DON’T GET TRAPPED IN THE COVERAGE GAP: ADDITIONAL INSUREDS UNDER COMMERCIAL GENERAL LIABILITY POLICIES – RECENT DEVELOPMENTS

  • By Michael
  • 13 Nov, 2012
As the former owner of a contracting business I am all too familiar with the need to be named as an “additional insured” on a subcontractor’s certificate of insurance.  Most business owners and risk managers though don’t fully understand the nuances of this often overlooked but vitally important part of their overall insurance coverage.  For […] The post DON’T GET TRAPPED IN THE COVERAGE GAP: ADDITIONAL INSUREDS UNDER COMMERCIAL GENERAL LIABILITY POLICIES – RECENT DEVELOPMENTS appeared first on GGHH Law.
As the former owner of a contracting business I am all too familiar with the need to be named as an “additional insured” on a subcontractor’s certificate of insurance.  Most business owners and risk managers though don’t fully understand the nuances of this often overlooked but vitally important part of their overall insurance coverage.  For those that fail to read the fine print a trap may be looming and, as evidenced by a recent District Court case in the Northern District of Illinois, falling in could cost your company hundreds of thousands of dollars.
It is standard procedure in most service agreements that the service provider (the “Provider”) name the recipient of those services (the “Recipient”) as an “additional insured” on the Provider’s commercial general liability insurance (“CGL”) policy and evidence the same in a certificate of insurance issued by the Provider’s insurance carrier.  The Recipient traditionally relies on this certificate as evidence of insurance in the event that damage to person or property is caused by the Provider, its employees or agents during the performance of the Provider’s duties under the agreement.  The Recipient further expects that the Provider’s insurance will be primary in the event of an incident causing such damage.  A recent case decided in the U.S. District Court for the Northern District of Illinois, however, exposed a coverage gap in which an additional insured might not be covered by the Provider’s CGL policy for damages incurred by the Provider’s employees.
The Provider in the case, Independent Building Maintenance Company (“IBM”), was engaged by Archer Daniels Midland Company (“ADM”) to perform window cleaning services.  The service contract included a provision requiring IBM to obtain insurance and indemnify ADM for liability arising from the work IBM performed.  A policy with The Burlington Insurance Company (the “Insurance Company”) was accordingly endorsed to name ADM as an additional insured.  Subsequently, an IBM employee was cleaning windows when his ladder slipped causing him to injure his knee.  The employee filed suit against ADM asserting negligence and premises liability.  ADM tendered the defense of the suit to the Insurance Company, which ultimately disclaimed any duty to provide a defense.  ADM settled the suit for $150,000 and alleged that it spent almost $200,000 in attorney’s fees over the course of the suit.  The Insurance Company claimed it had no duty to defend ADM in the suit because (1) the policy’s cross liability exclusion barred coverage for bodily injury to an “employee of any insured” and (2) the employer’s liability exclusion barred coverage for bodily injury to an “employee of the insured”.
The court addressed the employer’s liability exclusion first, which is a typical provision in a CGL policy that bars coverage for personal injury claims by employees of the insured as such claims would normally be covered by an employer’s workers compensation insurance.  The policy also included a severability clause that ADM relied on to argue that it was entitled to separate coverage under the policy so that a claim of injury by IBM’s employee against ADM would actually be covered.  In general, severability clauses are intended to treat each entity covered under the policy as if each were insured separately.  The court agreed with ADM, citing an Illinois Supreme Court case that considered the interplay of a severability clause and an employee exclusionary clause barring coverage for bodily injury to employees of “ the insured”.  The court noted, however, that drafting a broader exclusion might be effective in barring coverage for employee’s suits against non-employer-insureds despite the existence of a severability clause.
Though the language of the employer’s liability exclusion was not sufficient for the Insurance Company to bar coverage to ADM, the court found the opposite with the cross liability exclusion which barred coverage for bodily injury to an “employee of any insured”.  ADM attempted to rely on the same severability argument but the court disagreed, pointing in particular to the language “ any insured”.  The court found that the distinction between the terms “ the insured” and “ any insured” in an exclusion is crucial in determining the significance of a severability clause, and even more so where the terms were used in different exclusion provisions of the same policy.
In summary, the court relied on the plain language to conclude that the employer’s liability exclusion did not bar coverage for ADM because the injured employee was not actually ADM’s employee (i.e., not an employee of “ the insured” under the plain language of the exclusion), but did bar coverage for ADM under the cross liability exclusion because, being named as an additional insured on the original endorsement, ADM became “ any insured” under the terms of the exclusion.  In practice, business owners and risk managers should be wary to avoid the trap ADM fell into by doing some simple planning.  First and foremost, realize that a certificate of insurance is merely evidence that coverage exists and is current but is subject to the exclusions in the original policy.  Where possible obtain a waiver of the cross liability exclusion in the certificate of insurance, and be sure your counsel negotiates strong contractual indemnity provisions in the underlying agreement and that the Provider has the balance sheet strength to honor them.
For further information or a free consultation contact Jordan Uditsky at juditsky@gghhlaw.com .
By Robert Haney 13 Nov, 2017

When preparing to organize your dental practice, choosing the form of business entity may seem daunting. Dentists have many options for organizing their practices. In Illinois, these options include a limited liability partnership, professional association, professional limited liability company or a professional service corporation (“PSC”). Often, the best option for solo practitioner dentists is to form a PSC as it can provide tax advantages, liability protection and other benefits that are beyond the scope of this article. While a PSC operates similarly to a traditional corporation, because of its unique nature the set-up and maintenance of a PSC is a bit more nuanced than that of the traditional corporation. This article will provide you with a general overview and basic legal compliance checklist of the PSC incorporation requirements for dentists, but may also be applicable to other healthcare professionals.

