Is Being Named As An “Additional Insured” On An Insurance Endorsement Sufficient To Provide

Henry L. Goldberg and Michael J. Hogan | Moritt Hock & Hamroff | August 22, 2018

The New York Court of Appeals (New York’s highest court) recently held that being named as an additional insured on a Certificate of Insurance might not, by itself, provide any coverage for additional insureds.

The Dormitory Authority of the State of New York (“DASNY”) contracted with general contractor Samson Construction Company (“Samson”) for construction of a new forensic laboratory for New York City. DASNY also contracted with a joint venture between Gilbane Building Company and TDX Construction Corporation (hereinafter, “Gilbane JV”) for Gilbane JV to be the construction manager on the project. DASNY’s contract with Samson provided that Samson would obtain general liability insurance for the job, with an endorsement naming as additional insureds as follows: “DASNY, the State of New York, the Construction Manager, Gilbane JV, and other entities specified on the Sample Certificate of Insurance provided by DASNY.” The Sample Certificate of Insurance listed as Additional Insureds under General Liability with respect to this project: … Gilbane/TDX Construction Joint Venture.” Samson obtained general liability insurance coverage from Liberty Insurance Underwriters (“Liberty”).

DASNY sued Samson and Perkins Eastman, Architects, P.C. (Perkins) (the project architect), alleging that Samson damaged the excavation support system in August of 2003 by negligently removing a section of steel plating which caused the foundation of the neighboring building to settle several inches. Perkins then commenced an action against Gilbane JV. Gilbane JV provided notice to Liberty, seeking defense and indemnity under the Liberty policy. Liberty denied coverage. Gilbane JV commenced a lawsuit, alleging that it qualified for coverage under the Liberty policy as “an additional insured.” The lower court denied Liberty’s motion for summary judgment, holding that Gilbane JV was an additional insured under the policy. The Appellate Division subsequently reversed the decision, granting Liberty’s motion for summary judgment, and the matter was appealed to the Court of Appeals.

The critical portion of the Liberty policy was the “Additional Insured-By Written Contract” provision, which read:

“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.”

Gilbane JV had no written contract with Samson naming Gilbane JV an additional insured, but argued that no such contract is necessary as that requirement would conflict with the plain meaning of the Liberty endorsement, as well as “well-settled rules of policy interpretation” and the parties’ reasonable expectations. The Court of Appeals concluded that Gilbane JV’s argument was meritless; the endorsement is facially clear and does not provide for coverage unless Gilbane JV is an organization “with whom” Samson has a written contract.

The Court of Appeals found that the endorsement would have the meaning Gilbane JV desired if the word “with” had been omitted. Omitting “with”, the phrase would read: “… any person or organization whom you have agreed by written contract to add …” and Gilbane JV’s position would have had merit. But, the Court of Appeals pointed out Samson and Liberty included the “with” in the contract between them, and it must be given its ordinary meaning. The “with”, in the Court’s opinion, can only mean that the written contract must be “with” the additional insured. The Court of Appeals found the endorsement’s meaning to be plain and unambiguous.

Gilbane JV attempted to offer extrinsic materials, including the sample certificate of insurance, in support of its argument that it reasonably expected to be covered by the policy, and relied heavily on the contract between DASNY and Gilbane JV, which required Samson (as the prime contractor) to name Gilbane JV as an additional insured on all liability policies obtained by Samson. This approach was rejected by the Court of Appeals, holding that “[e]xtrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide.” The Court of Appeals concluded that Gilbane JV might have a claim against Samson for failing to obtain additional insured status for Gilbane JV, but that breach would not permit the Court to rewrite Samson’s contract with Liberty.

MH&H Commentary

Clearly, based upon the foregoing Court of Appeals decision, being named as an additional insured on an Insurance Certificate does not convey coverage to the named insureds in all instances. In order to guarantee coverage, the “additional insurance” provision or endorsement itself must be obtained and reviewed. If such provision or endorsement contains the controversial “with” (as the Liberty provision did) there must be a written contract between the additional insured and the contract holder (insured) of the General Liability Policy for coverage to exist.

