Risk Allocation: Indemnity, Waiver, and Insurance
§ 17.1Risk Allocation Methods and Definitions
Indemnity: An indemnity is a promise to safeguard and hold another party harmless against a liability. An indemnity creates a potential cause of action for the indemnitee against the indemnitor. Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).
Waiver: A waiver is an agreement not to hold another party responsible for a liability. A waiver operates to bar any right of action on the released matter. Hart v. Traders & General Insurance Co., 189 S.W.2d 493, 494 (Tex. 1945). Waivers are sometimes referred to as “releases.”
Insurance: Insurance is a contract under which a company in the business of insuring against losses undertakes for a specified period of time to defend a party against, and compensate the party for, loss arising from a specified risk in consideration for the payment of a premium by the insured party.
Transfers of Risk: One strategy employed by a party in a transaction to minimize exposure to losses is to transfer identified risks to one or more of the following parties:
1.the party on the other side of the transaction through the use of contractual indemnities and waivers (and if the damages or injuries are of the type covered by the indemnitor’s commercial general liability insurance policy and the indemnity is an insured contract, as the term is defined in the indemnitor’s commercial general liability insurance policy, the risks may also be transferred to the general liability carrier of the indemnitor to the extent of coverage);
2.a third party through a guaranty of payment or performance;
3.an insurance company or corporate surety by purchasing insurance or bonds (provided the risks are insurable or bondable); or
4.an insurance company or corporate surety by becoming a loss payee, additional insured, or beneficiary, as applicable, under an insurance policy or a bond purchased by another party (provided the risks are insurable or bondable).
§ 17.2:1Types of Indemnities and Waivers
Insurance professionals sometimes describe indemnities as being “limited,” “intermediate,” or “broad.”
1.A limited indemnity clause imposes liability on the indemnitor only to the extent of the indemnitor’s fault or negligence and is the most favorable type of indemnity clause for an indemnitor.
2.Under an intermediate indemnity clause, the indemnitor assumes all liability except for the sole negligence of the indemnitee.
3.A broad-form indemnity clause imposes the entire risk of loss on the indemnitor, including the sole negligence of the indemnitee, and is the most favorable type of indemnity clause for an indemnitee.
§ 17.2:2Drafting Considerations for Indemnities and Waivers
1.Does the party giving the indemnity or waiver have the authority or capacity to enter into the indemnity or waiver? (See section 17.2:3 below.)
2.What is the creditworthiness of the indemnitor? Is a guaranty, a surety bond, or insurance necessary?
3.Should persons other than the contracting parties (for example, shareholders, directors, officers, employees, contractors, or subcontractors) benefit from the indemnity or waiver?
4.Will liabilities arising out of the acts or omissions of persons other than the party giving the indemnity or waiver (for example, employees, agents, and contractors) be subject to the indemnity or waiver?
5.Is the recovery against the party giving the indemnity or waiver limited as to amount, ability to seek a deficiency judgment, or source of funds to pay damages?
6.What risks are covered by the indemnity or waiver?
7.Is the indemnity or waiver consistent with insurance coverages carried by the parties, both as to amounts and risks insured? To what degree are the indemnified risks covered by the indemnitee’s available insurance? To what degree is the amount of indemnified risk covered by the indemnitee’s available insurance?
8.Is the obligation to defend and the entire cost of defense included in the indemnity? If so, will the beneficiary of the indemnity be entitled to separate counsel of its choosing?
9.Are there any types of damages (for example, punitive or consequential) that are excluded?
10.Are there any limitations as to the time period the indemnity or waiver will be in effect or the time period for making a claim under the indemnity or waiver?
11.Do any anti-indemnity statutes apply? (See section 17.2:4 below.)
12.Is compliance with the fair notice doctrine necessary? (See section 17.2:5 below.)
§ 17.2:3Indemnities by Cities and Counties Prohibited
The Texas Constitution states that no debt for any purpose may be incurred by any city or county unless provision is made at the time of creating the debt for levying and collecting a sufficient tax to repay the debt. See Tex. Const. art. XI, §§ 5, 7. Because an indemnity is by its nature uncertain as to the timing and amount of the liability that could be incurred, an indemnity by a city or county is invalid. See T. & N.O.R.R. Co. v. Galveston County, 169 S.W.2d 713 (Tex. 1943).
With some exceptions, Texas Insurance Code chapter 151 prohibits broad-form and intermediate indemnities in construction contracts and requirements in a construction contract for insurance policies or endorsements that cover broad-form or intermediate indemnities. Under Tex. Ins. Code § 151.102, an indemnity in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable to the extent that it requires an indemnitor to indemnify a party, including a third party, against a claim caused by the negligence or fault, violation of a law, or breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier. Under Tex. Ins. Code § 151.104, a provision in a construction contract that requires the purchase of additional insured coverage or any coverage endorsement or provision within an insurance policy providing additional insured coverage is void and unenforceable to the extent that it requires coverage that is prohibited under Tex. Ins. Code § 151.102.
The definition of a “construction contract” contained in Tex. Ins. Code § 151.001(5) is extremely broad, including any “contract, subcontract, or agreement . . . made by an owner . . . for the design, construction, alteration, renovation, remodeling, repair, or maintenance of . . . a building, structure, appurtenance, or other improvement to or on . . . real property.” Whether the definition covers a lease that contemplates leasehold improvements or contains provisions regarding repairs, maintenance, or alterations is, at best, unclear.
Among the exceptions under Insurance Code chapter 151 are the following:
1.There is a broad exception for any provision in a construction contract that requires a party to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier (that is, so-called third-party-over actions). Tex. Ins. Code § 151.103.
2.Indemnity provisions contained in loan and financing documents other than construction contracts to which the contractor and owner’s lender are parties. Tex. Ins. Code § 151.105(3).
3.An indemnity provision in a construction contract, or in an agreement collateral to or affecting a construction contract, pertaining to a single family house, townhouse, duplex, or directly related land development, or to a public works project of a municipality. Tex. Ins. Code § 151.105(10).
Texas law also prohibits certain indemnities by a contractor with respect to an architect’s negligence and certain indemnities by an architect with respect to an owner’s negligence. See Tex. Civ. Prac. & Rem. Code § 130.002.
Even if no anti-indemnity statute applies, when an indemnity, release, or waiver provision seeks to shift the risk of one party’s future negligence or other fault to the other party, Texas imposes a fair notice requirement before enforcing that agreement. Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993). The fair notice requirements are set out as the express negligence doctrine and the conspicuousness requirement. Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004). The fair notice requirement is a rule of contract interpretation and is therefore determinable as a matter of law. Fisk Electric Co. v. Constructors & Associates, 888 S.W.2d 813, 814 (Tex. 1994).
Express Negligence Rule: If the parties to a contract want to indemnify one of the parties against its own negligence, the parties must express their intent in specific terms within the four corners of the contract. Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705, 707–08 (Tex. 1987). This same rule applies to releases. Dresser Industries, Inc., 853 S.W.2d 505. There is no specific required language to use to comply with the express negligence doctrine in Texas, other than use of the terms negligence or fault, but a good example to follow states: “Tenant will release, defend, and indemnify landlord [and any other indemnitees] from any claim or loss even though caused in whole or in part by the negligence (whether sole, joint, or concurrent), strict liability, or other legal fault of landlord [or any other indemnitees].” Whether a release or indemnity for gross negligence is enforceable is unclear, but any release or indemnity intended to apply to gross negligence may need to specifically mention gross negligence to meet the express negligence test. Van Voris v. Team Chop Shop, LLC, 402 S.W.3d 915 (Tex. App.—Dallas 2013, no pet.).
Conspicuousness Rule: The indemnity, release, or waiver provision indemnifying or releasing a party from its own negligence must be conspicuous (for example, a separate indemnity and waiver provision in contrasting, capitalized, or colored type with a clear and informative heading). Dresser Industries, Inc., 853 S.W.2d at 510–11.
Extensions of Fair Notice Doctrine: The fair notice doctrine has also been held to apply to indemnities or waivers—for strict liability (Houston Lighting & Power Co. v. Atchison, Topeka & Santa Fe Railway Co., 890 S.W.2d 455, 459 (Tex. 1994)) and of a third party by a subscribing employer notwithstanding the exclusive recovery (or one action) rule under the Workers’ Compensation Act (Enserch Corp. v. Parker, 794 S.W.2d 2, 9 (Tex. 1990)).
§ 17.3Overview of Insurance Policies
§ 17.3:1Categories of Insurance
Property Policies: Property insurance is “first party” insurance that compensates the named insured for property that has been lost, damaged, or destroyed. Examples of property insurance policies are commercial property, builder’s risk, terrorism, and business income insurance. (See section 17.4 below.)
Liability Policies: Liability insurance is “third party” insurance that compensates a third party injured by the actions or omissions of an insured. Examples of liability insurance are commercial general, business auto, workers’ compensation, liquor liability, and pollution insurance. (See section 17.5 below.)
Package Coverage Policies: Package coverage policies cover both property risks and liability risks. An example of a package coverage insurance policy is homeowner’s insurance. (See section 17.4:4 below.)
