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.

How Utah Evaluates a Worker’s Entitlement to PTD Benefits

Ryan B. Frazier | Kirton McConkie | August 28, 2017

Have you ever thought about how the word “limit” de­fines our perceptions of and interactions with the world around us? The concept of a “limit” engenders thoughts of a bound­ary, an edge, or an end. When we say something is limited, we are suggesting that it is restricted, constrained, or regulated. Something that is limited is imperfect or incomplete. We speak of pushing things to the limit when we are going to the edge of our abilities, or we declare the “sky’s the limit” to indicate that things are unrestricted.

The word “limit” also carries an abundance of meaning when it’s used in the context of analyzing a worker’s ability to perform basic work activities and whether an injured worker is entitled to permanent total disability (PTD) benefits under Utah’s workers’ compensation statutory scheme. The way the word is used in Utah law was key in a recent decision by the Utah Supreme Court addressing whether a construc­tion worker who was injured on the job was entitled to PTD benefits.

Decision makers go back and forth

Mark Oliver was working for D. Tyree Bulloch Con­struction on March 27, 2000. While he was on a Bulloch construction site, he fell from a suspended porch and was injured. For years after the injury, he worked in a variety of jobs, including as a construction worker, landscape de­signer, and delivery truck driver. In 2007, he stopped work­ing altogether.

Several years after he was injured on the job, Oliver applied to the Utah Labor Commission for PTD benefits under Utah’s Workers’ Compensation Act. The parties presented conflicting medical and vocational evidence to the commission. Both Oliver and Bulloch had medi­cal experts who provided opinions on Oliver’s ability to work. Dr. Mark Passey opined that Oliver is able to perform “just about any activities he wishes to do.” By contrast, Dr. Jacob Corry opined that he suffers from constant attention difficulties because of his pain and is severely restricted in his ability to walk, balance, and crouch.

In addition, the parties had vocational experts who testified about Oliver’s ability to work. Oliver’s voca­tional expert testified that he likely couldn’t perform basic work activities because of his inability to concen­trate. Bulloch’s vocational expert disagreed, opining that Oliver could perform “medium-duty” work and wasn’t limited in his ability to perform basic work ac­tivities. However, Bulloch’s vocational expert conceded that if Corry’s medical opinion was correct, Oliver likely wouldn’t be able to perform basic work activities.

Because of that conflicting evidence, an administra­tive law judge (ALJ) appointed an independent medical panel to perform an impartial review of the medical evidence. The panel determined that Oliver could per­form medium-duty work as long as he was able to be absent from work occasionally, elevate his legs for five to 10 minutes every hour, and take occasional unscheduled breaks. In addition, the panel concluded that he is able to perform basic work activities. It found that he could con­centrate, commute, communicate, work, remain at work, and cope with the work setting.

The ALJ reviewed the evidence, concluded that Oli­ver was permanently totally disabled, and tentatively awarded him PTD benefits. Bulloch appealed the award of benefits, and the commission reversed the ALJ’s deci­sion on two grounds.

First, relying on the medical panel’s report, the commission concluded that Oliver failed to prove that he was limited in his ability to perform basic work activities. The commission noted that although the panel determined that he might require unscheduled breaks and occasionally need to be absent from work, it found that the “indefinite circumstances do not present a rea­sonable limitation on [his] ability to do basic work activi­ties,” particularly in light of its conclusion that he could work, remain at work, and cope with work changes. The commission also noted that being required to elevate his legs for five to 10 minutes every hour wasn’t enough to show that he was reasonably limited in his flexibility and endurance. Second, the commission disagreed with the ALJ’s determination that Oliver couldn’t perform the essential functions of his work as a delivery truck driver.

The commission denied Oliver’s claim for PTD ben­efits for two reasons:

(1) He was not limited in his ability to perform basic work activities.

(2) He was not prevented from performing the essential functions of the work for which he was qualified up to the time of his on-the-job injury.

Oliver appealed the commission’s decision to the Utah Court of Appeals, which reversed the denial of benefits. The court found that the commission misinter­preted the “basic work activities provision” of the stat­ute applicable to permanent total disabilities. The court also consulted the U.S. Bureau of Labor Statistics’ (BLS) Occupational Outlook Handbook (which wasn’t in the record as evidence during the commission proceedings) and concluded that the commission’s determination that Oliver was qualified to work as a delivery truck driver wasn’t supported by substantial evidence. The court of appeals reinstated the ALJ’s PTD benefits award. Bull­och appealed to the Utah Supreme Court.

Proving entitlement to PTD benefits

The Utah Supreme Court reversed the decision of the Utah Court of Appeals and concluded that the com­mission properly denied Oliver’s application for PTD benefits. To put the issues into context, the supreme court first explained what an employee must prove to qualify for PTD benefits. Under Utah Code Section 34A- 2-413(1), an employee seeking an award of PTD benefits must meet six factors:

(1) He sustained a significant impairment as a result of the work-related injury.

(2) He is not gainfully employed.