Will Strict “No Damages for Delay” Clauses Be Outlawed on New York Public Construction Projects? Stay Tuned.

Peter Strniste | Robinson & Cole Construction Law Zone | July 6, 2018

For years, general contractors and trade contractors have faced very strict “no damages for delay” clauses on New York State construction projects. The tides are changing.  If signed into law, S. R. 06686, Reg. Sess. 2017-2018 (NY 2017) will require public entities to allow contractors, subcontractors and suppliers to recover for costs associated with project delays to the extent the delays were caused by the entity’s actions or inactions. Public entities would include, without limitation, any state agency, department, board, bureau, municipal corporation, school district or any instrumentality or public subdivision of the State of New York.

The proposed law would allow recovery for delay damages, despite contract language to the contrary, under the following circumstances:

  • Failure of the public entity to take reasonable measures coordinate and progress the work;
  • Extended delays attributable to the public entity in the review or issuance or orders-on-contract or field orders, in-shop drawing reviews and approvals or as a result of the cumulative impact of multiple orders on contract; which constitute a qualitative change to the project work and which have a verifiable impact on project costs;
  • The unavailability of the site for such an extended period of time which significantly affects the scheduled completion of the contract; or
  • The issuance of a stop work order relative to a substantial portion of work for a period exceeding 30 days.

The law would actually require that each contract contain a provision mirroring the Act.

The proposed legislation also outlines strict claim submittal requirements in order for a claimant to be entitled to compensation for delays. The contractor, subcontractor or supplier must provide a notice of claim for the delay to a public entity by personal service or certified mail no more than fifteen (15) days after such contractor knew the facts which form the basis of the claim. The public entity must acknowledge receipt of the notice, in writing within five (5) days. The legislation expressly precludes oral notices and provides that the failure to provide such notice will result in per se prejudice to the public entity, which under most circumstances will preclude the claim.

Claimants will also be required to certify in writing and under oath that all of the information offered in support of the delay claim is accurate and complete and being submitted in good faith. This requirement could strengthen a False Claims Act claim against anyone making a claim for delay damages without justification. The New York False Claims Act imposes liability on anyone who knowingly presents false claim, request or demand for payment to a public entity. The knowingly requirement under the False Claims Act extends beyond actual knowledge to those submitting information with a reckless disregard of the truth or falsity of the information. With the certification under oath requirement, the proposed legislation could also have the effect of deterring frivolous claims for delay damages.

Under the proposed law, the onus would be on the claimant to record and maintain diligent written records of their claim, “For any claim asserted pursuant to this title, the contractor, subcontractor, or materialman shall keep detailed written records of the costs and shall make them available for the purposes of audit and review. Failure to provide the required written notice or to maintain and furnish records of the costs of such claims shall constitute a waiver of the claim.” The proposed law would also require the claimant to provide the following documents to the public entity, upon request:

  • Description of the operations that were delayed, the reasons for the delay and an explanation of how they were delayed;
  • A detailed factual statement of the claim providing all necessary dates, locations, and items of work affected by the claim;
  • The date on which actions resulting in the claim occurred or conditions resulting in the claim became evident;
  • The names, functions and activities of each contractor, subcontractor and materialman involved in, or knowledgeable about facts that gave rise to such claim;
  • The identification of any pertinent documents, and the substance of any material oral communication relating to such claim;
  • The amount of additional compensation sought; and
  • If an extension of time is also requested, the specific number of days for which it is sought and the basis for such request as determined by an analysis of the construction progress schedule.

In addition, the law would require, upon submitting a claim, that the contractor, subcontractor or supplier certify in writing and under oath that the supporting data is accurate and complete to his or her best knowledge or belief and that any amount demanded reflects in good faith, what he or she believes to be the public entity’s liability.

We are monitoring the legislation closely and will keep our readers advised of any developments. You can also review the entire text of the legislation and check out its status here.