Personal lines of insurance are for individuals and families—for example, homeowner’s insurance and renter’s insurance. Commercial lines of insurance cover businesses—for example, commercial property insurance, commercial general liability insurance, and business owner’s policies.
Insurance Services Office, Inc., commonly known in the insurance industry as ISO, drafts insurance forms that are used either verbatim or with modifications in all fifty states. (The National Board of Fire Underwriters, the organization to which many real estate documents still refer, merged with the American Insurance Association in 1966 and ceased to exist as a separate entity. In 1971 the American Insurance Association merged with twenty-nine other ratings agencies to create ISO.) Although ISO forms are dominant, other forms in the marketplace may be (1) “manuscripted,” that is, drafted by an insurance company (and which may be similar to or less broad than the ISO equivalent); (2) promulgated by the Texas Department of Insurance (for example, the Homeowner’s A, B, and C coverages); or (3) drafted by a competitor of ISO (for example, the American Association of Insurance Services).
Another set of property insurance forms, known as inland marine forms or floaters, evolved to insure property being transported by canal barges and later railroads and trucks. Today, inland marine is used primarily for “property which is mobile by nature and for which there is no fixed situs; and . . . instruments of communication or transportation such as bridges, tunnels, piers or television antennas” (State of New York Insurance Department, Circular Letter No. 22 (2000), August 11, 2000). In addition, inland marine forms are used in the construction area and for specialized coverages such as jewelry and computer data. Inland marine forms are generally manuscripted.
§ 17.4:1Terminology and Structure
Commercial property insurance is the property insurance form used in most commercial settings. The phrase fire and extended coverage insurance was the name of a named-peril property insurance policy that is no longer available, and the phrase casualty insurance is incorrect if used to describe property insurance. Unlike commercial liability insurance and residential insurance, there is no standard commercial property policy form. Each commercial property insurer has its own policy form. To some extent, commercial property insurers may employ property insurance policy language provided by ISO.
An ISO commercial property insurance policy is not a single form. Rather, an ISO commercial property insurance policy is made up of six different forms:
1.Common policy conditions (ISO Form IL 00 17)—describes the conditions applicable to all insurance policies.
2.Commercial property conditions (ISO Form CP 10 90)—describes the conditions applicable only to commercial property policies.
3.ISO Form CP 00 10, entitled “Building and Personal Property Coverage Form”—describes the property being covered.
4.Declarations and schedules provide specifics such as the name of the insured, location of property, and coverage amounts.
5.A causes of loss form (ISO Forms CP 10 10, CP 10 20, or CP 10 30)—determines whether the policy will be a named peril policy or an all risks policy (see section 17.4:2 below).
6.Any necessary coverage forms or endorsements describing additional property covered, additional limits, and optional coverages (see sections 17.4:3 and 17.4:5 below).
As a general rule, commercial property insurance is used to cover completed buildings, and builder’s risk insurance is used to cover buildings under construction or, in some cases, under extensive renovation. No bright line exists as to when builder’s risk insurance should be used rather than commercial property insurance. Builder’s risk policies have several important advantages over commercial property policies with respect to coverage for buildings under construction, such as coverage for property stored offsite and property in transit.
§ 17.4:2Forms of Commercial Property Policies
Historically, property insurance was written on either a named-peril basis, which insured against property damage arising from causes of loss expressly enumerated in the policy, or an all-risks basis, which insured against property damage arising from all causes of loss except those that were expressly excluded by the policy. The insurance industry has now abandoned use of the words risk and peril and instead uses the term cause of loss.
Basic and Broad (Named-Peril) Forms: Two named-peril commercial property insurance policies are currently available: causes of loss—basic form and causes of loss—broad form. The basic form (ISO Form CP 10 10) covers the following causes of loss: fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicle collision, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. The broad form (ISO Form CP 10 20) covers all the causes of loss covered by the basic form plus falling objects; weight of snow, ice, or sleet; water damage from leaking appliances; and collapse from specified causes.
Special (All-Risks) Form: The correct terminology for commercial property insurance currently written on an all-risks basis is causes of loss—special form (ISO Form CP 10 30), which was formerly known as “all-risk.”
Leased Property: The ISO commercial property policy insures a commercial tenant’s use interest in leasehold improvements and betterments. The ISO Building and Personal Property Coverage Form (ISO Form CP 00 10) states that it provides coverage for business personal property including “[y]our use interest as tenant in improvements and betterments” and defines “improvements and betterments” as “fixtures, alterations, installations or additions: (a) [m]ade a part of the building or structure you occupy but do not own; and (b) [y]ou acquired or made at your expense but cannot legally remove.” If insurance coverage is desired for building standard improvements or improvements made by a previous tenant, coverage is to be by ISO Form CP 14 01 09 17 (entitled “Scheduled Building Property Tenant’s Policy”) and ISO Form CP 14 02 09 17 (entitled “Unscheduled Building Property Tenant’s Policy”).
See “Loss Payee and Mortgagee Clauses” in section 17.4:3 below for a discussion of a commercial landlord’s interest as a loss payee by endorsement to a property policy maintained by a tenant insuring a building owned by the landlord (ISO Form CP 12 18 06 07) and section 17.6:5 for a discussion of a commercial landlord’s interest as an additional insured on a property policy maintained by a tenant insuring the building (ISO Form CP 12 19 06 07).
Separate property policies or endorsements are available to fill the gaps created under standard forms of commercial property insurance policies.
Equipment Breakdown: Equipment breakdown (formerly boiler and machinery) coverage (for example, ISO Endorsement Form BM 00 20) insures against property losses caused by the explosion of pressure vessels and sudden and accidental, mechanical or electrical breakdown of covered machinery. Coverage for the resulting loss of business income may be added.
Builder’s Risk: Because of the higher likelihood of property loss during construction, a specialized form of property insurance called builder’s risk is used during the construction of a building in lieu of commercial property insurance.
Although ISO has promulgated a builder’s risk form (ISO Form CP 00 20), most builder’s risk policies are written on manuscripted inland marine forms. ISO builder’s risk insurance forms are available on a basic, broad, or special causes of loss basis, but the inland marine forms that are more commonly used may, depending on the insurer, have broader or narrower coverage than their ISO counterparts. Among the causes of loss that may not be covered by a builder’s risk policy without endorsement are collapse resulting from design error and damage resulting from freezing, flood, and earthquake.
Builder’s risk property insurance is available in nonreporting (commonly known as “completed value”) or reporting forms. Under a completed value form, coverage is automatically increased as construction occurs. A reporting form will not cover the increased value until the increase is reported to the insurance carrier, usually on a monthly basis.
A builder’s risk policy can cover most of the property used in or incidental to the construction even if the property is stored off-site or in transit, but may not cover the following unless the policy is specifically endorsed: landscaping, temporary structures such as scaffolding, construction trailers, site work, underground structures such as footings, equipment used to construct the building, and business income.
Many extensions of coverage are available under builder’s risk insurance policies. Because builder’s risk policies forms are generally manuscripted, these extensions may be included within the basic coverage of some policies but must be added by endorsement to other policies. Most extensions or endorsements have a “sublimit,” which is less than the full policy limit but the maximum amount recoverable with respect to the extension or endorsement. The following are some of the extensions of coverage or endorsements that are available for builder’s risk policies:
1.Contract penalties—covers contractual penalties to the insured’s customers incurred as a result of a delay of completion date.
2.Collapse—covers damage or loss from collapse of the structure caused by certain causes of loss, generally including defective materials and faulty design, plans, or workmanship (but not the cost of correcting the defective workmanship or faultily designed work).
3.Debris removal—covers the cost of removing debris resulting from a covered cause of loss in excess of the limit of proceeds for debris removal contained in basic coverage. Many builder’s risk policies cover this risk but with a sublimit. In such cases, the sublimit can be increased by endorsement.
4.Expediting expense—covers additional expenses necessarily incurred to complete construction on schedule after the occurrence of a covered cause of loss.
5.Pollutant cleanup—covers the cost of removing pollutants released by a covered cause of loss.
6.Preservation of property—covers the cost of removing covered property from the premises to preserve the property from loss after a covered cause of loss has occurred.
7.Soft costs (sometimes called “extra expenses”)—covers necessary expenses incurred as a result of a delay of completion date, such as interest on the construction loan, real estate taxes, architectural and engineering supervisory costs, costs to renegotiate leases, brokerage commissions, and legal and accounting costs (caveat: coverage varies from policy to policy).
8.Testing—covers damage or loss from testing of boilers or other pressure vessels, air-conditioning systems, and mechanical or electrical machines or devices.
9.Loss of rents—covers the loss of rents caused by the delay of completion.
Because builder’s risk property policies typically cease coverage if any portion of the structure is occupied for purposes other than testing, a phased project may require an endorsement to permit a certain level of occupancy.
