Privity and Additional Insured Coverage

Larry P. Schiffer and Suman Chakraborty | Squire Patton Boggs | October 5, 2017

When a worker is injured on a construction job and sues the relevant parties, a side battle often ensues over which carrier has the duty to defend and indemnify the owner, general contractor or subcontractor based on the language in the various construction contracts requiring some or all of those parties to be named as additional insureds. When there are multiple subcontracts cascading down

to the injured worker’s employer, determining whether the employer’s policy must defend and indemnify other parties as additional insureds can be confusing. In a recent Summary Order, which does not have precedential effect, the Second Circuit Court of Appeals weighed in on this issue under New York law.

In Cincinnati Ins. Co. v. Harleysville Ins. Co., an employee of a sub-subcontractor was injured and sued the building owner, general contractor and subcontractor. The sub-subcontractor’s construction contract with the subcontractor required the sub-subcontractor to add the subcontractor, general contractor and owner as additional insureds to the sub-subcontractor’s insurance policy. The subcontractor’s carrier sued the sub-subcontractor’s carrier arguing that the latter carrier had to defend and indemnify the additional insureds. The district court granted the subcontractor’s carrier’s summary judgment motion in part by finding that the sub-subcontractor had a duty to defend and indemnify the building owner as an additional insured, but not the general contractor. On appeal, the Second Circuit reversed in part and held that the sub-subcontractor’s carrier had no duty as neither the building owner nor the general contractor were additional insureds under the policy.

According to the court, the sub-subcontractor’s policy had 2 endorsements that addressed additional insureds. The first was the “Privity Endorsement,” which grants additional insured coverage “when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” The second was the “Declaration Endorsement,” which refers to the declarations section of the policy for a schedule of additional insureds.

In reversing, the court held that the Privity Endorsement did not confer additional insured status on the building owner or general contractor because there was no contractual privity between them and the sub-subcontractor. Simply put, the sub-subcontractor had no direct construction contract with the owner or the general contractor. The court noted that the law in New York was clear on this point and that New York courts had interpreted the identical provision to require contractual privity. The court stated that it did not matter if the sub-subcontractor’s construction contract required the owner and general contractor to be named as additional insureds (this was a matter for breach of contract), that contract could not modify the insurance policy because the Privity Endorsement was clear on its face that the construction contract had to be between the insured and the purported additional insureds. Because the insured had no construction contract with the owner or the general contractor there was no contractual privity and no coverage.

As to the Declaration Endorsement, the court noted that neither party were listed on the schedule as additional insureds. The court also found that a reference to a heading on the Declaration Endorsement that was the same as the Privity Endorsement did not expand the additional insured coverage grant automatically to every party when required in any construction agreement with the insured. Essentially, the court refused to write the Privity Endorsement out of the insurance policy. The court held that the Privity Endorsement modified the automatic status heading language in the declarations, not the other way around. In essence, the court held under New York law that in insurance contracts that require privity for additional insured coverage, the lack of a direct contract between the insured and the party seeking the additional insured coverage precludes extending additional insured coverage.

Insurance Co. Not Liable For Theoretical Claims, Judge Says

Rick Archer | Law 360 | August 25, 2017

A Nevada federal judge Thursday found an insurance company had no duty to defend construction companies against theoretical future claims, saying the argument stretched the duty to defend “to the breaking point.”

U.S. District Judge Jennifer A. Dorsey issued a summary judgment rejecting three insurance companies’ attempt to force Ironshore Speciality Insurance Co. to join them in defending against a defective construction suit, saying their argument was based on the theoretical possibility of future liability.

“Although the duty to defend is broad, it is not limitless. A possibility that there could later be a potential for coverage is not the same as an existing potential for coverage — and the latter is needed to trigger the duty to defend,” she said.

Ironshore was sued by American Guarantee & Liability Insurance Co., Assurance Co. of America and Northern Insurance Co. of New York, all of which had written policies to a number of Nevada construction contractors who were sued for allegedly defective construction work.

Ironshore had also written policies for the companies but had refused to defend them, saying the allegedly defective work was done before the policy period and that coverage for prior work could only be triggered by “sudden and accidental” damages caused by the work, which were not being claimed in the suits.

The insurers, however, argued the suits did not expressly state that no accidental damage occurred, therefore making a future claim for accidental possible and triggering the duty to defend.

Judge Dorsey disagreed, saying the underlying suits both do not allege a sudden accident and make no suggestion any sudden accidents occurred.