Conditions Precedents in Construction Contracts

Kenneth M. Block and Joshua M. Levy | New York Law Journal | June 19, 2018

Given the fast-paced nature of most construction projects in New York City, strict compliance with the minute details of each contract clause often falls low on the list of the parties’ priorities. Although the parties can often fulfill their obligations through substantial compliance with an agreement’s terms, under certain circumstances, even a minor deviation from the contract’s requirements can forfeit a party’s rights or benefits.

In a prior article, we discussed conditions precedent in the context of notice provisions, but conditions precedent can operate in any form. (See, Kenneth M. Block, Enforcement of Notice Provisions NYLJ, Sept. 11, 2013, p. 5, col. 2). In the context of construction, provisions related to defective work, change orders, dispute resolution and delay claims are often drafted as conditions precedent. This article will explore the differences between typical contract terms and those that rise to the level of conditions precedent, the latter requiring strict compliance to avoid forfeiture.

Conditions Precedent

A condition precedent is “an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.” Merritt Hill Vineyards v. Windy Heights Vineyard, 460 N.E.2d 1077 (1984). Conditions precedent are distinguishable from promises as conditions precedent contain language that mandates strict performance and sets forth clear consequences for noncompliance. Barsotti’s, Inc. v. Consol. Edison Co. of New York, 680 N.Y.S.2d 88, 89 (1st Dep’t 1998). While New York contract law requires the breach of a promise to be material or prejudicial to release a non-breaching party from its duties under the agreement or forfeit the breaching party’s rights, conditions precedent “must be literally performed; substantial performance will not suffice.”MHR Capital Partners v. Presstek, 912 N.E.2d 43, 47 (2009). Failure to comply strictly with the requirements of a condition precedent functions as a waiver of the right or obligation the condition preceded. Kingsley Arms v. Sano Rubin Const. Co., 791 N.Y.S.2d 196 (3d Dept. 2005). (It should be noted that, pursuant to CPLR 3015(a), when a defense to an action is based on the failure to comply with a condition precedent, the denial of performance “shall be made specifically and with particularity.”)

Applications of New York Law

In Archstone v. Renval, a developer sued its contractor over a deposit demanded by the contractor and which the developer claimed was paid under duress. Archstone Dev. v. Renval Constr., 156 A.D.3d 432 (1st Dept. 2017). The governing contract was AIA Document A201-2007 that required mediation “as a condition precedent to binding dispute resolution.” The First Department upheld the lower court’s dismissal of the action without addressing the merits of the case simply because the developer failed to seek mediation. Despite the developer’s substantial compliance with all the other conditions precedent to the claim, its failure to seek mediation did not meet the requirement of strict performance and the clear consequence set forth in the contract was the developer’s inability to maintain the court action.

Likewise, in Schindler Elevator v. Tully Construction, a subcontractor brought suit against a contractor for delay damages it incurred in performance of its work. Schindler Elevator Corp. v. Tully Const. Co., 30 N.Y.S.3d 707, 709 (2d Dept. 2016). The relevant subcontract required the subcontractor to submit “within forty-five (45) days…and every thirty (30) days thereafter…verified statements of the details and amounts of such damages, together with documentary evidence of such damages” further stating that failure “to strictly comply with the requirements…shall be deemed a conclusive waiver…of any and all claims for damages for delay…” Although the subcontractor produced letters and e-mails it had sent the contractor making the contractor aware of the delay claims, the communications did not contain verified statements nor were they supported by documentary evidence of the damages. Accordingly, the Second Department overturned the lower court’s dismissal of the contractor’s motion for summary judgment and dismissed the subcontractor’s claim. Having failed to comply strictly with the condition precedent, the subcontractor effectively waived its right to claim damages for the delays.