Business Income: Business income coverage (ISO Endorsement Form CP 00 32) insures against loss of earnings resulting from the insured’s inability to operate a business after the occurrence of a covered cause of loss. This type of coverage was formerly known as “business interruption” insurance. Business income and extra expense coverage (ISO Endorsement Form CP 00 30) also insure against extraordinary additional expenses resulting from the insured’s inability to operate a business after the occurrence of a covered cause of loss. If desired, business extra expense coverage can be obtained by itself.
Rental value coverage insures against loss of rents (including abatement of rentals under leases) resulting from the insured’s inability to operate a building after the occurrence of a covered cause of loss. Rental value coverage is available under both business income endorsement forms (ISO Forms CP 00 30 and CP 00 32) but is not included unless specified in the declaration to the policy.
All of the ISO commercial property causes of loss forms (ISO Forms CP 10 10, CP 10 20, and CP 10 30) exclude coverage for business income loss caused by “the failure of power or other utility services . . . if the failure occurs outside of a covered building.” ISO Form CP 15 45, entitled “Off-Premises Services—Time Element,” is an endorsement to a business income coverage form (with or without extra expense coverage) that provides coverage for the loss of income arising from off-premises utility service disruption.
ISO Form CP 15 08, entitled “Business Income from Dependent Properties—Broad Form,” is an endorsement to a business income coverage form (with or without extra expense coverage) that provides coverage for loss of income (and extra expenses incurred, if applicable) because of damage to another company’s facility. For example, a San Antonio–based automobile manufacturer depends on parts from an automobile parts facility located in Beaumont. If the Beaumont plant were damaged and rendered inoperable by a hurricane, the San Antonio manufacturer would incur losses even though the automobile manufacturer’s plant is unharmed.
Crime (or Fidelity): This coverage protects the insured against loss of property (generally money, securities, and inventory) resulting from the types of crime enumerated in the policy. Among the crimes for which crime insurance is available are computer fraud, social engineering fraud, employee dishonesty, embezzlement, extortion, forgery, premises theft, premises burglary, safe burglary, wire transfer fraud, counterfeiting, and off-premises robbery.
Earth Movement or Earthquake: Earth movement or earthquake coverage insures against property losses caused by earth movement, including earthquake shocks and volcanic eruptions. Earth movement coverage is broader than earthquake coverage. Earthquake coverage, for instance, does not cover mudslides.
Flood: Flood coverage insures against property losses caused by rising waters, backup of storm sewers, and storm surges. Flood coverage is necessary because all three of the ISO commercial property insurance causes of loss forms (ISO Forms CP 10 10, CP 10 20, and CP 10 30) expressly exclude coverage for floods and many other types of water damage.
The National Flood Insurance Act of 1968 (42 U.S.C. §§ 4001–4131) (NFIP) created a program to make available flood insurance for property owners in flood-prone areas. Regulations implementing the NFIP are found at 44 C.F.R. pts. 59–78. See also Tex. Loc. Gov’t Code § 240.901 (participation in federal flood insurance program); Tex. Water Code §§ 16.311–.324 (Flood Control and Insurance Act). The Flood Disaster Protection Act of 1973 mandated that federally regulated lending institutions could not “make, increase, extend, or renew any loan secured by improved real estate or a mobile home located or to be located in an area that has been identified . . . as an area having special flood hazards and in which flood insurance has been made available” under the NFIP without flood insurance in an amount equal to the lesser of the loan amount or the available coverage. 42 U.S.C. § 4012a(b)(1).
NFIP insurance has several drawbacks:
1.The maximum coverage limits are $500,000 for a building and $500,000 for contents.
2.The policy pays only direct physical loss by or from flood and does not pay indirect damages such as loss of income.
3.In most cases, NFIP insurance pays only actual cash value, not replacement cost.
4.Coverage is not available without a thirty-day wait, except when obtaining new financing.
The NFIP must be extended by Congress from time to time. As of the publication date of this edition, the NFIP has been extended until September 30, 2022.
See section 17.4:5 below.
Private flood insurance coverage is also available. Coverage under a commercial property policy can be expanded with ISO Endorsement Form CP 10 65. Form CP 10 65 also has several drawbacks:
1.The endorsement does not cover underground water flows or seepage.
2.The endorsement excludes coverage for flooding within a wait period of seventy-two hours after the inception date of the endorsement, damage to land (including excavations, grading, filling, or backfilling), removal of mud and earth deposited by flooding, and loss or damage caused by sewer backup or overflow unless the backup or overflow occurs within seventy-two hours after the flood recedes.
3.A commercial property policy endorsed for flood coverage usually contains a very high deductible with respect to properties located in a special flood hazard area shown on flood insurance rate maps produced by the Federal Emergency Management Agency.
4.A commercial property insurance policy endorsed for flood coverage for flooding usually contains a sublimit with respect to the amount of coverage available for flood damage (a sublimit limits the amount of coverage available to cover a specific type of loss to an amount smaller than the policy limit).
Glass: Before 2000, coverage was excluded or limited in commercial property insurance policies for damage to plate glass. Glass coverage was obtained through so-called “plate glass insurance,” issued as a separate coverage form. The exclusions and limitations were removed from ISO forms CP 10 10, CP 10 20, and CP 10 30 in 2000.
Loss Payee and Mortgagee Clauses: A loss payee is a party named in a loss payee endorsement. A loss payee clause is referred to as an open clause if the loss payee under the loss payable clause has no independent right to enforce the policy but is simply a recipient of payments when the insured becomes entitled to collect under the policy. The drawback of an open clause is that the action or inaction of the insured can defeat the right of a loss payee to collect (for example, the insured may make a misrepresentation, fail to pay premiums, or fail to report a loss timely). On the other hand, a closed clause creates a separate contract between the insurer and the loss payee or mortgagee and contains language to the effect that the act or neglect of the insured will not invalidate the policy. A closed loss payee clause is also referred to as a mortgagee clause. It provides special protections to the mortgage holder that generally include payment for covered loss that will be made to the mortgage holder, not to the insured or to the insured and the mortgagee; coverage applies for the benefit of the mortgagee even if the insured’s claim is denied because of the insured’s acts, subject to a couple of basic requirements. The mortgagee will receive written notice of policy cancellation by the insurer.
Standard mortgage holder protection for buildings or structures only (but not the business personal property) is built into the current ISO Building and Personal Property Coverage Form (ISO Form CP 00 10).
The current edition of ISO Endorsement Form CP 12 18, entitled “Loss Payable Provisions,” uses four different descriptions to describe the loss payee: “Loss Payable,” “Lender Loss Payable,” “Contract of Sale,” and “Building Owner Loss Payable.” It is critical for a mortgagee to pick the right category. If “Loss Payable” is chosen in the schedule to the endorsement, the provision becomes an open clause, and the interest of the loss payee is protected only if the named insured chooses to enforce the protection. However, if “Lender Loss Payable” is chosen in the schedule, the provision becomes a closed clause and protects a lender loss payee the same way as a mortgage holder is protected by the standard mortgagee clause in the building and personal property coverage form, with an important difference: under ISO Endorsement Form CP 12 18, the mortgagee protection applies to both the building and the business personal property associated with the building.
Form CP 12 18 may also be used by a landlord to create a “Building Owner Loss Payable” and establish privity between the landlord and the tenant’s property carrier with respect to insurance proceeds payable because of the loss of the landlord’s property.
Signs: This coverage (ISO Form CM 00 28) insures against damage to signs resulting from windstorm, vandalism, or vehicle damage.
Terrorism: Terrorism insurance protects the insured against losses arising from terrorist activities that are excluded from commercial property policies.
Until 2002, damage or loss from terrorism was not expressly excluded by ISO’s commercial property insurance policy forms. Following the attacks of September 11, 2001, ISO introduced several exclusions for losses caused by terrorism. In November 2002, the federal government enacted the Terrorism Risk Insurance Act of 2002 (TRIA) requiring all U.S. commercial property insurers to offer coverage for losses caused by international terrorism and creating a reinsurance program for this coverage with a total annual limit of $100 billion. TRIA was extended in 2005 and reauthorized in 2015, in a modified form, through December 31, 2020. In December 2019, TRIA was reauthorized through December 2027. As originally enacted, TRIA applied to violent acts causing damage in excess of $5 million in the United States (or aircraft or U.S.-flagged vessels), committed by a party acting on behalf of a foreign person or interest, and certified as terrorism by the secretary of the U.S. Treasury. The 2007 reauthorization deleted the requirement that an act of terrorism be committed by someone acting on behalf of a foreign person or interest to be certified as an act of terrorism. However, the insurer is not required under TRIA to provide terrorism coverage if the insured rejects the coverage in writing or if the insured does not pay the premium for the terrorism coverage. TRIA does not set the premiums for terrorism coverage. See 15 U.S.C. § 6701 note (Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322, as amended by Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-144, 119 Stat. 2660, the Terrorism Risk Insurance Program Reauthorization Act of 2007, Pub. L. No. 110-160, 121 Stat. 1839, and the Terrorism Risk Insurance Program Reauthorization Act of 2015, Pub. L. No. 114-1, 129 Stat. 3). See also 31 C.F.R. pt. 50.