“The plaintiffs’ argument would expand the duty to defend to the breaking point. Before the duty is triggered, there must be some allegation or evidence to create a current potential for coverage. And an allegation that is so vague that it could possibly encompass covered allegations in the future is not enough,” she said.

In a prior case involving construction defect claims the same parties the court found the exclusion did not apply and awarded the insurance plaintiffs more than $988,000 following an April bench trial.

Counsel for the insurance companies declined comment. Counsel for Ironshore did not immediately respond to requests for comment Friday.

The insurance companies are represented by William C. Reeves of Morales Fierro & Reeves.

Ironshore is represented by William C. Morison of Morison & Prough LLP.

The case is Assurance Co. of America et. al. v. Ironshore Specialty Insurance Co., case number 2:15-cv-00460 in the United States District Court for the District of Nevada.

No Duty To Defend Additional Insured When Bodily Injury Not Caused by Insured

Tred Eyerly | Insurance Law Hawaii | July 19, 2017

The court found there was no duty to defend a suit for bodily injury against the additional insured where the injury was not caused by the insured. Consigli Constr. Co. v. Travelers Indem. Co., 2017 U.S. Dist. LEXIS 95339 (D. Mass. June 21, 2017).

Consigli was the general contractor for a renovation project at a high school. Among the subcontractors was American Environmental, Inc., who was responsible for demolishing concrete floors within the existing structures, and Costa Brothers, who did the masonry work. Wellington M. Ely was an employee of Costa Brothers and worked as a mason on the project.

Costa Brothers had a CGL policy with Travelers. As a subcontractor, Costa Brothers agreed to name Consigli as an additional insured on its policy.

Ely was injured when he tripped and fell over exposed wire where where the concrete floor had been broken up. American Environmental had demolished the concrete floor, allegedly without removing protruding wires or warning workers of the potential tripping hazard. Ely alleged that American Environmental and Consigli were both responsible for his injuries because American Environmental performed its demolition work negligently and Consigli failed to maintain a safe working environment.

Ely sued American Environmental and Consigli. Consigli tendered its defense to Travelers. The tender was denied because Travelers contended that Costa Brothers was not the cause of the loss.

Consigli settled with Ely and sued Travelers. Travelers moved for summary judgment. The court noted that Costa Brothers agreed to name Consigli as an additional insured, but only as to some injuries. Consigli qualified as an additional insured “[o]nly with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal injury'” and “[i]f and only to the extent that, the injury or damage is caused by acts or omissions of [Costa Brothers] . . .”

There was no possibility, based on the allegations of the underlying complaint, that Costa Brothers caused the injury to Ely. American Environmental caused the wire to be exposed by demolishing the floors negligently. Costa Brothers was not alleged to have undertaken work in the area where the accident occurred. Therefore, there was no act or omission by Costa Brothers identified in the complaint that would make Costa Brothers the proximate cause of Ely’s injury or would show that Costa Brothers brought about or provoked Ely’s injury.

Travelers had no duty to defend and was granted summary judgment.

Ninth Circuit Holds That Despite ‘Known Damage’ Exclusion Insurer Had Duty Under Oregon Law to Indemnify and Defend Contractor When Property Damage Resulted From Contractor’s Negligent Repair of a Prior Negligent Act

Alex Corey | Constructlaw | June 22, 2017

Alkemade v. Quanta Indem. Co., 2017 U.S. App. LEXIS 6896 (9th Cir. Apr. 20, 2017)

In 1994, Adrianus and Rachelle Alkemade (the “Alkemades”) bought a house from Meltebeke Built Paradise Homes (“Meltebeke”). The home was built on expanding soils, causing significant structural damage.  Meltebeke repaired the existing damage and hired an engineering firm to install a helical pier foundation, which would have prevented any further damage to the home.  However, the helical pier foundation was also installed negligently, afflicting the home with the same type of structural damage as before.

Alkemades sued Meltebeke for negligent supervision of the helical piers installation. Meltebeke entered a settlement agreement with Alkemades in which Meltebeke assigned to Alkemades the right to sue its insurers, Quanta and GFIC, who refused to defend Meltebeke on grounds that its knowledge of the damage caused by the original, defective construction prevented coverage under a known damages provision in Meltebeke’s policies (the “Policies”).  Alkemades subsequently sued the issuers for breach of contract in the U.S. District Court for the District of Oregon for their failure to defend and indemnify Meltebeke.  The insurers moved for summary judgment.

