumstance, the association enters into a written contract with the contractor and the work proceeds. In all cases, that contract should at a minimum require the contractor to carry and maintain, throughout the life of the project, adequate commercial general liability, property damage, automobile, and minimum statutory workers compensation insurance. A properly negotiated contract should require that the contractor add the association as Additional Insured on its policies. Once this contractual obligation is in place, however, many associations simply ask for a COI to confirm the association has been listed. That COI, however, is often not worth the paper it is printed on unless the addition as Additional Insured is done through a written endorsement to the policy itself.
At its basic level, a COI is a document which evidences that someone else has insurance, and not necessarily confirmation that another party, such as a condominium association, has been formally added to the contractor’s policy. COI’s do not generally confer coverage, rather they are often used as tools of the insurance industry to evidence the existence of coverage.
In order to guarantee the association has been conferred status as Additional Insured, a written endorsement to the policy is needed to formally modify the coverages provided under the insurance policy. It is critical for the association to also review the contractor’s policy to confirm that the work it intends to perform is covered by the policy in the first instance. Many contractor’s policies have provisions which state that it may only add additional insureds through formal written endorsements to the policy. Other policies may have exclusions for condominiums, multi-family, etc. which can create complications for an association attempting to implicate coverage, even if it was properly added to the policy as Additional Insured.
Most jurisdictions have held that persons claiming to be Additional Insureds have an affirmative obligation to review the actual policy and not rely solely on the COI. In practice, this is rarely done. Often times the insurance carriers never see the COI’s issued by agents and claim to have had no knowledge that the policy they have issued was purportedly altered to add an additional insured. Courts have generally sided with insurers when the only evidence of Additional Insured status is through a COI.
Practical Takeaways For Associations and Property Mangers
- The two primary insurance-related objectives for condominium associations when hiring a contractor or vendor are to (1) make sure the association is formally added as an Additional Insured and is afforded the protections of the policy itself; and (2) that the insurer is required to notify the association of cancellation of the policy for nonpayment, nonrenewal, and/or expiration. Otherwise the association may have no idea the contractor is performing work on the property with lapsed insurance coverages. This is accomplished through a written Notice of Cancellation Endorsement.
- It is good practice for associations to have their counsel draft, or at a minimum review, all vendor and service contracts, and a must when an association is preparing for any significant repairs and/or renovations to common area elements. When negotiating the contract, and certainly before any work commences on the property, associations and property managers should keep the following requirements in mind:
- Have the association added as an Additional Insured to all contractors’ policies through a written endorsement to the policy itself;
- Association should be added to the policy on a primary and noncontributory basis;
- Association should require a Notice of Cancellation Endorsement. This endorsement obligates the insurer to notify the association of a cancellation or nonrenewal of the contractor’s insurance coverages;
- Association should include indemnification language in the contract which requires the contractor to defend and indemnify the association in the event the association is sued and the contractor’s insurer denies coverage; and
- Before the contractor commences any work on the property, including any pre-construction mobilization efforts, the association should obtain proof of both the Additional Insured and Notice of Cancellation Endorsements;
Banks Who Lend to Condominium Associations Also Require Certain Insurance Protections.
Banks and lenders making loans to condominium associations should require similar protections from both the association’s master insurance policy as well as the insurance policies for any contractor performing work for an association with an active line of credit or loan repayment.
While the bank can ask that it be added as Additional Insured in these circumstances, the most important consideration for anyone lending to condominium associations is to obtain a “Loss Payee with Lender Loss Payable Provision Endorsement.” The Loss Payable Provision endorsement is important because it obligates the insurer to make payment to the lender for a covered loss, regardless of any wrongful act or noncompliance on behalf of the insured which may nullify coverage for the insured. The Loss Payable Provision endorsement will also entitle the lender to notice from the insurer in the event of cancellation or nonrenewal by the carrier. This endorsement creates a contractual obligation between the insurer and the lender which is not dependent on whether the borrower is entitled to the coverage afforded by the policy. Lenders who loan to condominium associations are secured parties, not mortgagees, so a typical mortgagee endorsement will likely not adequately protect the lender in these circumstances.