§ 17.4:4Residential or Farm Property Insurance
Homeowner’s Insurance: Homeowner’s insurance is available to the owner of an owner-occupied dwelling. Homeowner’s insurance is a package coverage insurance policy covering both property claims, such as loss of or injury to the dwelling and to the insured’s personal property, and some personal liability claims. A homeowner’s insurance policy also covers some living expenses incurred as a result of temporary displacement because of damage to a dwelling. See https://www.tdi.texas.gov/pubs/consumer/cb025.html for an explanation of homeowner’s insurance coverage, enhancements, and exclusions.
Most homeowner’s policies may be written on forms generated by the Texas Department of Insurance (TDI) (HO-A, HO-B, and HO-C) or forms generated by ISO (HO 00 02, HO 00 03, and HO 00 05). There are also numerous unregulated company-specific forms. See https://www.tdi.texas.gov/orders/co020741.html for a discussion of the state-approved homeowner’s forms in Texas.
The property coverage under homeowner’s insurance policies varies as follows:
1.TDI Form HO-A and ISO Form HO 00 02—named-cause of loss basis (see section 17.4:2 above) for both the dwelling and its contents;
2.TDI Form HO-B and ISO Form HO 00 03—risk of direct physical loss basis (see section 17.4:2 above) for the dwelling and a named-peril basis for its contents; and
3.TDI Form HO-C and ISO Form HO 00 05—all-risks basis for both the dwelling and its contents.
The amount collected for loss of or injury varies as follows under the various forms:
1.TDI Form HO-A—actual cash value (see section 17.4:5 below) for both the dwelling and its contents;
2.ISO Form HO 00 05—replacement cost (see section 17.4:5 below) for both the dwelling and its contents; and
3.TDI Forms HO-B and HO-C and ISO Forms HO 00 02 and HO 00 03—replacement cost for the dwelling and actual cash value for its contents. (All four forms can be endorsed to cover replacement cost for the contents.)
Condominium Insurance: A condominium has two sets of insurance, one covering the condominium association and another covering the individual unit owners.
The condominium association’s insurance requirements are set forth in Tex. Prop. Code § 82.111. Tex. Prop. Code § 82.111(a) requires that the condominium association maintain separate commercial property and commercial general liability policies. A commonly used condominium association property coverage form, ISO Form CP 00 17, entitled “Condominium Association Coverage Form,” is nearly identical to its commercial property insurance coverage counterpart, ISO Form CP 00 10, except that the definition of business personal property is limited to the personal property owned by the association or indivisibly by all unit owners and other property for which the association is responsible under the declaration. Tex. Prop. Code § 82.111(d) also requires that the unit owners be named as insureds under the association’s policies, that the association’s insurers waive subrogation as to the unit owners, and that the association’s policies are primary to a unit owner’s policies if there is duplicate coverage.
Individual unit owners purchase the equivalent of homeowners coverage for their individual units known as “condominium unit owners” policies. Like homeowners insurance, unit owners insurance is a package coverage insurance policy covering both property claims with respect to the unit interior and the insured’s personal property and liability claims. Unit owners policies may be written on TDI forms HO-B-CON and HO-C-CON and ISO Form HO 00 06.
The property coverage under unit owners insurance policies varies as follows:
1.TDI Form HO-B-CON and ISO Form HO 00 06—named-cause of loss basis (see section 17.4:2 above) for both the unit interior and its contents (all risks coverage is available for both dwelling and contents under ISO Form HO 00 06 by endorsement); and
2.TDI Form HO-C-CON—all-risks basis for both the unit interior and its contents.
The amount collected for loss of or injury varies as follows under the various forms:
1.TDI Form HO-C-CON—replacement cost (see section 17.4:5 below) for both the dwelling and its contents; and
2.TDI Form HO-B-CON and ISO Form HO 00 06—replacement cost for the dwelling and actual cash value for its contents. (Both forms can be endorsed to cover replacement cost for the contents.)
Tenant’s Insurance: Tenant homeowner’s insurance (commonly known as tenant’s or renter’s insurance) is available to tenants of residential property. Tenant’s insurance is a package coverage insurance policy that covers the property insurance causes of loss of injury to or loss of the tenant’s personal property and the liability insurance cause of loss of bodily injury to third parties. The property portion of tenant’s insurance is available in either a named-cause of loss version called broad form or, for a higher premium, an all-risks version called comprehensive form (see section 17.4:2 above). The amount collected for property loss under tenant’s insurance is limited to actual cash value, unless the insured has purchased an endorsement increasing coverage to replacement cost (see section 17.4:5 below). The risks of injury to or loss of the dwelling, unit, or apartment are generally covered by the landlord’s property insurance policy on the dwelling, but tenant’s insurance may cover some damage to the dwelling, unit, or apartment caused by the tenant if the tenant is liable for the damage under the lease. Tenant’s insurance also covers some living expenses incurred as a result of temporary displacement from the dwelling, unit, or apartment because of damage.
Farm and Ranch Insurance: Farm owner’s (sometimes called farmowner’s) insurance is available to individuals who own and occupy property meeting the definition of a farm or ranch and who do not elect to be insured by a farm mutual insurance company (in Texas, farm mutual insurance companies cannot write liability insurance). Farm owner’s insurance is a package coverage insurance policy that covers the property insurance causes of loss of injury to or loss of farm dwellings, outbuildings, and personal property and the liability insurance causes of loss of bodily injury to third parties.
If a farmer or rancher is not an individual or is purchasing his property insurance from a farm mutual company, the farmer or rancher must purchase separate property and liability insurance policies. In a farm or ranch context, the equivalent of a commercial property insurance policy is typically called a farm and ranch insurance policy, and the equivalent of a general liability insurance policy is typically called a farm liability policy. In some situations liability insurance is provided through a commercial general liability policy properly endorsed to cover farm or ranch operations.
Farm or ranch operations can be covered by personal lines or commercial lines of insurance depending on the magnitude of the farming operation. Typically, an insurance company will set a threshold of gross income from farm or ranch activities or number of acres farmed or number of cattle grazed to differentiate between a personal line farm policy and a commercial line farm policy.
Caveat: The activities of a farm tenant may impact the size of the operation for insurance purposes. Assume, for example, a gentleman farmer (typically, a person with a country home and a few horses or other farm animals) whose level of farming or ranching activity does not rise to a commercial level insures the property in question under a homeowner’s insurance policy, a personal lines coverage. The gentleman farmer then leases out surplus acreage to a farmer whose level of activity on the leased property is attributed to the gentleman farmer for insurance purposes. When a claim is made against both the owner and tenant because of an injury arising out of the operation of the tenant, the owner may discover that he is not covered because personal lines policies exclude from coverage losses arising out of operations covered under commercial lines policies.
The discussion in this section covers terminology used in commercial property and business owner’s policies. These concepts may vary under homeowner’s or farm and ranch policies.
Actual Cash Value: Actual cash value means an amount equal to the difference between the cost of replacing property with property of like kind and quality at the time of loss and the amount of physical (not book) depreciation of the property. Unless a commercial property policy is properly endorsed, the insured is entitled only to actual cash value. Actual cash value will be paid whether or not the property is replaced or restored.
Replacement Cost: Replacement cost is the cost of repairing or replacing insured property at the time of the occurrence of the loss, without reduction for loss of value through depreciation. Replacement cost will not be paid until the property is replaced or restored with property of like kind.
Agreed Value: Agreed value is an agreed valuation method that can be used with either actual cash value or replacement cost. The named insured and insurance company agree to the amount of the actual cash value or replacement cost for the insured property (less the applicable deductible) before the policy is written. Agreed value is desirable because it eliminates coinsurance. An agreed value endorsement usually requires annual agreement between the insurer and named insured.
Coinsurance: Coinsurance is a method by which an insurance company penalizes its insured for underinsuring below a minimum percentage of the replacement cost of a property at the time of loss (usually 80 percent if the policy is written for a single property and 90 percent if the policy covers more than one property). If coinsurance applies, the insurer will pay only an amount (subject to the policy limit and less any applicable deductible or self-insured retention) equal to the product obtained by multiplying the amount of the loss by a fraction having as its numerator the amount of coverage the insured actually carried and as its denominator the minimum amount of coverage the insured should have carried.
Ordinance or Law Coverage: The valuation methods discussed above focus on the cost of replacing the existing structure without consideration to changes in laws or codes. Additional coverage under the Standard Building and Personal Coverage Form (ISO Form CP 00 10) is available up to the lesser of $10,000 or 5 percent of the value of the damaged building as of the time of the loss. Larger amounts can be covered by an ordinance or law coverage endorsement (ISO Endorsement Form CP 04 05).
Debris Removal: The commercial property insurance policy limit includes debris removal costs resulting from a covered loss, but the recovery is limited to 25 percent of the sum of the paid loss plus the deductible. An additional limit of $10,000 is made available by the current edition of the ISO commercial property policy for debris removal if (1) the amount payable under the policy to reconstruct or repair plus the amount payable under the policy for debris removal exceeds the entire policy limit or (2) the cost of debris removal exceeds 25 percent of the sum of the paid loss plus deductible. Higher limits for debris removal are strongly recommended and can be purchased by adding ISO Endorsement Form CP 04 15, entitled “Debris Removal Additional Limit of Insurance.”
