Are You Sure You’re an “Additional Insured”? The Second Circuit Says You May Not Be

Pillsbury Winthrop Shaw Pittman LLP | March 6, 2018

In a previous blog post we discussed a New York trial court decision in which the court granted additional insured status to entities that did not contract with the named insured, but were referenced by category in the named insured’s subcontract. But before concluding you’ve got additional insurance, there’s another opinion you should know about. Around the same time, the U.S. Court of Appeals for the Second Circuit came to the opposite conclusion holding that an Additional Insured endorsement did not cover the University of Rochester Medical Center, even though the subcontract specifically provided that the University would be an additional insured, and Harleysville Insurance Co. therefore had no obligation to defend or indemnify it in a suit filed by an injured construction worker.

In Cincinnati Insurance Co. v. Harleysville Insurance Co., et al., Jumall Little, an employee of The Kimmell Company Inc. was injured while making repairs at the Medical Center. Little sued the University, the general contractor on the project, and the subcontractor that engaged Kimmell to do the work Little was performing when he got injured.

As was required by its subcontract, Kimmel took out an insurance policy with Harleysville, which provided coverage for certain additional insureds through two separate endorsements, the Privity Endorsement and the Declaration Endorsement. Neither endorsement, though, expressly included either the University or the general contractor as an Additional Insured.

The Privity Endorsement provided additional insurance coverage to entities in contractual privity—a direct contractual relationship—with Harleysville’s named insured, Kimmel:

[w]hen you [Kimmel] and such person or organization [Kimmel’s subcontractor] have agreed in writing in a contract or agreement [the subcontract] that such person or organization [Kimmel’s subcontractor] be added as an additional insured on your policy.

The Second Circuit found that the “Privity Endorsement does not confer ‘additional insured’ status on [the University or the General Contractor] because the Privity Endorsement requires contractual privity,” and Kimmel did not enter into a contract with either entity directly. The panel held that while Kimmel contractually agreed to name the University as an additional insured, such an agreement does not modify the express terms of the insurance policy Kimmel actually purchased.

The University fared no better under the Declaratory Endorsement. That endorsement amended the policy “to include as an additional insured the person(s) or organization(s) shown in the Schedule.” The Corresponding “Schedule of Other Coverages” included “Owners, Lessees Or Contractors – Automatic Status When Required In Construction Agreement With You.” It did not name the University with particularity. The panel upheld the lower court’s ruling that the Declaration Endorsement did not confer “additional insured” status on either the University or the General Contractor because neither the University nor the General Contractor were specifically listed on the corresponding Schedule.

So, if you think you’re an additional insured, give it another thought. Don’t just rely on a representation that you’re covered! Make sure you take the time to review the Additional Insured Endorsement, just as you would any other insurance policy. And, as always, if in doubt, consult a coverage lawyer—preferably before you agree to additional insurance offered by your subcontractors.

Contractors Beware: Your Subcontractor Provided Additional Insured Coverage may have Gaps

David S. Lynch | Kilpatrick Townsend | February 14, 2018

Construction contracts generally require subcontractors to extend additional insured status on the subcontractor’s policies for the benefit of the contractor who relies on this coverage to protect it from claims arising out of the subcontractor’s work on the project. The intent is to place the risk of loss for the subcontractor’s work on the subcontractor’s liability policies. In order to assure that the subcontractor has complied with these contract requirements, contractors generally require the subcontractor to provide a certificate of insurance. However, even though a subcontractor has technically provided the required insurance, the insurance may not meet the expectations of the contractor that the risks to the contractor associated with the subcontractor’s work be covered under the subcontractor’s policy.

One such circumstance occurred to a general contractor in Illinois, who required a subcontractor to name it as an additional insured on the subcontractor’s general liability policy. Vivify Constr., LLC v. Nautilus Ins. Co., 2017 Ill.App.(1st) (2018). The subcontractor complied and had the contractor added to its policy as an additional insured. However, the subcontractor’s policy also contained an endorsement which effectively narrowed coverage under the policy. While liability policies contain employee exclusions which remove from coverage claims made by employees of the insured seeking coverage, this endorsement broadened the exclusion to remove from coverage claims made by any employee of any insured, whether the employer was the party seeking coverage or not.