The Policies excluded coverage for damage known by the insured, in whole or in part, that occurred before the policy period began. If such damage was known to the insured, then any “any continuation, change or resumption” of that damage was also deemed known, and excluded.  

The insurers argued that “the helical piers were simply one more in a long line of unsuccessful attempted remedial fixes to the known property damage resulting from expanding soils.” In other words, the property damage sustained after the installation of the helical piers was a “continuation, change, or resumption” of the previously known property damage.  Therefore, the known damages provisions excluded coverage.  The District Court found this interpretation reasonable and granted summary judgment for the insurer’s favor.

On appeal, Alkemades argued that damage caused by Meltebeke’s first negligent act does not “continue, change or resume” when later damage is sustained after a repair that would have fixed the problem absent a second negligent act. The Ninth Circuit evaluated Alkemades’ argument in light of Oregon law, which provides that if the insured offers a competing plausible and reasonable interpretation of the policy, that interpretation governs regardless of whether the insurer offers a different interpretation that is also plausible and reasonable.

The Ninth Circuit reasoned that the Policies’ phrase “continuation, change, or resumption” modified “damage previously known,” a reasonable interpretation is that both the previously known damage and the later damage must share a cause. Because it was possible that the later damage was due to the negligently installed helical pier, and not the original negligent construction, the Court determined that it was plausible to treat the later damage separately.

District Court Rules “Professional Services” Exclusion means Professional Services

R. Bruce Wallace | Nexsen | Pruet | June 29, 2017

Recently, the United States District Court for the District of South Carolina granted judgment in favor of an insurance carrier, finding the carrier did not owe a duty of defense or a duty to indemnify the insured in an underlying professional malpractice claim. In State Farm Fire and Casualty Company v. Morningside Consultants, Inc., State Farm initiated a declaratory judgment action against Morningside Consultants, Inc. (MCI). MCI was the defendant in eight separate tort suits alleging, in effect, that MCI had negligently inspected several construction projects, which were rife with construction defects. State Farm had issued two policies to MCI seriatim, which were the subject of the declaratory action. Each policy contained an exclusion for damage resulting from “the rendering or failure to render any professional services.” During the policies’ effective periods, MCI provided professional building inspection services.

MCI advanced two theories in support of coverage: (1) MCI holds no professional licenses, such that it could not render “professional” services within the meaning of policies; and (2) application of the exclusion would render the two policies meaningless.

Unfortunately, MCI did not articulate a basis for the first argument. In fact, MCI did not provide any facts or legal precedent in support of the argument that the lack of a professional license moves the provision of inspection services beyond the ambit of “professional services” as described in the policy. In the words of the district court “[n]o one, of course, would suppose, suggest, or suspect it is within the purview of this Court to take a single simple sentence in a counseled case, fashion an argument, adorn it with legal citations, and then judge the strength of its own argument.” As such, the district court summarily rejected MCI’s argument on this point. Moreover, the insurance policies at issue defined “professional services” to specifically exclude “inspection services.” So, not only did MCI fail to provide facts to support its argument, the only facts discussed by the court on this point directly contradicted MCI’s position.

The district court then moved to MCI’s “futility” argument, and soundly rejected it as well. In support of its second argument, MCI relied on the case of Isle of Palms Pest Control Co. v. Monticello Ins. Co.  In Monticello, the Court of Appeals held that the exclusion (extermination services) sought to bar coverage for the very operations the insured meant to be covered. The district court distinguished Monticello because that policy did not define “professional services,” unlike the MCI policy. Second, the district court found that not all claims were barred by the policy language in the MCI policy. Quoting from the insured’s deposition, the district court found that MCI’s owner did not seek coverage under the subject policies for mistakes in his “written [inspection] reports,” but rather for other risks associated with visiting properties during inspection appointments. Finally, the district court found that the Monticello policy premiums were based in part on the gross receipts from that insured’s exterminating business, whereas MCI’s policy premiums were de minimus.

While Morningside presents a vindication for clarity and contractual interpretation, it contains three reminders for practitioners in the insurance realm. First, if you advance a position, you better support it with factual and legal arguments. Second, do not suggest a defined term in a policy means the opposite of its plain meaning. Finally, consider and articulate the risks insured versus the premium paid as a whole to assist the court in determining whether the exclusion swallows the allegedly covered risks.