By contrast, in Facilities Development v. Nautilus Construction, a surety appealed the dismissal of its motion for summary judgment to dismiss an action by an owner on the grounds that the owner’s failure to require its contractor to obtain fire insurance prior to the start of work was a condition precedent to the performance bond’s payment. Facilities Dev. Corp. v. Nautilus Const. Corp., 550 N.Y.S.2d 127 (3d Dept. 1989). While the contract did require the contractor to obtain fire insurance, no conditional language was used nor any consequence for failure provided. The court held that the fire insurance requirement could not be construed as a condition precedent as it was just “one provision among several that the parties intended to be performed.” Without the necessary conditional language or explicit consequence for failure to perform, the fire insurance requirement was only a promise and did not require the literal performance demanded from an express condition precedent.

Conclusion

Those entering into agreements for construction should be vigilant about conditional contractual language—especially if the conditions state a consequence for failure. Words such as ‘until,’ ‘if,’ ‘provided’ and (most obviously) ‘as a condition precedent’ are indicators of a condition precedent and will require the strict performance discussed in this article. Developers, owners, contractors and subcontractors performing work under agreements with such terms should be certain that their performance literally complies with the condition precedent to avoid the forfeiture of any rights or benefits under the agreement. Even substantial performance, as demonstrated by the subcontractor in Schindler, will be insufficient to prevail on a contract claim. In certain instances, such as Archstone, a court may not even consider evidence as to the merits of the claim if the condition precedent has not been strictly satisfied.

However, conditions precedent can be advantageous for both owners and contractors if used properly. They are ideal for situations where precise performance is critical to the success of a project, allowing the parties to delineate clearly the performance required, such as the timely and detailed submitting of change orders or the prompt notice of a potential delay. Nevertheless, if used incorrectly or—worse yet—inadvertently, the unintended consequences could be disastrous and often irreversible.

The Tenth Circuit’s Prediction: New York State Likely to Follow Trend Recognizing Damages Caused by Subcontractor’s Faulty Work is a Covered “Occurrence”

By Frederic J. Giordano and Stephanie S. Gomez | K&L Gates | May 17, 2018

The United States Court of Appeals, Tenth Circuit recently issued a favorable decision for policyholders finding property damage arising from a subcontractor’s faulty work arose from an accidental “occurrence” under New York law.  In Black & Veatch Corp. v. Aspen Ins. (UK) Ltd,[1] a 2–1 Tenth Circuit panel agreed with Black & Veatch Corp. (“B&V”) that its excess policy — which contained a New York choice-of-law provision — covered claims for property damage to a third party caused by its subcontractor’s faulty work.[2]  The Tenth Circuit reversed the district court’s ruling that B&V’s subcontractor’s faulty work caused damage to only B&V’s own work and, therefore, was not a covered “occurrence.”[3]  The Tenth Circuit concluded the New York Court of Appeals would likely find the subcontractor’s faulty work was an accidental “occurrence,” following the growing trend of other state high courts that have addressed this coverage issue under commercial general liability (“CGL”) polices.[4]  Policyholders — whose policies are governed by New York law — should take notice and consider the implications of this decision on whether New York will soon join the majority view that faulty workmanship by a subcontractor can be an occurrence under CGL policies.

In 2005, B&V, a Kansas engineering firm, entered into contracts with American Electrical Power Service Corporation (“AEP”) to engineer several jet bubbling reactors (“JBRs”) — which eliminate contaminants from the exhaust emitted by coal-fueled power plants — at four coal-fire power plants in Ohio and Indiana.[5]  B&V subcontracted the work for the JBRs’ internal components.[6]  Deficiencies in the subcontractor’s work caused the JBRs’ internal components to deform, crack, and sometimes collapse.[7]  Subsequently, AEP notified B&V of the damaged JBRs arising from its subcontractor’s faulty work.[8]  AEP and B&V settled the dispute, and B&V agreed to pay more than $225 million in repair and replacement costs for its subcontractor’s defective internal components.[9]