An employee of the subcontractor was injured on the job and filed a lawsuit against the contractor. The contractor sought coverage for the claim under the subcontractor’s policy as an additional insured. The subcontractor’s carrier denied coverage relying on the broadened employee exclusion. This denial was upheld.

Another circumstance occurred in connection with the construction of a house. D.R. Horton Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740 (Tex. 2009). The homebuilder required the foundation subcontractor to include the homebuilder as an additional insured under its liability policy. The subcontractor obtained the required endorsements, but they limited additional insured coverage to losses arising out of the negligence of the subcontractor. When the homebuilder was sued by the homeowners for defects in the foundation of the house, the homebuilder sought coverage under the foundation subcontractor’s general liability policy as an additional insured. Since the pleading filed against the homebuilder did not include any allegations against the subcontractor, the court determined that the additional insured endorsement was not triggered and that the insurance company did not owe the homebuilder a defense to the lawsuit.

The lessons to be learned are first to specify what types of coverage subcontractors are required to carry, to specify any limitations on coverage that are not acceptable, and to specify the exact additional insured endorsements the subcontractors are required to obtain. If possible, it is recommended that the subcontractor’s policies be reviewed in advance to determine whether there are any limitations on coverage which would inhibit the intended transfer of the risk of loss for the subcontractor’s operations to the subcontractor’s insurance coverage. If a review of the policies is not possible, it is recommended that the subcontractor be required to produce a copy of any endorsements to the policy.

Additional Insured Status: Playing The Speak-Out Game On A Construction Project

Matthew DeVries | Best Practices Construction Law | February 21, 2018

Last weekend we played Speak-Out: Kids versus Parents, a game where you use a plastic thingy to obstruct your speech capabilities.  The winning team is the one that guesses the most phrases.  Reading and understanding an insurance policy on a construction project can be a lot like understanding my kids playing Speak Out.

Proper insurance coverage is an important risk management tool for contractors, subcontractors, project owners/developers and design professionals. Whether you are required by contract or law, purchase and maintaining the appropriate coverage can help you avoid catastrophe on your project.  Since there are so many types available, it is important to understand what is being covered…and what is not.

This was a hard lesson learned by a contractor recently in Vivify Construction v. Nautilus Insurance Co., a recent decision issued by the Appellate Court of Illinois.  In that case, the contractor and subcontractor (and their insurance carriers) were pointing the finger at each other for injuries sustained by an employee of the subcontractor.

The subcontract agreement required the subcontractor to indemnify and hold harmless the contractor against claims of bodily injury resulting from the subcontractor’s work.  The subcontract also required the subcontractor to include the contractor as an “Additional Insured” on its policy.

The insurance policy provided “Additional Insured” coverage for the contractor.  But it also contained an endorsement that included an “employee exclusion,” which stated that the policy did not apply to bodily injury to the subcontractor’s own employees.

The Court was required to parse through the applicable contract and insurance provisions.  In the end, the Court found that—despite the “Additional Insured” status of the contractor—the subcontractor’s insurance policy contained the broadened employee exclusion provisions.  This ultimately negated coverage.

Vivify Construction addresses such a small portion of insurance coverage disputes on construction projects, but the lesson is far more impactful.  Despite the difficulty in reading and understanding insurance coverages on a project, you are advised to specify in your contracts what types, amounts, and limitations are acceptable for a project. While cumbersome, don’t just rely on a certificate of insurance provided by a party, but ask them to get you a copy of the actual policy to review.  Don’t try to figure out what was said after the dispute arises.

“Additional Insured” Counseled to Read the Policy

Robert M. Frey | Butler Snow | January 30, 2018

An Illinois General Contractor learned a hard lesson the other day; the case is Vivify Constr., LLC v. Nautilus Ins. Co., 2017 IL App (1st) 170192.