§ 17.5:1Claims-Made vs. Occurrence-Basis Liability Policies
Claims-Made: In theory, a claims-made liability policy covers any claim actually made during the policy term, regardless of when the injury or damage that gave rise to the claim occurred, but in reality the claims-made policy probably excludes claims arising from injuries or damages that occurred before the inception of the policy term (known as prior acts). For an additional premium, a claims-made policy can sometimes be modified to cover prior acts. Unless renewed on a similar form with retroactive coverage or with a coverage extension known as extended reporting period or tail coverage, all coverage ends when the claims-made policy expires. Defense is frequently included within the policy limits of claims-made policies and reduces the amount available to compensate an injured party for a loss. Claims-made policies are usually manuscripted.
Occurrence-Basis: An occurrence-basis liability policy covers claims for injuries or damages caused by an occurrence, but only if the injury or damage actually occurs during the policy period, regardless of when the claim is made (subject, of course, to statutes of limitation applicable to the claim). ISO Form CG 00 01 defines an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Defense is provided as an additional benefit under ISO occurrence-basis commercial general liability forms and does not reduce the limits available to pay for a loss, except for the defense of indemnitees if certain conditions are not met.
§ 17.5:2Standard Form of General Liability Policies
Comprehensive General Liability: “Comprehensive general liability insurance” is, in fact, much less comprehensive in coverage than “commercial general liability insurance,” has not been widely used since 1986, and should not be specified in real estate or other transaction documents.
Commercial General Liability: Commercial general liability insurance is the prevalent form of liability insurance in a commercial real estate context and has three coverages:
1.Coverage A—bodily injury (including death, disease, and illness) and physical injury to tangible property (including loss of use).
2.Coverage B—personal and advertising injury (including false arrest, detention or imprisonment, malicious prosecution, wrongful eviction or entry, slander, or libel, publication violating a person’s right of privacy, using another’s advertising idea, and copyright infringement).
3.Coverage C—medical payments.
Limits: The standard ISO commercial general liability policy form contains six policy limits: (1) each occurrence limit, (2) general aggregate limit, (3) products-completed operations aggregate limit, (4) personal and advertising injury limit, (5) damage to premises rented limit (formerly “fire damage limit”), and (6) medical expense limit.
A general aggregate limit is the maximum amount that a commercial liability insurance company will pay for all losses incurred during any one policy period except for bodily injury and property damage covered by the products-completed operations aggregate. ISO Form CG 25 04, entitled “Designated Location(s) General Aggregate Limit,” an endorsement to a commercial general liability policy covering multiple properties, applies the general aggregate limit separately to each location but only with respect to bodily injury, property damage, and medical expenses. ISO Form CG 25 03, entitled “Designated Construction Project(s) General Aggregate Limit,” an endorsement to a contractor’s commercial general liability policy covering multiple projects, applies the general aggregate limit separately to each project but only with respect to bodily injury, property damage, and medical expenses.
Contractual Liability: Several exclusions apply to Coverage A and Coverage B under a commercial general liability insurance policy: willful misconduct, liquor liability, workers’ compensation, employer’s liability, pollution, aircraft, auto or watercraft, mobile equipment, war, damage to property, damage to product, damage to impaired property not physically injured, recall of products, and work or property, subject to the exception for damage to premises rented. However, the exclusion most often referenced in a real estate transaction is contractual liability.
The term contractual liability in the insurance context generally refers to claims that arise out of liability for the actions of others, rather than out of the actions of an insured, that has been contractually assumed by the insured. Coverage A excludes liability assumed under contracts but has an exception to this exclusion for liability assumed in a contract or agreement that is an insured contract. The definition of “insured contract” includes most indemnities that cover the tort liability of another party; however, a contractual assumption of another person’s contractual liability is not covered under the typical definition of “insured contract.” If, for example, a contractor agrees to indemnify the owner for its potential tort liability to an injured employee, the contractor would have insurance coverage for its indemnity obligation; if, however, the contractor agreed to indemnify the owner for the owner’s contractual indemnity to the owner’s representative, the contractor’s indemnity might be enforceable but would not be covered under the contractor’s standard commercial general liability policy. In addition, the insured contract exception cannot expand the scope of the commercial general liability policy beyond the coverage provided or the limits of liability that have been purchased. If, for example, the policy excludes coverage for property damage and bodily injury caused by pollutants, an indemnity for property damage and bodily injury caused by pollutants will not be covered by the policy even if the indemnity is contained in an insured contract. Coverage B of the ISO form of commercial general liability policy also contains an exclusion for liability assumed in contracts but does not contain the insured contract exception. Coverage is typically available by the addition of ISO Form CG 22 74, entitled “Limited Contractual Liability Coverage for Personal or Advertising Injury,” or, in some cases, by the deletion of the contractual liability exclusion.
Business auto insurance (ISO Form CA 00 01) is a form of insurance covering liability arising out of the operation of automobiles by the insured and the ownership, maintenance, or use of mobile equipment subject to compulsory insurance or financial responsibility laws or other motor vehicle insurance laws. Landlords and mortgagees may require business auto insurance to cover potential liability arising from vehicular accidents occurring in project parking lots (commercial general liability policies expressly exclude coverage for injuries and damages arising from the operation of autos) and from the loading or unloading of goods from vehicles not being performed by certain types of mobile equipment such as forklifts.
§ 17.5:4Workers’ Compensation Insurance
Workers’ compensation insurance is a statutory program that imposes strict liability on employers for injuries to employees occurring while the employees are acting in the scope of employment but limits the exposure of employers to a schedule of maximum recoveries. Tex. Lab. Code ch. 406. Landlords and lenders may wish to require tenants and borrowers to carry workers’ compensation insurance to reduce the possibility that the tenant or borrower suffers an economically disastrous judgment because of an employee injury. If an employee of a tenant receives an award from a workers’ compensation policy in a situation in which the landlord is also negligent, the employee is less likely to sue the landlord.
§ 17.5:5Employer’s Liability Insurance
Employer’s liability insurance supplements workers’ compensation insurance by covering an employee for bodily injury occurring while in the scope of his or her employment if the injury is not covered by workers’ compensation insurance. Unlike workers’ compensation, the injured party must prove that the employer owed a duty to the injured party, that the employer breached the duty, and that the breach was the proximate cause of the injury. Employer’s liability policies have defined each occurrence and aggregate limits, and these limits may be expanded by an umbrella or excess liability policy.
§ 17.5:6Liquor Liability Insurance
Liquor liability insurance covers liability for bodily injury or property damage arising from (1) causing or contributing to the intoxication of any person, (2) furnishing alcoholic beverages to a person under the legal drinking age or under the influence of alcohol, or (3) violating any law relating to the sale, gift, distribution, or use of alcoholic beverages. Coverage applies only if the insured is involved in (1) manufacturing, selling, or distributing alcoholic beverages; (2) serving or furnishing alcoholic beverages for a charge; or (3) serving or furnishing alcoholic beverages for no charge, if a license is required for such activity. Insurance is available on an occurrence basis (ISO Form CG 00 33), on a claims-made basis (ISO Form CG 00 34), and on an aggregate per location basis (ISO Form CG 25 14).
Innkeeper’s liability insurance protects motel and hotel operators from liability arising from the safekeeping of the property of guests.
Garage liability insurance (ISO Form CA 00 05) protects garage and parking lot operators from liability arising from garage operations, automobile physical damage, and uninsured or underinsured motorists. Ten different levels of coverage are generally available, ranging from the broad category of “any auto” to the narrow category of “specifically described autos.” Garagekeeper’s liability insurance protects garage operators against only direct damage or legal liability for damage to vehicles in the care, custody, or control of the garage operator (for example, if the named insured provides valet service). Although garagekeeper’s liability insurance is available as separate coverage, garage liability insurance is broader coverage and includes garagekeeper’s coverage.
§ 17.5:9Umbrella or Excess Liability
Both umbrella and excess liability policies provide additional protection against catastrophic liability claims by increasing the policy limits of primary coverages.
Excess Liability: An excess liability policy relies on the primary policy for the insuring agreement and exclusions and provides coverage only in excess of the scheduled primary liability policies. The coverage is usually not broader than the primary policies.
Umbrella: An umbrella liability policy has its own insuring agreement and exclusions and usually serves three functions: (1) providing additional limits of liability over limits provided by the primary liability policies, (2) providing “drop down” coverage (that is, the umbrella coverage becomes primary) if the limits of the primary policy are exhausted, and (3) affording coverage for claims not covered by primary policies (to the extent not excluded by the umbrella liability policy). Because both an umbrella policy and the primary policy have their own insuring sections, differences may arise between coverages, especially if the two policies have been issued by different companies. To ensure that no gap in coverage is created, the umbrella liability policy should contain an affirmative statement that the umbrella policy follows the form of the primary policy or at least provides coverage that is no less broad than the underlying policy. Use of labels to identify a policy as an excess liability policy or an umbrella policy is problematic in today’s insurance market. Most policies identified as an umbrella policy are really a form of excess liability policy, and there are few policies that are purely an excess policy.
