Part 2 of 8
Have you ever encountered someone who treats additional insured coverage and contractual indemnity as interchangeable? They are not.
Under the AVOID Act, that confusion becomes costly much faster. When these concepts are blended at the outset, early errors are difficult to unwind later, even when better information becomes available. Understanding the distinction between additional insured status and contractual indemnity is no longer optional.
Two Different Legal Concepts
Additional insured coverage is an insurance concept. It arises from a policy endorsement and is governed by insurance policy language. The scope of coverage is defined by the endorsement’s grant, along with any applicable exclusions and conditions.
Contractual indemnity is a contract concept. While an insurance policy is itself a contract, contractual indemnity refers to an agreement between two non-insurance entities. A common example is a property owner hiring a contractor. The contract may include provisions requiring one party to defend or indemnify the other. In some cases, it may also require that one party be named as an additional insured.
Even where both appear in the same agreement, contractual indemnity and additional insured status remain separate legal theories. They are triggered differently and carry different consequences. Treating them as the same thing obscures how indemnity operates and how defense costs should be handled.
Two Different Sources of Obligation
An additional insured is owed coverage only if the policy terms are satisfied. The endorsement controls. Many endorsements limit coverage to liability caused by the named insured’s work. Some exclude coverage for the additional insured’s sole negligence.
Contractual indemnity depends entirely on the agreement between the parties. Some contracts require indemnity only for losses caused by the indemnitor. Others attempt to shift broader risk, including defense obligations.
The source matters because these obligations arise from different documents and are evaluated under different rules.
Defense Does Not Arise the Same Way
The distinction between additional insured coverage and contractual indemnity becomes critical when allocating defense costs. Additional insured defense obligations depend on the allegations in the complaint and the policy language. Contractual indemnity defense obligations depend on the contract terms and how the applicable jurisdiction treats defense provisions.
A contract may require a defense even where no insurance coverage applies. An endorsement may provide a defense even where the contract is silent.
When these concepts are conflated, defense dollars are often pulled from the wrong place. Defense costs under additional insured coverage are treated like any other defense costs under a liability policy. By contrast, where only contractual indemnity is owed, defense costs may erode policy limits and be paid from the liability limit.
Why the AVOID Act Makes This Worse
Before the AVOID Act, delayed impleader allowed this confusion to persist. Early tenders could be accepted loosely, and defense could be extended while the investigation continued. That delay often concealed weak analysis.
Under the AVOID Act, early tenders require earlier answers. If a claim team does not separate additional insured coverage from contractual indemnity at the outset, defense obligations may be assumed without a clear foundation. Once defense is extended, reversing course becomes difficult.
The Real Risk of Conflation
When additional insured coverage and contractual indemnity are blended together, control of the file erodes quickly.
Defense costs may unexpectedly erode limits. Contractual defense obligations may be assumed without confirming enforceability. Coverage disputes may surface later, after positions have hardened and costs have already been incurred.
These outcomes are not caused by the AVOID Act. They result from failing to separate concepts that were always distinct. The AVOID Act simply forces those failures to surface sooner.
The Correct Approach Going Forward
Disciplined claims handling requires treating these obligations independently. Policies must be reviewed as policies. Contracts must be reviewed as contracts. Defense decisions must be tied to the correct source of obligation and documented clearly.
As timelines compress, clarity becomes essential. The takeaway is simple: conflation creates exposure, and separation creates control.
Thank you for reading. Understanding the difference between additional insured coverage and contractual indemnity is foundational to disciplined risk transfer analysis. In the next article, we will address why tender letters assert positions but do not prove coverage.
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