The General Contractor, Vivify Construction, subcontracted part of the job to Victoria. Naturally wishing to protect itself from claims arising from Victoria’s work, Vivify required Victoria to maintain liability insurance, and to include Vivify “as an additional insured for claims caused in whole or in part by Victoria’s negligent acts or omissions. . . .” Id.  (brackets omitted).

Victoria did indeed include Vivify as an Additional Insured.  Unfortunately for Vivify, however, Victoria’s policy contained an exclusion for claims by employees of “any insured’s contractors, subcontractors, or independent contractors. . . .”  The trial court found, and the appellate court agreed, that this language unambiguously applied:  Vivify was an “insured”; Victoria was a Vivify “contractor”; and the injured worker was an “employee” of Victoria.  (The Court seemed to pass over the equally-fatal exclusion for claims by “employees . . . of any insured. . . .”).  The court distinguished cases reaching a different result based on the separation-of-insureds clause: “none of those cases involved policies containing the broad exclusionary language at issue here.”

As a parting shot to Vivify the Court closed with this observation (emphasis supplied):

We observe that while Vivify contends it is unlikely that Victoria will be able to pay Vivify’s legal expenses and any judgment against it, Vivify could have protected itself by reading the policy to ensure that it satisfied the subcontract. We cannot rewrite an insurance policy to suit Vivify’s needs.

Which leads us back to what we said some while ago:  “demand a copy of the Policy (not merely a COI); and read the Policy when you get it.”

Additional Insured Is Covered Under Ongoing Operations Endorsement Despite Subcontractor’s Completion of Work

Tred R. Eyerly | Insurance Law Hawaii | December 13, 2017

Although the homeowners did not own their homes when the subcontractors completed their work, the general contractor was still covered as an additional insured for the homeowners’ suits based on the ongoing operations endorsement in the subcontractors’ policies. McMillin Mgmt. Servs. v. Fin. Pac. Ins. Co., 2017 Cal. App. LEXIS 1000 (Cal. Ct. App. Nov. 14, 2017).

McMillin was the developer and general contractor for the project. Among the subcontractors were Martinez Construction Concrete Contractor, Inc. and Rozema Corporation. Martinez performed concrete flatwork between 2003 and November 2005. Rozema performed lath and stucco work between March 2003 and October 2005.

Lexington issued CGL policies to Martinez and Rozema. McMillin was an additional insured under both policies, “but only with respect to liability arising out of your [i.e., Martinez’s or Rozema’s] ongoing operations performed for [McMillin].” An exclusion provided that the insurance did not apply to property damage occurring after the insured subcontractor had completed operations on behalf of the additional insured.

McMillin completed construction of the homes in June 2005. In June 2010, several homeowners sued McMillin, alleging defective conditions in their homes arising out of the construction. McMillin tendered its defense to Lexington, who refused to defend. McMillin sued for declaratory relief. Lexington successfully moved for summary judgment. Because there were no homeowners in existence until after the subcontractors’ work was completed, any potential liability to the homeowners arising out of the subcontractors’ work must have arisen out of the subcontractor’s completed operations.

On appeal, the appellate court reversed. Even if McMillin did not face any liability to homeowners during the subcontractors’ ongoing operations, the endorsement did not state that Lexington would provide coverage solely for liability occurring during the subcontractors’ ongoing operations performed for McMillin. Rather, the endorsements stated that Lexington would provide coverage to McMillin for liability “arising out of” such ongoing operations. The term “arising out of” was not synonymous with “during.” Instead, the phrase “arising out of” was given a broad interpretation in the context of additional insured endorsements. The fact that there were no homeowners at the time of Martinez’s and Rozema’s ongoing operations did not establish that McMillin could suffer no liability arising out of such ongoing operations.

The court did not decide whether an ongoing operations additional insured endorsement provided coverage to the additional insured only for damages that occurred before the completion of the name insured’s ongoing operations. Rather, the court only needed to decide whether Lexington and the trial court were correct that the nonexistence of homeowners at the time Martinez and Rozema ceased ongoing operations established as a matter of law the lack of potential for coverage for McMillin under the policies.