CAN INSURERS LIMIT COVERAGE TO THE LANGUAGE OF A THIRD PARTY CONTRACT?

The language in a typical additional insured endorsement often narrows coverage to an amount equal to or less than the amount specified in the contract between the Named Insured and Additional Insured.  An example of this language can be found in the new 2013 ISO form endorsements.  New wording states that coverage to be afforded to the additional insured will not be broader than the underlying third-party agreement requires.  It also states that the coverage limit is not to be greater than either 1) the amount required by contract; or 2) the limit of coverage, whichever is less.

These changes tie the limits (amount) and extent (breadth) of coverage under an insurance policy to language found in a third-party contract.  Since the contract is not attached to the policy, nor is its language made an express part of the policy terms, the insurance company’s attempt to limit coverage to a third-party document presents some serious legal concerns.  These concerns can be used by additional insureds to argue against the endorsement as a matter of public policy, contract law and insurance law – all in order to broaden coverage.

First, courts interpret insurance policies using the rules of contract law.  Courts are generally “loathe to judicially rewrite the parties’ contract by engrafting extra-contractual standards.”  Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660, 676 (Tex. 2008).   This is exactly what the endorsement language is attempting, when it seeks to limit the insurer’s coverage to a third-party agreement.  The express language of the underlying contract is not set out specifically in the endorsement.  This grafts “extra-contractual” language into the policy agreement.

Second, one of the contracting parties to the insurance agreement – the insurance company – has no idea what that third-party contract even says.  The insurer is attempting to limit coverage; yet there is no proof that the insurer even knows what the third parties agreed to in the underlying contract.  Thus, there can be no meeting of the minds on this issue, nor appropriate consideration.  Both of these elements are necessary in order to enforce the terms of a contract, whether insurance or otherwise.

Third, since the third-party contract is referenced in the policy, and the policy uses its terms to limit coverage, the third-party contract becomes a contract of insurance under most states’ laws.  For example in Nebraska, an insurer must file the policy forms with terms and conditions for approval before issuing coverage in this State.  If part of a form is missing, it is declared invalid.  If part of an endorsement refers to language in a third-party contract that is not made a part of the policy, the form is incomplete.  The new language is unapproved as a matter of law by the Department. It is then unenforceable, too.