After recovering $3.5 million from its primary insurer, B&V submitted coverage claims to Aspen Insurance Ltd. (“Aspen”) under its excess CGL policy (the “Policy”), which provided $25 million of limits per occurrence.[10]  Aspen denied coverage on the grounds that damage arising from and confined to B&V’s own work was not an “occurrence.”[11]  In 2012, B&V filed suit against Aspen in the U.S. District Court for the District of Kansas for breach of contract and declaratory judgment as to B&V’s rights under the Policy.[12]  Aspen cross-moved for partial summary judgment on the coverage issue.[13]  The district court granted Aspen’s motion, holding property damage arising from the construction defects were not covered “occurrences” under the Policy because only B&V’s own work product — the JBRs — was damaged by its subcontractor’s faulty workmanship.[14]  B&V appealed.[15]

The issue before the Tenth Circuit was whether the New York Court of Appeals would find that the Policy covers a portion of B&V’s payments to AEP to repair and replace the damaged JBRs.[16]  The Tenth Circuit predicted the Court of Appeals would decide that the damages to the JBRs constitute an “occurrence” that triggers coverage under the Policy and, therefore, vacated the district court’s summary judgment decision.[17]  The Tenth Circuit’s reasoning was based on, but not limited to, the Policy’s language, New York’s rule against surplusage, and the trend among state supreme courts.[18]

First, the Tenth Circuit held the subcontractor’s shoddy work constituted an “occurrence,” as that term is defined in the Policy, because it was accidental and harmed a third party’s property.  The Tenth Circuit considered the Policy’s (1) basic insuring agreement defining the general scope of coverage and key terms, (2) exclusions from coverage, and (3) exceptions to the exclusions.[19]  The Policy’s basic insuring agreement held that Aspen would pay on behalf of B&V sums in excess of the liability limit provided by other insurance policies which B&V would “become legally obligated to pay as damages for . . . ‘Bodily Injury’ or ‘Property Damage’ . . . caused by an ‘Occurrence.’”[20]  An “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, that resulted in ‘Bodily Injury’ or ‘Property Damage’ that was not expected or not intended by the ‘Insured’.”[21]  “Property Damage” was defined as “physical injury to tangible property of a ‘Third Party’, including all resulting loss of use of that property of a ‘Third Party’ . . . .”[22]  The Policy also defined “Third Party” as “any company, entity, or human being other than an ‘Insured’ or other than a subsidiary, owned or controlled company or entity of an ‘Insured’.”[23]

The Tenth Circuit concluded the Policy covers damages arising from an “occurrence,” which includes an accident causing damage to the property of a third party — even though the term “accident” is not defined under the Policy.[24]  The Tenth Circuit reasoned B&V did not intend or expect its subcontractor to damage the JBRs.[25]  Because the JBRs’ construction defects were unintentional, they constituted an accidental “occurrence.”[26]  Next, the Tenth Circuit considered Aspen’s argument that damage to a third party did not occur since the Policy designated AEP as an additional insured, and the JBRs belonged to AEP.[27]  Disagreeing, the Court found that “when AEP claimed damages against B&V, the separation of insureds clause rendered AEP a third party with respect to its claims for property damage against B&V.”[28]  Thus, the damages involved physical harm to the property of a third party.

In further support of the ruling that it is a covered “occurrence,” the Tenth Circuit noted that Aspen’s interpretation of “occurrence” would render several Policy provisions “surplusage,” in violation of New York general principles of contract interpretation.[29]  The Policy included a “Your Work” exclusion that prohibited coverage for property damage to B&V’s own completed work.[30]  The “subcontractor exception” to the “Your Work” exclusion, however, provided that the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on [B&V’s] behalf by a subcontractor.”[31]  The Policy further contained “Endorsement 4,” which excluded coverage for property damage to “that particular part of real property” on which B&V or its subcontractor were actively working.[32]

