Don’t Sleep on This: New York High Court Addresses Scope of “Blanket” Additional Insured Endorsements

Tyrone R. Childress, Edward M. Joyce and Jason B. Lissy | Jones Day | April 2018

The Situation: The issue of whether “blanket” additional insured endorsements require direct contractual privity with an insurance policy’s “named insured” has received inconsistent treatment by U.S. courts.

The Development: The New York high court’s recent Gilbane decision confirms that the requirements for “additional insured” status continue to be determined by the specific language of additional insured endorsements themselves and not by the insurance requirements of parties’ underlying contracts.

Looking Ahead: Prior to a project’s commencement, the actual language of additional insured endorsements should be carefully reviewed to confirm its alignment with parties’ contractual intent.

Is a contractual privity requirement lurking within the fine print of your “additional insured” coverage? As illustrated by the New York high court’s recent decision in Gilbane Building Co./TDX Constr. Corp. v. St. Paul Fire and Marine Ins. Co., No. 22, 2018 WL 1473553 (N.Y. Mar. 27, 2018) (“Gilbane“), the answer, if overlooked, can mean the difference between being fully insured and not covered at all. 

Additional Insured Endorsements and the Contractual Privity Issue 

In addition to contractual indemnification provisions, many companies require that they be added as “additional insureds” to the liability insurance policies of those with whom they do business. By conferring direct rights to coverage for third-party liabilities that arise out of the performance of others’ work, additional insured status provides a number of important risk management benefits. It allows the additional insured to keep these losses off of its own insurance program, thereby protecting its loss history and avoiding related premium increases. It also protects the additional insured in the event that its counterparty is unable to perform its contractual indemnification obligations.

While additional insureds can be added to a policy via a “specific” endorsement (i.e., expressly identifying the particular individual or entity to be added), parties instead frequently rely upon “blanket” (also referred to as “automatic”) endorsements to do so. Designed to avoid having to create a new endorsement and obtain insurer authorization each time an additional insured is added to a policy, “blanket” additional insured endorsements generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.

As is the case in many large-scale construction and development projects (e.g., where a “downstream” subcontractor agrees in its subcontract with the project’s general contractor to add the “upstream” project owner as an additional insured under the subcontractor’s liability policies), the party to be added as an additional insured often is not in direct contractual privity with the named insured. The issue of whether such arrangements are sufficient to confer additional insured status under these “blanket” endorsements has received inconsistent treatment by United States courts.

As the New York high court’s recent Gilbane decision demonstrates, the question of whether direct contractual privity with a policy’s named insured is a prerequisite to additional insured status continues to depend on the precise language of the “blanket” additional insured endorsement used. 

Factual Background

Gilbane involved the construction of a 15-story building at the Bellevue Hospital Campus in Manhattan for use by New York City’s Chief Medical Examiner. The Dormitory Authority of the State of New York (“DASNY”), which was financing and overseeing the project, retained a joint venture formed between Gilbane Building Company and TDX Construction Corporation (the “JV”) to serve as the project’s construction manager. 

The construction management agreement between DASNY and the JV provided that any prime contractor, whether retained by DASNY or otherwise, was required to name the JV as an additional insured under its liability insurance policies. 

DASNY contracted separately with Samson Construction Company (“Samson”) to serve as the prime contractor for the project’s excavation and foundation work. In its prime contract with DASNY, Samson agreed to obtain a commercial general liability (“CGL”) insurance policy that included several entities, including the JV, as additional insureds. 

To satisfy this requirement, Samson obtained a CGL policy from Liberty Insurance Underwriters (“Liberty”), containing a blanket additional insured endorsement (titled “Additional Insured—By Written Contract”) stating:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.” (emphasis added). 

During construction, Samson’s excavation work allegedly caused significant structural damage to adjacent buildings. DASNY sued Samson and the project architect for negligence, and the project architect, in turn, commenced a third-party action against the JV.

When the JV looked to Liberty to defend and indemnify the JV against the project architect’s third-party claim, Liberty denied coverage on the ground that the JV was not an additional insured under Samson’s CGL policy.

Disagreement Between the Trial and Intermediate Appellate Courts

In the ensuing coverage dispute commenced by the JV, Liberty moved for summary judgment, maintaining that its “blanket” additional insured endorsement added as additional insureds only parties with whom Samson had a direct contractual relationship. Given that Samson and the JV were not in contractual privity, Liberty argued that its “blanket” additional insured endorsement therefore did not extend coverage to the JV. 