Primary Liability: Both umbrella and excess liability policies contain a schedule of the primary liability policies over which umbrella or excess liability coverage is to be provided. This schedule may require that the primary coverage limits be unimpaired on inception of the umbrella or excess liability coverage, in which case the umbrella or excess liability coverage policies and their primary policies may need to have the same inception date.
§ 17.5:10Hunting Lease Liability
An individual may be able to purchase an endorsement under the individual’s homeowner’s insurance policy extending personal liability coverage to a hunting lease. The availability and cost of this type of endorsement may vary with different insurance carriers. Although most forms of homeowner’s insurance currently do not exclude bodily injuries caused by firearms, an individual should confirm that his homeowner’s insurance policy does not contain an exclusion for hunting accidents before seeking to extend coverage to the premises under a hunting lease. An individual should also consider whether the personal liability limits under his homeowner’s insurance policy are adequate to cover a hunting accident.
Hunting lease insurance, which covers hunting accidents, is also available from specialized insurance carriers, often through organizations such as hunting clubs and the National Rifle Association.
If the tenant under a hunting lease is a business entity, the tenant will probably be unable to extend its commercial liability policy to cover hunting accidents at the hunting lease and will need to purchase a hunting lease insurance policy.
§ 17.6Additional Insured Status and Forms
An additional insured is a party that is provided coverage as an insured under a policy by an additional insured endorsement. (Note that the correct terminology is “additional insured,” not “additional named insured.”) Except as discussed in sections 17.6:4 through 17.6:7 below, the status of additional insured is always used with reference to liability policies. An additional insured party is not responsible for payment of the policy premium, but a small administrative charge may be required to issue the endorsement. The policy premium is not adjusted for an additional insured’s loss history.
With some exceptions, most notably coverage for bodily injury or death of an employee, Texas law prohibits a requirement in a construction contract for an additional insured endorsement covering a broad-form or intermediate indemnity. See section 17.2:4 above.
Many real estate attorneys believe that if a person or entity is an additional insured under the liability insurance of another person, the additional insured is afforded all the benefits of the other person’s insurance policy; but in reality, protection is provided to the additional insured party only to the extent stipulated in the additional insured endorsement. Numerous additional insured endorsement forms exist for different situations with varying degrees of coverage. Many additional insured endorsements explicitly or by implication exclude coverage for the sole or contributory negligence of the additional insured and limit or deny coverage to specific types of operations or locations.
§ 17.6:3Additional Insured Endorsement Forms
Additional insured endorsement forms contain a granting clause stating that the party listed or described in the endorsement is to be included as an insured under the policy followed by restrictions introduced by the phrase but only with respect to. Granting clauses in additional insured endorsements do not typically cover partners, employees, agents, and other parties related to the party named as additional insured unless language to that effect is added or a contractual requirement to that effect is picked up by the wording of the endorsement. Although ISO publishes more than thirty different additional insured endorsement forms, individual insurance companies are increasingly using manuscripted forms that differ greatly in coverages and clarity. Hence, the type of additional insured endorsement required must be stipulated by ISO designation (including title, form number, and edition date) or, at a minimum, described in terms of the desired coverage.
The additional insured endorsements discussed below are standard forms promulgated by ISO. Note that the words you and your used in the forms quoted below refer to the named insured, not the additional insured.
In 2004, the ISO 20 10 additional insured form was amended to exclude coverage for the additional insured’s sole negligence by adding a requirement that the claim be caused “in whole or in part” by the acts or omissions of the named insured. This change arguably eliminated from coverage liability attributable to the additional insured’s sole negligence.
Then, in April 2013, the additional insured endorsement forms entitled “Additional Insured—Owners, Lessees or Contractors—Scheduled Person or Organization” (ISO Form CG 20 10 04 13) and “Additional Insured—Managers or Lessors of Premises” (ISO Form CG 20 11 04 13), as well as several others, were amended to add three significant additional limitations. First, coverage is restricted to the extent permitted by law. While the apparent intent was to incorporate statutes such as Tex. Ins. Code § 151.104, voiding a contractual provision requiring an additional insured endorsement to the extent that the provision requires coverage for an indemnity prohibited under Tex. Ins. Code § 151.102, the prohibition, if applicable, would presumably apply without this language. Second, coverage cannot be broader than the coverage required by the provision contained in the underlying contract, which is often limited to the indemnity obligations assumed by the named insured. Here, the intent is to prevent coverage from exceeding what is required by the contract, so it is important for the contract to properly describe the scope of coverage required. Third, the dollar amount of coverage under the additional insured endorsement is limited to the lesser of the policy limit or the dollar limit of coverage required by the underlying contract. For this reason, insurance provisions in contracts often state that the policy limits set forth in the contract are minimum coverages and are not intended to limit the total amount the party should carry. However, note some manuscript endorsements may include endorsements that limit coverage to the lesser of the policy limit or the “minimum” limits of coverage required by the underlying contract. The party seeking additional insured coverage should specify in the contract that the limits of insurance are just minimums and should specifically require that additional insured status be provided to the full limits of any liability policies. In any event, named insureds may wish to avoid restrictive additional insured endorsements, because the named insured’s contractual obligation to provide additional insured coverage may be broader than the scope of the coverage of the available additional insured endorsement. On the other hand, the named insured may not want to provide additional insured coverage for risks that are assumed by or are the obligation of the additional insured. If so, both the contract and the policy should limit the additional insured coverage to the risks contractually assumed by the named insured.
In late 2019, ISO amended many of its additional insured endorsement forms, including the CG 20 10 and the CG 20 11. The changes made to these additional insured endorsement forms are not material to an understanding of the three limitations introduced in 2013. The following provisions from ISO endorsement CG 20 10 04 13 and CG 20 11 04 13 illustrate the three limitations introduced in 2013 (the first and second by paragraphs 1 and 2 below and the third by paragraph C below):
However:
1.The insurance afforded to such additional insured only applies to the extent permitted by law; and
2.If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.
...
C. With respect to the insurance afforded to these additional insureds, the following is added to Section III – Limits of Insurance:
If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:
1.Required by the contract or agreement; or
2.Available under the applicable Limits of Insurance shown in the Declarations;
whichever is less.
This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations.
ISO Form CG 20 10 04 13.
Owners, Lessees, or Contractors: The additional insured endorsement form entitled “Additional Insured—Owners, Lessees or Contractors—Scheduled Person or Organization” (ISO Form CG 20 10 04 13, quoted in part below) is commonly used in construction situations. The named insured (the “you” and “your” referenced in the endorsement) provides additional insured coverage to the person or persons identified in the endorsement’s schedule, for instance an owner, a lessee, or a general contractor (or other person upstream of the named insured). The endorsement has three drawbacks: (1) it covers only the named insured’s ongoing operations—that is, the additional insured is not covered for bodily injury or property damage occurring after completion or abandonment of the work; (2) it excludes from coverage injuries or damage caused by the sole negligence (but not the contributory negligence) of the additional insured, since the endorsement requires that the injury or damage be partially or totally caused by the named insured; and (3) it substitutes the word caused for the phrase arising out of used in editions before 2004 in order to eliminate coverage for losses or injuries occurring because of contractors’ operations but not necessarily because of contractors’ actions.
A. Section II—Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused in whole or in part by:
1.Your acts or omissions; or
2.The acts or omissions of those acting on your behalf;
in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.
ISO Form CG 20 10 04 13; ISO Form CG 20 10 12 19.
Coverage for completed operations can be obtained by using ISO Form CG 20 10 in tandem with ISO Form CG 20 37 12 19 entitled “Additional Insured—Owners, Lessees, or Contractors—Completed Operations.”
Managers or Lessors of Premises: The additional insured endorsement form entitled “Additional Insured—Managers or Lessors of Premises” (ISO Form CG 20 11 04 13, quoted in part below) is commonly used in lease situations and does not exclude the sole or contributory negligence of the additional insured. Coverage is tied to the lease’s definition of “premises.” Thus, if a lease defines “premises” in a way that excludes adjacent driveways or corridors, the landlord may not be an additional insured with respect to bodily injuries and property damage occurring in loading areas serving the premises.
A. Section II—Who Is An Insured is amended to include as an insured the person(s) or organization(s) shown in the Schedule but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule and subject to the following additional exclusions:
This insurance does not apply to:
1.Any “occurrence” which takes place after you cease to be a tenant in that premises.
2.Structural alterations, new construction or demolition operations performed by or on behalf of the person or organization shown in the Schedule.
ISO Form CG 20 11 04 13. A major change by ISO to this endorsement was made effective December 2019. The coverage trigger in paragraph A was revised to read as follows:
A. Section II—Who Is An Insured is amended to include as an insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by you or those acting on your behalf in connection with the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule and subject to the following additional exclusions . . . .
ISO Form CG 20 11 12 19. ISO eliminated the “arising out of” language previously included in the CG 20 11. The CG 20 11 is now in line with the revisions made in 2004 to the CG 20 10 additional insured endorsement form to limit the coverage trigger for additional insured protection to liability “caused, in whole or in part, by” the named insured and by those acting on its behalf. Arguably, this change eliminates additional insured protection for the landlord and managers for their sole negligence.
