The Intersection of Contractual Indemnity Clauses and Additional Insured Status: You May Have Less Coverage Than You Think

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Parties to sophisticated construction projects, real estate transactions, and services agreements routinely allocate risks by contract through the use of indemnity provisions. Parties often reinforce that risk allocation by providing the indemnified party with “additional insured” status under the indemnitor’s insurance program, effectively granting the additional insured direct coverage rights under the indemnitor’s insurance program. In other cases, parties seek certificates of insurance from the indemnitor’s insurers, or other assurances that an indemnity obligation is an “insured contract.”

Because indemnity agreements and insurance policies are separate contracts, courts generally treat the scope of an indemnity provision in an underlying contract separately from the scope of an additional insured’s insurance coverage under the indemnitor’s insurance policy because the insurer is not a party to the underlying contract. However, companies must take care not to inadvertently limit their rights to insurance in indemnity agreements. As discussed below, companies must pay careful attention to the intersection between indemnity provisions and additional insured endorsements when negotiating risk allocation arrangements to avoid gaps or potential loss of insurance coverage.

An Eastern District Of Louisiana decision limited the scope of the additional insured’s coverage based on the parties’ indemnification provision in In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, No. 2:10-md-02179-CJB-SS (E.D. La. Nov. 15, 2011).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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