In response, the JV maintained that Liberty’s “blanket” additional insured endorsement did not require direct contractual privity between the named insured and the additional insured, but instead required only that the additional insured be identified in a written contract to which the named insured is a party. Given that Samson was required to add the JV as an additional insured in its prime contract with DASNY, the JV maintained that it was therefore afforded additional insured status under Samson’s CGL policy. 

Denying Liberty’s motion for summary judgment, the trial court determined that the CGL policy’s “blanket” additional insured endorsement “requires only a written contract to which Samson is a party” and that this requirement was met by Samson’s written contract with DASNY, which obligated Samson to obtain insurance including the JV as an additional insured. 

Over a vigorous dissent, the intermediate appellate court reversed, holding that the CGL policy’s “blanket” additional insured endorsement “clearly and unambiguously requires [that] the named insured execute a contract with the party seeking coverage as an additional insured.” Differentiating between the phrases “with whom” and what it viewed as the more-expansive phrase “for whom,” the intermediate appellate court reasoned that the “plain meaning” of the words “any person or organization with whom you have agreed to add as an additional insured by written contract,” as used in the “blanket” additional insured endorsement, required a direct contractual relationship between the named insured and additional insured. 

New York Court of Appeals Finds a Contractual Privity Requirement

 In a 5-2 opinion affirming the intermediate appellate court’s decision, the New York Court of Appeals determined that the CGL policy’s “blanket” additional insured endorsement was “facially clear” and the phrase “with whom,” when afforded its ordinary meaning, “can only mean that the [named insured’s] written contract must be ‘with’ the additional insured.”

Finding the “blanket” additional insured endorsement unambiguous, the New York high court determined that extrinsic materials such as the insurance procurement requirements of the Samson–DASNY prime contract could not be used to “rewrite” the CGL policy, and instead merely conferred the JV with potential third-party beneficiary standing under the prime contract to sue Samson for its breach.

Tips to Avoid Unintended Consequences

The New York high court’s recent Gilbane decision underscores the need for parties to carefully review the scope of their additional insured coverage prior to a project’s commencement. To that end, the following tips will help to avoid unintended consequences like those in Gilbane and ensure that additional insured coverage aligns with parties’ contractual intent:

  • Avoid “Contractual Privity” Requirements. Where parties to be added as additional insureds lack a direct contractual relationship with the policy’s named insured, “specific” endorsements, or “blanket” additional insured endorsements that do not require direct contractual privity with the named insured, should be used. In particular, parties should avoid “blanket” additional insured endorsements like the one at issue in Gilbane (e.g., ISO Form CG 20 33 04 13) and instead consider broader forms, such as ISO Form CG 20 38 04 13 (“Additional Insured—Owners, Lessees or Contractors—Automatic Status for Other Parties When Required in Written Construction Agreement”), which provide additional insured status to both the party with whom the named insured directly contracts in writing to perform operations, as well as “any other person or organization [the named insured is] required to add as an additional insured under the contract or agreement.”
  • Require Additional Insured Coverage to be “Primary And Noncontributory.” Parties should consider whether to require that additional insured coverage be provided on a “primary and noncontributory” basis and have named insureds obtain endorsements to their liability policies providing the same (e.g., ISO Form CG 20 01 04 13, “Primary and Noncontributory—Other Insurance Condition”). Doing so ensures that contribution will not be sought from the additional insured’s own insurance policies (i.e., that the additional insured’s own insurance policies will apply in excess of, and not subject to pro-rata allocation with, the named insured’s liability policy).
  • Specify “Completed Operations” Coverage Requirements. Many standard form additional insured endorsements provide coverage only for “ongoing operations.” In addition, while “completed operations” coverage for additional insureds is available via separate endorsements (e.g., ISO Form CG 20 37 04 13, “Additional Insured—Owners, Lessees or Contractors—Completed Operations), these endorsements may provide only completed operations coverage for occurrences during the policy period, which may be of insufficient duration. Additional insureds seeking completed operations coverage should accordingly consider requiring downstream parties to purchase project-specific completed operations coverage for a specified period following the project’s substantial completion (e.g., through the applicable state’s statute of repose).
  •  Evaluate the Scope of Coverage for Additional Insureds’ Sole Negligence. Parties should consider whether the particular language of their additional insured endorsements will provide coverage for the additional insured’s sole negligence (i.e., for liabilities that are not at least partially caused by the named insured’s own acts or omissions). Given courts’ inconsistent treatment of this issue, parties should be familiar with how their insurance policy language has been construed under applicable state law, as well as with any state anti-indemnity statutes that may further restrict the availability of coverage for an additional insured’s sole negligence.
  • Do Not Rely on “Certificates of Insurance” as Proof of Coverage.Parties should keep in mind that additional insured status is created only by an actual endorsement issued and approved by the insurer, and cannot be obtained via a “certificate of insurance.” To confirm their additional insured status, parties therefore should not rely upon “certificates of insurance” (which do not constitute adequate proof of coverage) and should instead require that they, at a minimum, be provided with copies of the policy’s declarations pages, schedule of forms, and the additional insured endorsement itself.