§ 17.6:4Additional Insured as Its Interest May Appear
The beneficiary of a property insurance policy must have an “insurable interest” in the insured property, that is, a lawful, substantial, and enforceable interest in the safety or preservation of the subject matter of the insurance. Examples of parties having insurable interests in a building are the owner and the mortgagee. The owner is the named insured under a property policy, and a lender’s interest would be protected with a lender loss payable or other mortgagee clause endorsement. In the context of builder’s risk policies the terminology “additional insureds as their interests may appear” has often been used to attempt to protect parties other than the named insured and mortgagee. If the owner of a building under construction procured a builder’s risk policy, the owner would be the named insured and the contractor and subcontractors would be named as additional insureds as their interests may appear. In theory, if the building were destroyed before completion, the contractor and subcontractors would be entitled to the portion of the insurance proceeds attributable to the portion of the completed construction for which the contractor and subcontractors had not been paid at the time the destruction occurred, and the insurance company would not be able to sue its “insureds” to recover its loss. However, the phrase has led to confusion in litigation and to unintended consequences. Risk managers now advise against the use of “additional insureds as their interests may appear” in builder’s risk policies and suggest instead that (1) all parties be named as insureds under the builder’s risk policy, without reference to the phrase “additional insureds as their interests may appear”; (2) mutual waivers of subrogation be included in the construction contracts and subcontracts; and (3) the parties confirm that the policy permits the waivers of subrogation. If there are coverages that are not intended to benefit all parties (such as a third-party liability extension that is not intended to benefit the contractor), that issue may need to be addressed in the policy and the applicable contracts.
§ 17.6:5Additional Insured Status for Landlords in Property Proceeds
ISO Form CP 12 19, entitled “Additional Insured—Building Owner,” provides that the building owner identified in the endorsement is a “Named Insured” with respect to the coverage provided under the tenant’s property policy “for physical loss or damage to the building(s) described in the Schedule” to the endorsement.
§ 17.6:6Additional Insured Status for Landlords in Rental Value
ISO Form CP 15 03, entitled “Business Income—Landlord as Additional Insured (Rental Value),” names the landlord as an additional insured with respect to that portion of proceeds payable under a business income endorsement representing the amount of rent payable under the lease. The remainder of the business income proceeds are payable to the tenant, that is, the named insured. In addition, the insurer commits to provide advance notice in writing of cancellation to the additional insured. This endorsement is especially useful in an absolutely net lease transaction.
§ 17.6:7Requirement that Coverage Be Primary and Noncontributory
If a party that is named as additional insured expects such coverage to be primary and noncontributory to the additional insured’s existing insurance coverage, the policy providing additional insured coverage must be endorsed to that effect. All policies have “other insurance” clauses that govern how overlapping insurance policies are required to share coverage. Some such clauses say a particular policy will be excess to any other policy, while some “other insurance” clauses provide for sharing duplicate coverage pro rata. When the issue arises because the named insured has two policies that provide overlapping coverage, these “other insurance” clauses make sense—the named insured is covered in any event, and the loss is shared by the overlapping insurers in accordance with the policy provisions. However, if a party has its own insurance but also requires that it be an additional insured on another party’s policy, it could be argued that the “other insurance” clauses should not apply and that the coverage obtained from the counterparty’s policy should be primary. In the absence of an endorsement, however, this may not be the result; the courts may split coverage between a party’s own insurance and its coverage as an additional insured. In addition, if the “other insurance” clause is a strong excess clause, the additional insured coverage might be rendered completely inapplicable depending on the amount of the claim and the limits of the respective policies. This result can be avoided by contractually requiring that coverage provided to the additional insured shall be primary and noncontributory to any other policy providing coverage to any additional insured, at least to the extent of the risks and liabilities assumed by the counterparty. ISO Form CG 20 01 04 13 is an example of such an endorsement, stating:
This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that:
(1)The additional insured is a Named Insured under such other insurance; and
(2)You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured.
ISO Form CG 20 01 04 13.
However, the above endorsement applies only to policies in which the additional insured is a named insured, and the additional insured and the counterparty will both want to determine the existence of any such restrictions and whether any such restrictions are acceptable to them.
An insurance company is subrogated to the rights of its insured against third parties to the extent of a loss paid by the insurance company. However, the parties to a business transaction may prefer not to endanger their business relationship with potentially expensive, stressful, and time-consuming litigation conducted by an insurance company in the name of one party against the other party. Hence, each insured may require its insurance company to waive its right of subrogation to the insured’s rights against the other party. If the named insured does not want to waive subrogation for risks that it did not intend, the contract can limit the scope of the waiver to the risks assumed by the named insured.
§ 17.7:2Components of Waiver of Subrogation
A waiver of subrogation provision should have two components: a covenant by the insured to obtain the waiver of subrogation from its insurer and a release by the insured with respect to the liability that is covered by the insurance policy for which the waiver is sought. The purpose of the release is to protect the beneficiary of the waiver if the party agreeing to obtain the waiver fails to purchase insurance or if the loss exceeds the scope or limit of the insurance policy.
A waiver of subrogation should also state affirmatively which party is to be responsible for any deductible or self-insured retention under the policy in question.
The current ISO edition of “Commercial Property Conditions” form (ISO Form CP 00 90) used in conjunction with an ISO commercial property insurance policy contains the following waiver of subrogation:
If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:
1.Prior to a loss to your Covered Property or Covered Income.
2.After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following:
a.Someone insured by this insurance;
b.A business firm:
(1)Owned or controlled by you; or
(2)That owns or controls you; or
c.Your tenant.
This will not restrict your insurance.
ISO Form CP 00 90 07 88 (emphasis added).
The ISO form of commercial general liability policy (ISO Form CG 00 01) states “The insured must do nothing after loss to impair” the insurance company’s right of recovery. Most insurance professionals believe that the implication of the language is that a waiver of subrogation given by the named insured before the occurrence is permissible.
Waivers of subrogation are also available for workers’ compensation, employer’s liability, and builder’s risk policies but are not provided absent a request.
§ 17.7:4Fair Notice Doctrine Compliance
A provision that requires one party to release the liability of the other party even if the other party is negligent must comply with the fair notice doctrine under Texas law. See section 17.2:5 above. However, a provision requiring the insurer to waive subrogation has never been held to be subject to the fair notice doctrine.
§ 17.8Deductible vs. Self-Insured Retention
Both a deductible and a self-insured retention (SIR) require the insured to pay the first dollars of a loss. However, the potential that a third-party claimant will not be compensated under a liability policy with an SIR is substantially greater than that under a policy with a deductible. When a deductible exists under a liability policy, the insurance company keeps control of the adjustment process, defends the insured, typically pays the claim to the third party, and thereafter charges the insured for the deductible. If an SIR exists, the insured controls the adjustment process to the extent of its SIR (unless the insured has contracted with a third party to administer the process) and the liability insurer has no duty to defend the insured or pay the claim to the third party until the SIR is exhausted.
A.M. Best’s analysis of property and casualty insurance companies is generally the standard cited in real estate transaction documents. Best assigns a “Financial Strength Rating” to insurance carriers. If a company is below Best’s minimum asset threshold or if sufficient information is not available or is not submitted or if the insurer so requests, Best may elect not to assign a Financial Strength Rating to an insurance company. Reports are available from the A.M. Best website (www.ambest.com) at no cost.
The components of a Best’s financial strength rating are the following:
1.Rating—A company is assigned one of sixteen “Best’s Ratings.” Each rating is composed of a letter (A to D) with or without plus or minus signs. A++ is the highest rating and D is the lowest.
2.Financial Size Category—A rated company is also assigned one of fifteen Financial Size Categories on the basis of its capital, surplus, and conditional reserve funds from which losses are paid. The Financial Size categories are referred to as “Classes” and described with capital roman numerals. Class I (up to $1 million) is the smallest and Class XV ($2 billion or more) is the largest.
3.Outlook—An Outlook indicates the potential future direction of the company’s rating over a designated period of twelve to thirty-six months. Outlooks can be “positive,” “negative,” or “stable.”
Property and casualty insurance companies that are not rated are designated “NR-1” through “NR-5” based on the reason for which Best did not rate the company.
The desired quality of insurance companies should be specified with a combination of both Best’s Rating and Financial Size Category. Most mortgagees require a minimum Best’s financial strength rating of “A” (Excellent) and a financial size category of “Class X” ($500 million to $750 million).
§ 17.10Evidencing the Existence of Coverage
The most common method for evidencing the existence of insurance coverage is to obtain a certificate of liability insurance or evidence of personal or commercial property insurance issued by an insurance broker. The standard forms of certificates of liability insurance and evidence of property insurance are published by the Association for Cooperative Operations Research and Development (ACORD), an insurance industry trade association.