Pre-Incorporation

1)     Choose Your Company’s Personnel . Traditional corporations are not generally limited in who can participate in its ownership and operation. However, under the Professional Services Corporation Act (the “PSC Act”), a PSC is limited in who is allowed to participate in the company. All shareholders, directors, officers, agents and employees of the PSC must be duly licensed by the Illinois Department of Financial and Professional Regulation (“IDFPR”) to provide their respective dental services. Only “ancillary personnel” do not require licensure. Ancillary personnel, which typically includes clerks, administrative staff and technicians, are employees who:

a)    Are not licensed under the Illinois Dental Practice Act (“Dental Act”);

b)    Are supervised by persons licensed under the Dental Act;

c)    Do not hold themselves out to be licensed under the Dental Act; and

d)    Are not prohibited by the IDFPR from being employed by the PSC.  

2)     Choose Your Company’s Name . Choosing your company’s name is vital to your PSC as it is often the first impression that people have of your company. The PSC Act has two main requirements when choosing your company’s legal name. The name must:

a)    Include the full name or last name of one or more of the shareholders; and

b)    End with “chartered”, “Limited”, “Ltd.”, “Professional Corporation”, “Prof. Corp.” or “P.C.”

However, if you would like to operate your company under a different name, your PSC can adopt a fictitious name by making a filing with the county clerk of the county where your company’s principal office is located.

3)     Choose Your Company’s Location . The PSC Act and Dental Act require that your company’s principal address be located in Illinois. Additionally, the PSC Act requires you to submit a separate application for licensure from IDFPR for each business location in Illinois.

Incorporation

1)     Draft Your Corporate Documents . To ensure that your PSC is in full corporate compliance, you will need to draft articles of incorporation, bylaws and other necessary documents for your company. In having these documents prepared, please note that it is important to use attorneys experienced in setting up PSCs to best protect your company from increased and unnecessary liability.

2)     File Articles of Incorporation with the Illinois Secretary of State . Once you have compiled all of the necessary corporate documents, you will need to file the Articles of Incorporation with the Secretary of State. Articles of Incorporation can be filed in-person, via mail or on the Secretary of State website .

3)     Obtain Your Federal Employer Identification Number . You can obtain a Federal Employer Identification Number or EIN, from the IRS via telephone or the IRS website .

4)     Register with the IDFPR . The final step in setting up your PSC before your company can begin practicing dentistry in Illinois is obtaining a license for your PSC from the IDFPR. The license application can be filled out online via the IDFPR website .

Post-Incorporation

Once you organize a PSC, it is imperative to properly maintain the “corporate veil”, or the invisible wall separating you from your PSC. If the corporate veil is not maintained, the limited liability benefits you are afforded under your PSC can be destroyed and you may be held personally liable for the liabilities of your PSC (note however, that a PSC does not provide insulation from dental malpractice, for which a dentist remains personally liable). In order to maintain your PSC’s corporate veil, you must:

1)    Timely file the PSC’s Annual Reports.

2)    Timely renew the PSC’s license with IDFPR.

3)    Properly maintain separate corporate minutes, records and consents for the PSC.

4)    Do not commingle PSC funds and personal funds.

5)    Only sign documents in the operation of your PSC in your capacity as an officer, director or shareholder of the company.

Please note that the foregoing list is not necessarily exhaustive but it is the minimum you need to do to maintain your PSC.

That concludes the general overview and basic legal compliance checklist for forming a PSC in Illinois. It is important to remember that while a PSC may be the correct choice for certain dentists, it may not be the best choice for you. Accordingly, regardless of how you choose to organize your dental practice, it is important to consult with an experienced attorney beforehand to determine which type of entity best suits your specific needs. Please feel free to reach out to me with any questions at bhaney@ghulaw.com or visit our website at www.chicagodentalattorney.com .    

 

Robert Haney is an attorney and business advisor serving businesses in the Chicagoland area and throughout the country. Mr. Haney advises businesses and entrepreneurs from startup to sale, and strives to be a trusted advisor to his clients by delivering practical and efficient counsel on a wide range of matters. His combination of legal and business experience provides a unique perspective when counseling clients, giving him an understanding of the true value and application of his advice to their organizations. To learn more about Mr. Haney, visit www.ghulaw.com .

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As the former owner of a contracting business I am all too familiar with the need to be named as an “additional insured” on a subcontractor’s certificate of insurance.  Most business owners and risk managers though don’t fully understand the nuances of this often overlooked but vitally important part of their overall insurance coverage.  For […] The post DON’T GET TRAPPED IN THE COVERAGE GAP: ADDITIONAL INSUREDS UNDER COMMERCIAL GENERAL LIABILITY POLICIES – RECENT DEVELOPMENTS appeared first on GGHH Law.
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