Three Key Takeaways

  1. In many large-scale construction projects, parties frequently rely upon “blanket” endorsements, which generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.
  2. In these situations, however, the party to be added as an additional insured often is not in direct contractual privity with the policy’s named insured. As illustrated by the Gilbane decision, whether such arrangements are adequate to confer additional insured status under “blanket” endorsements depends on the precise language of the endorsement used.
  3. Prior to a project’s commencement, the actual language of additional insured endorsements should therefore be carefully reviewed to confirm its alignment with parties’ contractual intent.

Unfortunate (and Unexpected) Restriction on Additional Insured Status

Stan Martin | Commonsense Construction Law LLC | March 28, 2018

The New York Court of Appeals, in a split decision, has focused on one word in deciding that a owner’s construction manager was not entitled to additional insured status on the general contractor’s policy.

The contract required the GC to include the owner, DASNY, the State of New York, and the owner’s construction manager as additional insured parties. The contract included a sample certificate of insurance identifying each of those parties.

The GC’s policy, though, included the following definition (emphasis added):

WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.

The Court of Appeal held that the GC did not enter into a contract “with” the construction manager, and so the construction manager was not a party “with whom” the GC had agreed to include as an additional insured. Thus, the Court of Appeal construed the phrase “with whom” as modifying the phrase “by written contract.” And said that absent the word “with,” the construction manager would have been included. Finally, the appellate court held that the definition was not ambiguous, and so principles of interpretation of an ambiguous term would not come into play.

The dissent goes on at greater length, exploring the nuance of the policy definition. It stated that “the majority focuses on a single word in the blanket additional insured endorsement at issue while ignoring others, thereby finding clarity where none exists.” Which aptly describes the situation, in my view. Noting that the language “is awkward and unclear, at the very least,” the dissent would have ruled that the phrase “by written contract” modifies “to add.” And not “with whom.” That reading further comports with normal expectations for the scope of additional insured coverage.

So a party who, by industry expectation and by standard convention, should have had additional insured status for claims arising from the general contractor’s work, has been left to shoulder the risk arising from the GC’s operations with its own coverage. The carrier is likely the only one arguing that this was the intent. A poor interpretation of an awkwardly-written clause.

Owner’s reps and other owner consultants may want to insist on reading the prime contractor’s additional insured language.

The case is Gilbane Bldg. Co./TDX Constr. Corp. v St. Paul Fire & Mar. Ins. Co., 2018 N.Y. LEXIS 490 (NY Court of Appeal, Mar. 27, 2018).

New York Insurance Law: Under Construction

Seth Schafler and Om V. Alladi | Proskauer | March 30, 2018

Imagine you hired a general contractor to renovate the master bathroom of your home. The general contractor hired a subcontractor to do the plumbing work, but the subcontractor botched the job, resulting in a massive leak causing extensive damage to other areas of your home and valuable personal property. You demand full compensation for the loss, but unfortunately the contractors you hired had no assets besides their comprehensive general liability insurance policies.

Will those insurance policies cover this loss? 

Until now, New York courts may well have answered this question in the negative, because they did not consider a subcontractor’s defective workmanship to qualify as an “occurrence” under CGL policies. But that view may be changing.

Recently, a number of cases in courts around the country have taken a fresh look at coverage in this scenario and reached the opposite conclusion. In 2016, the New Jersey Supreme Court changed its previous position and decided that under current CGL policies, damages caused by a subcontractor are a covered “occurrence” and therefore insurable.

More recently, in February 2018, the United States Court of Appeals for the Tenth Circuit, applying New York law, predicted that if the question were presented today, New York would find a potential for coverage even though prior intermediate appellate decisions in New York went the other way.