§ 17.10:1ACORD 25 “Certificate of Liability Insurance”
The 2016 edition of the ACORD 25 certificate (form 17-1 in this chapter) combines all disclaimers contained in previous editions into two disclaimers located at the top of the certificate:
THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. THIS CERTIFICATE OF INSURANCE DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE CERTIFICATE HOLDER.
IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must have ADDITIONAL INSURED provisions or be endorsed. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).
The disclaimers address several matters:
1.The certificate is issued as a matter of information only.
2.The certificate confers no rights on the certificate holder.
3.The certificate does not create a contract between the certificate holder and the insurer or the insurance broker.
4.The certificate does not amend, extend, or alter the coverage afforded by the enumerated policies.
5.If the certificate contains a statement that an insurance policy has been endorsed to include an additional insured or to include a waiver of subrogation, but the endorsements were not, in fact, issued, the holder of the certificate has no rights against the insurer or broker.
An ACORD 25 certificate is expressly made subject to “all the terms, exclusions and conditions” of the policies listed therein, notwithstanding any requirement in any contract pursuant to which the certificate was issued. The certificate holder is also made aware that the policy limits shown in the certificate may have been reduced by paid claims.
An ACORD 25 certificate requires the issuing company to deliver notice only in the event of cancellation of the policies before the expiration date “in accordance with the policy provisions.”
The ACORD 25 certificate is designed to be used with liability policies. To use the form for property policies, information must be inserted into the “DESCRIPTION OF OPERATIONS / LOCATIONS / VEHICLES” space, which appears below the workers’ compensation blank.
§ 17.10:2ACORD 28 “Evidence of Commercial Property Insurance”
The 2016 edition of the ACORD 28 certificate (form 17-2 in this chapter) summarizes and states coverage under a commercial lines property policy (for example, a commercial property policy) to a mortgagee, additional insured, or loss payee and is designed to comply with the requirements of current lending practices. ACORD 25 and 28 have similar disclaimers. (See section 17.10:1 above for a discussion of the disclaimers.) ACORD 28 requires the issuing company to deliver notice only in the event of cancellation of the policies before the expiration date “in accordance with the policy provisions.”
§ 17.10:3Practical Considerations
According to risk managers, the vast majority of certificates of insurance are incorrectly completed. Hence, the forms should be reviewed for accuracy.
Insurance certificates are subject to fraud. A red flag is a certificate that is provided directly from the party that is supposedly insured rather than a third-party insurance agent. The recipient of a certificate may wish to consider (1) contacting the issuing insurance agency to confirm its existence, (2) contacting the insurance carrier to confirm the existence of the coverage, and (3) requiring copies of all endorsements dealing with additional insureds, loss payees, mortgagees, and waivers of subrogation.
§ 17.10:4Alteration, Modification, Disclaimers, and Notice
Texas has joined a large number of states that have enacted laws to prevent modification of the provisions of ACORD forms. Tex. Ins. Code § 1811.052(b) provides that “[a] person may not execute, issue, or require the issuance of a certificate of insurance for risks located in this state, unless the certificate of insurance form has been filed with and approved by the [Texas Department of Insurance].” Under Tex. Ins. Code § 1811.103, a standard certificate of insurance form promulgated by ACORD or ISO is deemed approved when filed with the Texas Department of Insurance, unless the standard form violates certain parameters contained in Tex. Ins. Code § 1811.102. The effect of approval of a certificate form by the Department is that a certificate confirms only that the referenced policy has been issued. Any certificate in violation of Texas Insurance Code chapter 1811 “is void and has no effect.” Tex. Ins. Code § 1811.156.
Tex. Ins. Code § 1811.053 prohibits any alteration or modification of a certificate of insurance form approved the Texas Department of Insurance unless the alteration or modification is approved by the Department. In addition, Tex. Ins. Code § 1811.051 forbids an agent from issuing a certificate of insurance that alters, amends, or extends the coverage or terms and conditions provided by the referenced insurance policy. “A certificate of insurance may not contain a reference to a legal or insurance requirement contained in a contract other than the underlying contract of insurance, including a contract for construction or services.” Tex. Ins. Code § 1811.154.
In the parameters for an acceptable form, Tex. Ins. Code § 1811.101 adopts many of the disclaimers contained in ACORD forms: “for information purposes only”; the certificate “does not confer any rights or obligations other than the rights and obligations conveyed by the policy”; the certificate does not convey a contractual right to a certificate holder; and “the terms of the policy control over the terms of the certificate.”
Tex. Ins. Code § 1811.155(b) prohibits any alteration in a certificate of the notice provisions of a referenced insurance policy. Under Tex. Ins. Code § 1811.155(a), a certificate can require notice to a person only if the person is named in the policy or endorsement and the policy or endorsement (or law) requires notice to be provided.
§ 17.11Examples of Insurance Requirements
Forms contained in chapters 8 (Deeds of Trust), 10 (Ancillary Loan Documents), 19 (Commercial Construction Contract Documents), and 25 (Leases) in this manual include insurance requirements and provisions that offer examples of the principles discussed in this chapter.
Almy, John. “Protective Safeguards Endorsements.” In Advanced Real Estate Law Course, 2019. Austin: State Bar of Texas, 2019.
Brady, Timothy J. and Jeffrey L. Brady. “Properly Insuring Your Communities Do’s and Don’ts.” In Handling Your First (or Next) POA Client: Basics of Representing Condominium and Homeowners Associations, 2019. Austin: State Bar of Texas, 2019.
Comiskey, Charles E. “Insurance Gaps: In the Eye of the Beholder.” In Advanced Real Estate Law Course, 2014. Austin: State Bar of Texas, 2014.
Johnston, Aaron, Jr. “Insurance and Indemnity in Real Estate Transactions (Drafting Insurance Requirements for Leases/Developments/Whatever).” In Advanced Real Estate Drafting Course, 2016. Austin: State Bar of Texas, 2016.
———. “Property and Liability Insurance and Indemnities in Real Estate Transactions.” In Handling Your First (or Next) Commercial Real Estate Lease, 2015. Austin: State Bar of Texas, 2015.
Johnston, Aaron, Jr., and Charles E. Comiskey. “Property and Liability Insurance and Indemnity in Real Estate Transactions.” Chap. 11 in Commercial Real Estate Transactions Handbook, 4th ed., edited by Mark A. Senn. New York: Aspen Publishers, 2013.
Locke, William H., Jr. “Drafting Indemnities (and Their Relationship to Insurance).” In Advanced Real Estate Drafting Course, 2017. Austin: State Bar of Texas, 2017.
———. “Texas Risk Management Manual—Chapter 1: Risk Management 101.” In Advanced Real Estate Law Course, 2018. Austin: State Bar of Texas, 2018.
______. “Texas Risk Management Manual—Chapter 2: Indemnity 201.” In Advanced Real Estate Law Course, 2018. Austin: State Bar of Texas, 2018.
______. “Texas Risk Management Manual—Chapter 3: Insurance 201.” In Advanced Real Estate Law Course, 2018. Austin: State Bar of Texas, 2018.
______. “Texas Risk Management Manual—Chapter 4: Waiver of Subrogation 201.” In Advanced Real Estate Law Course, 2018. Austin: State Bar of Texas, 2018.
______. “Texas Risk Management Manual—Chapter 5: Forms and Commentary.” In Advanced Real Estate Law Course, 2018. Austin: State Bar of Texas, 2018.
_______. “Three Scofflaws Are on the Loose, but There Is a New Sheriff in Town (the Good, the Bad and the Ugly of CGL Endorsements—and the Solution).” In Advanced Real Estate Law Course, 2017. Austin: State Bar of Texas, 2017.
Locke, William H., Jr., and Charles E. Comiskey. “11 Things You Wish You Had Known About Commercial Project Insurance.” In Advanced Real Estate Law Course, 2013. Austin: State Bar of Texas, 2013.
Locke, William H., Jr., Charles Comiskey, and Elizabeth A. Lowe. “Insurance for Real Estate Lawyers.” In Advanced Real Estate Law Course, 2015. Austin: State Bar of Texas, 2015.
Malecki, Donald S., and Jack P. Gibson. The Additional Insured Book. 7th ed. Dallas: International Risk Management Institute, Inc., 2013. Online edition.
McLaurin, Jason C. “An Overview of Business Interruption Insurance.” In Advanced Insurance Law Course, 2018. Austin: State Bar of Texas, 2018.
Melendi, Stephen A. “Priority of Coverage or: Who Picks Up the Tab at the End of the Night.” In Advanced Insurance Law Course, 2017. Austin: State Bar of Texas, 2017.
Nettles, Larry W. “Environmental Indemnity and Liability Allocation Agreements—Evaluating and Negotiating About the Risks.” In Advanced Real Estate Drafting Course, 2010. Austin: State Bar of Texas, 2010.
Robinson, Linda G., and Jack P. Gibson. Commercial Property Insurance. Dallas: International Risk Management Institute, Inc., 2009. Online edition.
Woodward, W. Jeffrey, Richard J. Scislowski, Maureen C. McLendon, and Jack P. Gibson. Commercial Liability Insurance. Dallas: International Risk Management Institute, Inc., 2010. Online edition.