Special Legal Feature
Certificates of Insurance
Read the fine print!
by Nancy L. Kaszak
There is a children's verse that park district directors might find helpful to recall.
For want of a nail, the horse's shoe was lost; For want of a shoe, the horse was lost; For want of a horse, the soldier was lost; For want of a soldier, the battle was lost; For want of a battle, the war was lost; All for want of a horse shoe nail.
We have all been there. After months, sometimes years, of planning, discussions, arguments, persuasion and agonizing, you are finally breaking ground on the long-awaited park construction project. Just before the press release and ceremony, an innocent paper comes across a park director's desk, filled with small print and insurance-"ese." It is the contractor's certificate of insurance. The natural tendency is to say "Great" after you see the required amount of coverage and the park district's name on the certificate. But beware, this paper can be the nail on which your war may be lost.
In March 1988. the Glenview Park District hired a painting contractor to sand and paint the ceiling beams of its indoor ice rink. The contract specified that the contractor would insure the District against accidents occurring during work on the project. The contractor provided the District with a certificate of insurance listing the District as an "additional insured" on the contractor's insurance policy.
On the second day of the work, a painter fell head first from a scaffold. The painter suffered severe and permanent brain damage. The painter filed a lawsuit alleging that the District was negligent and had violated the Illinois Structural Work Act, a state statute requiring that scaffolds and other supports on a work site be safely erected and constructed. The District understandably looked to the contractor's insurance policy for protection.
To the surprise of the District, the contractor's insurer quickly pointed out that the District was only an "additional insured." The insurer asserted that the fine print of the policy stated that an "additional insured" is not insured for damages arising out of the "negligence of the additional insured." The insurer claimed that because the lawsuit alleged that the District was negligent, the insurer did not need to defend the District lawsuit.
The District is a member of the PDRMA Pool which chose our law firm to defend the claim. We defended the painter's lawsuit and sued the contractor's insurer. The District said that the insurer's argument was silly. The District would not be sued unless the plaintiff alleged that the District, at a minimum, was negligent. The agreement with the contractor anticipated that insurance protection for all such claims would be provided by the contractor and the contractor's insurance company. The insurer's interpretation rendered the insurance coverage for the additional insured in these situations to always be meaningless. If you were sued, you would lose your insurance; you would not be covered. The District argued that such a provision in an insurance policy was deceptive and against public policy. After extensive litigation, the Illinois Supreme Court ultimately and correctly ruled that the District was covered under the contractor's policy.
A park district, like any other governmental entity, is constantly vulnerable to potential catastrophic liability for accidents occurring during the course of contract work. A district is vulnerable, whether or not it is negligent Being an additional insured on an insurance policy may not always provide adequate protection for the district, but should, at least, give the protection which was expected. This case offers valuable lessons for all districts trying to transfer risk to a contractor.
Lesson #1: Bid specifications should be drafted to require the contractor to provide at least standard "additional insured" coverage from a company acceptable to me district. The insurance certificate should be on a form approved by the insurance industry organization that drafts standard insurance policy forms and in amounts adequate to cover anticipated defense and liability costs in the event of a claim. The boilerplate "additional insured" clause must
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be carefully reviewed and modified when necessary. In the Glenview case, the policy did not follow the standard language.
Lesson #2: Every effort should be made to obtain and fully review the actual insurance policy, not just the certificate of insurance. It is important to review the "additional insured" clause in conjunction with the actual policy to see if the fine print cancels out the protection which the certificate of insurance appears to promise. In addition, the policy should state that it will not be cancelled or modified without 30 days prior written notice to all insured and additional parties.
Lesson #3: Some governmental bodies have gone one step beyond requiring the contractor to provide "additional insured" coverage. It may be desirable to require, in the bid specification, that the contractor purchase an owner's insurance policy, commonly known as an "owner's liability protective" policy. Under these policies, the district, not the contractor, is the owner and beneficiary of the policy which covers only the contract work. With this type of policy, the district does not have to fear that a claim from some other job will exhaust the contractor's own policy which covers all its operations and may have many "additional insured" parties. Since the owner ultimately pays for the insurance coverage, your contract specification can call for an alternate bid including owner's liability protective coverage. The specific cost of this extra protection can then be easily identified.
So when you see a certificate of insurance appear on your desk, do not run for the hills. Do not hide it in a file folder, either. Pause. Take a step back. Get a cup of coffee. Look at it. Ask questions. Talk to your lawyer and insurance agent. And, get answers. (National Union Fire Insurance Company of Pittsburgh, Penn. v. Glenview Park District, 158 ILL 2d 116,632 NE 2nd, 039 (1994).)
Nancy L. Kaszak is counsel to the law firm Ancel, Glink, Diamond, Cope & Bush, P.C. She is also the state representative from District 24.
20 • Illinois Parks & Recreation • January/February 1995
Sam S. Manivong, Illinois Periodicals Online Coordinator