The issue in the Tenth Circuit case was whether a general contractor could recover for property damage caused by their subcontractor’s faulty installation of a component in a coal-fired power plant. The contractor settled claims brought by the owner for $225 million, and sued its CGL carrier for coverage. The insurers argued that subcontractor-caused damage was not an “occurrence” under New York law, but the contractor argued that position was outdated.

Although the insurers convinced a district court judge to dismiss the case based on prior New York authority, the Tenth Circuit reversed, predicting that the New York Court of Appeals would find coverage if the question were presented today. The Tenth Circuit reached this conclusion based on a comprehensive study of changes in the CGL policy, which showed that the policy form had been modified specifically to recognize coverage for damages caused by a subcontractor’s defective construction work, and that it would be contrary to the intent of the policy to deny coverage due to the absence of an “occurrence.”

It is too soon to tell whether the Tenth Circuit’s prediction will prove correct. But its decision follows a trend of court decisions over the past several years which have found coverage in these circumstances. In addition, recent decisions of New York’s highest court have focused on the precise policy wording and insisted that effect be given to every provision in an insurance contract, in line with the Tenth Circuit’s reasoning.

This is not the last we will hear from the courts on this evolving issue. Stay tuned for further developments. In the meantime, however, New York policyholders should not assume that there is no coverage for property damage caused by a subcontractor under a CGL policy and should take appropriate action to preserve coverage such as giving timely notice of occurrences or claims and assessing their litigation options.

Insurer’s Motion to Dismiss Complaint for Collapse Coverage Fails

Tred R. Eyerly | Insurance Law Hawaii | March 7, 2018

The insurer’s motion for summary judgment seeking dismissal of the insured’s claim for collapse coverage was rejected by the Supreme Court of New York. Parauda v. Encompass Ins. Co. of Am., 2018 N.Y. Misc. LEXIS 269 (N.Y. Sup. Ct. Jan. 25, 2018).

The insureds submitted a claim to Encompass for damage to the brick siding, or façade, of their home, which was bulging near the front door. Encompass hired H2M Architects and Engineers to inspect the home and issue a report. H2M determined that the brick façade near the front door was separated from the house. Photos showed that the bricks had separated, the mortar joints were cracked, and there were cracks and deterioration in the mortar. H2M concluded that the brick façade was in poor condition and need repairs and/or replacement. H2M concluded that the separation of the brick façade was caused by water infiltration behind the wood trim and brick façade, occurring over a several year period. Encompass denied the claim based upon exclusions for “freezing, thawing,” “wear and tear,” and “inadequate maintenance.”

The insureds retained Diego Fernandez, a general contractor, to replace the stucco and wood trim in the house. Fernandez stated in an affidavit that the wooden vertical studs and horizontal plates that supported the house were in a severe state of decay. The vertical studs were hanging unattached to the horizontal plates and other vertical studs were crumbling, leaving the structure without support in certain areas. When Fernandez removed a section of the stucco adjoining the bricks near the front door, he found more decayed framing that was not supporting the house as it was intended. Fernandez installed temporary exterior supports, as well as temporary interior framing, to prevent further collapse of the building.

Encompass had a second inspection performed by Eagle Adjusting Services. Eagle found that water was getting behind the stucco and brick siding. The trim embedded in the stucco was rotten and missing in most areas. These issues had been going on for some time according to Eagle. Encompass again denied the claim based upon exclusions for “collapse,” “wear and tear,” “wet or dry rot,” “settling, shrinking, bulging,” and “inadequate maintenance.”

Plaintiffs sued, alleging that the loss was caused by the collapse of the building due to hidden decay. Encompass moved for summary judgment to dismiss the complaint. The policy required a structure to “abruptly fall down or cave in” to constitute a collapse. Further, the loss was excluded by the policy exclusions covering wear and tear, wet or dry rot, and settling, shrinking, bulging.

The court determined that collapse must significantly effect the structure of the building to be covered. The affidavit of Diego Fernandez established prima facie that the vertical studs supporting the second floor had collapsed from decay. Because the collapsed studs could not be seen until the bricks and stucco were removed, plaintiff had established prima facie that the collapse was caused by hidden decay. The burden shifted to defendant to show a triable issue as to whether the collapse was caused by hidden decay or whether any policy exclusion applied. Focusing primarily on the exterior façade, Encompass’ experts thought that the home had not been properly maintained. However, the experts failed to explain how more regular maintenance would have uncovered the hidden decay. Thus, the experts’ opinions were merely conclusions.

Judgment was granted to the insureds to the extent of declaring that the loss was covered by the policy.

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.