Amending Insured Contract Definitions

What Constitutes an Insured Contract?

Every insurance policy subject to ISO definitions uses the term "insured contract." The term itself means something different with respect to each type of policy. To determine whether a specific contractual agreement would qualify as a covered "insured contract," you have to identify the type of policy at issue. Different types of policies cover different types of contracts. This section explains how to determine whether a specific agreement is an "insured contract" for coverage purposes. If the policy is a general liability policy, the definition of an "insured contract" can be a deceptively simple concept.
The fundamental definition of the term "insured contract" is as follows:
"[a]ny contract or agreement entered into by you where a party agrees to assume all or part of the named insured’s liability for ‘bodily injury’ or ‘property damage’ … 1. That arises out of the ‘ownership’ , ‘maintenance or use’ of premises you lease, rent or borrow …

• That indemnifies a municipality as required by ordinance;
• That is an "easement or license agreement" except in connection with construction or demolition within 50 feet of a railroad;
• Where you assume liability of another party … for ‘bodily injury,’ ‘property damage’ …
• With respect to elevator maintenance agreements."

This generally means that coverage extends to contracts in which a party agrees to indemnify the insured for a third-party claim.

Why Insured Contracts are Amended

There are several common reasons why an insured contract definition may need to be amended. One reason is a change in operations, such as when a business divests itself of a portion of its assets or changes the operation of its business from one that is not an insured contract to one that is an insured contract. In this situation the business may need to amend its insurance policies to insure its obligations under the new operation. Other circumstances that may lead to a needed amendment include a change in law or a change in the status of a co-contracting party. If a business decides that certain agreements should be deemed insured contracts, policy amendments will be necessary.

The Process of Amendments

A final haggled question may concern the amendment process. While the form policy contains no model for the amendment of the definition of insured contract, a common process involves the use of a report and signature verification system. Under this process, the insurer first augments the definition by executive action and gives the insured adequate time to object. If the insured fails to object, the amended definition is given effect, usually effective as of the date of the initial communication that informed the insured of the change.
If the insured does object, the insurer may simply revoke the amendment and revert to the current policy definition. If the insured wishes to press forward with its objection, a series of written exchanges may occur in which outside counsel for the parties are given an opportunity to present their advice and opinions about the merits of the amendment. This would typically lead to an in-person meeting among insurer and insured executives and counsel, where the merits of the amendment are debated and weighed. This last step, particularly in large insurance companies, may include actuaries and reserve specialists as well. At some point during this in-person meeting, the insurer will often ask the insured to provide a waiver endorsing any change. The focus of this is twofold: to protect the insurer from later criticism that it injected unfair pressure on the insured (e.g., by threatening cancellation), and to obtain the insured’s agreement that the change will be binding on third parties. Typically, the waiver will provide that the insured takes the amendment "in consideration of a slight reduction in premium," when in fact the reduction will be even larger.

Legal Considerations

Amending an insured contract definition will invariably have several legal implications. For example, if an insurer agrees to delete a contractual liability exclusion in light of a revised definition (or partial carve-out) of an insured contract and does so without any additional premiums for that change, the insurer must comply with all applicable state regulatory requirements related to a premium increase or fluxuation, which may limit the insurer’s ability to do such a thing.
An insured contract definition in a legal liability policy may cause issues for the policyholder if it is not consistent with the policy definition. For example, if the policy definition is narrower than the insured contract definition, the policyholder would not have coverage although the particular provision may have been covered under the insured contract definition. On the other hand, if the insured contract definition is broader than the policy definition, the policyholder should be prepared for lengthy coverage fights as to whether the insured contract definition applies at all to any given claim.
This class of legal implications is not unique to insurance law, and instead is a well-trod area that has been considered by many states. In Great Northern Insurance Co. v. Nighthawks Enterprises, Inc. , the U.S. Court of Appeals for the Ninth Circuit held, in applying Arizona law, that the insured was required to notify its insurer when it entered into a construction contract because the contract fit within the policy’s definition of an insured contract, and therefore the insured had a duty to notify its insurer prior to entering into the contract. The insured assumed contractual liability for the language of the indemnification clause in the contract, and the court held that the insured violated its duty to provide notice by failing to disclose the indemnity provisions, even though the insurer would have provided coverage for them. Similarly, in Richard S. Burns Architects, P.C. v. Two Trees Management Co., Inc., the Appellate Division of the Supreme Court of New York held that although the contractual liability exclusion did not apply to third party actions against the insured, the insured was required to provide notice to its insurer of the proposed indemnification agreement to preserve its ability to seek coverage from the insurer.
Consequently, policyholders should be prepared for collateral effects when the insured contract definition is amended in any way, including-but-elasticity being reduced from the previous wording and the scope of the definition being narrowed.