Aspen’s interpretation of “occurrence” excluded accidental damage to B&V’s own work resulting from a subcontractor’s faulty workmanship.[33]  The Tenth Circuit found that the Policy’s “Your Work” exclusion and “subcontractor exception” would lose their meaning under Aspen’s definition of “occurrence” because “it would be redundant to say the Policy does not cover property damage to B&V’s own work (as stated in the ‘Your Work’ exclusion) if the definition of ‘occurrence’ categorically and preemptively precludes coverage for such damages in the first instance.”[34]  The Tenth Circuit further explained “there would there would be no reason for the Policy to state that it covers damages to [B&V]’s work when ‘the damaged work . . . was performed . . . by a subcontractor’ if the basic insuring agreement does not encompass these damages.”[35]  The Tenth Circuit further held Aspen’s interpretation of an “occurrence” would also render part of “Endorsement 4” meaningless if faulty workmanship resulting in damage to B&V’s own work could never trigger coverage as an “occurrence.”[36]  In essence, if the Policy could never cover damage to the B&V’s work in the first instance, then there would be no reason for “Endorsement 4” to exclude coverage only for damage to a “particular part” of the JBRs.[37]

General contractors should take note of the Tenth Circuit’s policyholder-friendly decision in Black & Veatch Corp., which provides guidance to insureds with policies governed by New York law.  Although New York’s highest court has not addressed whether construction defects caused by a subcontractor’s defective work constitutes a covered “occurrence” under CGL polices, the Tenth Circuit came to a significant conclusion while interpreting New York law.  Policyholders should keep an eye on whether New York “joins the clear trend” among other states’ interpretation of CGL coverage.

 

Notes

[1] 882 F.3d 952 (10th Cir. 2018).

[2] Id. at 971.

[3] Id. at 957.

[4] Id. at 971.

[5] Id. at 954.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id. at 955–56.

[11] Id. at 956.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id. at 956–57.

[18] Id. at 956–57, 962.

[19] Id. at 958.

[20] Id. at 955.

[21] Id.

[22] Id.

[23] Id.

[24] Id. at 965.

[25] Id. at 962–63.

[26] Id.

[27] Id. at 963.

[28] Id. at 964.

[29] Id.

[30] Id. at 955.

[31] Id. at 956.

[32] Id. at 955 (emphasis in the original).

[33] Id. at 964.

[34] Id.

[35] Id.

[36] Id. at 965.

[37] Id.

Policyholders Bear the Risk When Insurance Was Unavailable on the Market

Alexis P. Joachim | Phelps Dunbar | April 26, 2018

On March 27, 2018, in a matter of first impression, the New York Court of Appeals ruled that under a “pro rata time-on-the-risk” allocation method, a policyholder bears the risk of uninsured years.  In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., the court was faced with determining whether in a long-tail environmental claim and under a “pro rata time on the risk allocation” an insurer is liable to its insured for years outside its policy periods when no applicable coverage was available on the market.  2018 WL 1472635.

The insurer’s expert opined that pollution coverage was not available to utility companies until 1925 and that a “sudden and accidental pollution exclusion” was adopted by the insurance industry after the 1970s.  Thus, KeySpan argued that allocation should not take into account those years prior to the availability of pollution coverage or after the unavailability of pollution coverage.

The court therefore was faced with how to allocate time on the risk to “gap years” or years in which no coverage existed.  The court recognized that courts in other jurisdictions generally require the policyholder to participate in the allocation for periods of non-coverage, but are “divided with regard to whether a policyholder should be held responsible for those periods of time when the relevant coverage was not offered for sale on the market.”

Some jurisdictions do not put the policyholder “on the risk” if insurance was unavailable – i.e. “the unavailability rule.”  Other courts have rejected this rule and held that the policyholder is on the risk for periods of non-coverage, regardless of whether the absence of coverage was voluntary or due to the inability to obtain coverage.

The court held that the unavailability rule was inconsistent with the policy language that requires the application of the pro rata approach – i.e. “during the policy period” limitation.  The court explained that allowing an insurer to be responsible for risks outside the policy period provides the policyholder with coverage for years where no premiums were paid and is beyond the reasonable expectation of the average insured, who would expect to receive coverage for risks during the policy period and nothing more.