Negotiating Amendments

When negotiating an insured contract, there can be useful opportunities to add more specific language that would ensnare more insurance coverage, particularly in the definitions of "insured contract" and "contractual liability." Coverage can change over time as policies are rewritten and carriers merge. In addition, as coverage positions change at the behest of outside general counsel, it is important to have specific language that hits the target. Because most policies require all parties to consent to any changes, it is critical that insureds work with their counsel to be able to propose some alternatives that can at least give the insured its best chance of coverage. Insureds should make sure that they consider having counsel draft the language themselves because it may be hard to predict what a carrier will be willing to agree to. Be specific about exactly what obligations you are undertaking, to make it easier for the carrier to agree to insuring those specific risks. If you know what obligations you have, it makes it easier to ask for the coverage that you will need. At the same time, if you know what obligations your contractor may be undertaking, you may also ask for incremental improvements to the policies under which your contractor is insured.
Carries have been known to "study up" on past precedents and decisions to get cleaner language on specific issues and hope that a judge/umpire will bow to "precedent." However, everyone knows that past decisions do not bind future courts. You may lose if you end up with a judge that takes a different view of the issues than other judges in the various circuits that have spoken on the issue; i.e., you may be better off with an umpire than with a judge. The point is that when you have a decision, a good tank of papers, a solid set of arguments, and a good umpire, you will probably succeed.

Examples of Insured Contracts that were Amended

Case Study 1: General Responsibility Designation
A contractor’s additional insured endorsements generically add the General responsibility of the Named Insured as an "included" contract. In a case in the 9th Circuit, the insurer asserted no duty to defend because the contract that called for the additional insured coverage by the words "General Responsibility." The court found that the contract required the "General Responsibility" and indeed, "General Responsibility" was a defined term under California law in the anti-indemnity statute. The insurer was forced to reconsider its position, and the result was that the parties settled for six figures.
(Security Ins. Co. v. A.F. Anderson Paving, Inc., 1993.)
Case Study 2: Contract Privity Requirement
In another case, the insured contractor had a "vendor’s" endorsement that included a "further indemnification" section that required "contract" and "contractual liability." The subcontractor fell short and not only failed to indemnify the general contractor, but it also did not name the insured as an additional insured. The insurer’s lawyers correctly declared a coverage position stating that the transaction was not a "contract" for purposes of California’s anti-indemnity statute, and the additional insured endorsement so provided. A motion for summary judgment by the insurer was granted, the case went to the 2nd District Court of Appeal where the decision was affirmed.
Case Study 3: Scope of Indemnification
A developer hired contractor to build apartments . In the contract, the contractor promised to defend and indemnify the landlord. The language was vague and did not specify damages. The insurer said the contract-based indemnity only applied to direct claims, and that the policies did not provide business risk coverage. Again, one way to address this problem is to add or amend the definition of "insured contract." However, in California one must comply with C.C.P. Section 431.20 which requires the party prevailing on a dispositive motion to serve a notice on the other party to provide a form of judgment for the court to approve. The insured refused to provide it, and the insurer so argued. The result was an order entered against the insurer for loss of equity in the property, attorneys’ fees, interest, and the exploratory damages of the insured and the general contractor.
Case Study 4: Owner-Contractor Waivers
In another instance, an owner hired a contractor who hired a subcontractor. The contractor passed on to the subcontractor all of the owner’s indemnity requirements. The insured subcontractor did not obtain its own policies despite the owner’s mandate, and the tort claim was presented to the insured due to the failure of its uninsured subcontractor. The insurer denied the claim on multiple grounds, including failure to satisfy the waiver-of-subrogation as provided by C.C.P. Section 2778, and by arguing there was no coverage provided for possible indemnity under the employee exclusion. The decision was in favor of the insured and against the insurer.