(3) He has an impairment or a combination of impair­ments that limits his ability to perform basic work activities.

(4) His impairment or impairments prevent him from performing the essential functions of the work for which he was qualified until the time of the accident.

(5) He cannot perform other work that’s reasonably available.

(6) The industrial accident or occupational disease is the direct cause of his permanent total disability.

The court clearly placed the burden of proving each of those elements by a preponderance of the evidence on the employee. Most of the inquiries focus on the employ­ee’s ability to work. If the employee fails to prove even one of the six elements, his claim for PTD benefits will be denied.

Pushing the limits

The Utah Supreme Court first examined the “basic work activities” element of Section 34A-2-413(1)(c)(ii). This element requires employees seeking PTD benefits to prove they have “an impairment or combination of impairments that limit [their] ability to do basic work ac­tivities.” The issue in this case was the meaning of the word “limit” as it is used in the statute.

The court of appeals maintained that employees can show a “limit” on their ability to do basic work activities by producing evidence of any limitation on their abil­ity to work, no matter how slight. In other words, even employees capable of performing basic work activities would be able to establish a claim for PTD benefits if they can show “some limitation” on their performance of basic activities.

The supreme court disagreed with the court of ap­peals’ interpretation, concluding that it was at odds with the “basic work activities” element in the statute. Looking to Provo City v. Utah Labor Commission, a case it decided in 2015, the supreme court explained that it has previously held that “basic work activities” are not just any activities performed in the workplace; rather, they are the activities that are essential to “a broad spectrum of jobs available.” In other words, they are the abilities that allow an employee to perform most jobs, including more sedentary lines of work.

The court then turned to an examination of how “limit” is used in the statute. It acknowledged that “limit” has a variety of possible meanings, but the word is not used in isolation in the statute. According to the court, it’s clear that in the context of the statute, whether an employee is “limited” in his ability to per­form basic work activities depends on whether, irrespec­tive of any impairments, he is meaningfully able to per­form the “core tasks” that are the basic requirements for employment.

Being “limited” in the ability to perform basic work activities is really a question of whether an employee has the abilities and aptitudes necessary for most jobs. If a limitation doesn’t hinder the employee from mean­ingfully engaging in the workforce, he may be limited in performing typical activities, but he isn’t limited in performing “basic” work activities. Thus, the supreme court concluded that the court of appeals incorrectly interpreted the word “limit” in the statute, and the commission correctly interpreted it.

In short, the supreme court concluded that only im­pairments that strike at the heart of the abilities and ap­titudes necessary for most jobs actually limit an employ­ee’s ability to do basic work activities. In other words, an impairment must meaningfully inhibit an employee from performing the core tasks of a wide swath of jobs, making it unreasonable for an employer to ask the em­ployee to perform those tasks.

The supreme court noted that interpretation isn’t consistent with federal disability law. However, federal law doesn’t govern the interpretation of the word “limit” as it’s used in the state’s workers’ comp law. Applying its interpretation, the supreme court concluded the com­mission’s determination that Oliver failed to satisfy the basic work activities element was supported by substan­tial evidence.

Analyzing the essential functions provision

The Utah Supreme Court also analyzed the essen­tial functions provision of the statute when it considered Oliver’s application for PTD benefits. Under the statute, an employee must show that his impairments “prevent [him] from performing the essential functions of the work activities for which [he] has been qualified until the time of the industrial accident.” The commission found that Oliver failed to prove that his impairments prevented him from performing the “essential func­tions” of a delivery truck driver, a job he was qualified to perform at the time of his work-related accident.

The court noted that an employee merely has to present evidence that the only job he is qualified to perform is the job he held at the time of the injury. However, an employer can counter that evidence with proof that the employee is qualified for another job (in this case, deliv­ery truck driver). The employee must then respond with evidence that he cannot perform the essential functions of that position. Oliver couldn’t do that. Accordingly, the court concluded that he failed to meet his burden on the essential functions element of the statute.

The supreme court also noted that the court of ap­peals shouldn’t have considered information about the qualifications of delivery truck drivers from the BLS that wasn’t on the record before the commission. The su­preme court upheld the denial of Oliver’s application for PTD benefits. Oliver v. Utah Labor Commission, Workers’ Compensation Fund, 2017 UT 39 (Utah July 25, 2017).

Lessons learned

This case illustrates that under Utah’s workers’ comp statute, an employee will be entitled to PTD ben­efits only if he is limited in the abilities and aptitudes necessary to perform most jobs. When confronted with a claim for PTD benefits, you should focus on whether the employee has the ability to perform the basic job duties—i.e., the core functions—of the majority of jobs, including sedentary jobs. If you concentrate on satisfy­ing that standard, you will be better able to defeat over­reaching claims for PTD benefits.

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.

Even When You Win, You Lose: Subcontractor’s Indemnity Obligation Enforced Despite Being Absolved of Liability at Trial

Scott Murphy | Barnes & Thornburg | July 25, 2017

In Provenzino v Macomb County2017 WL 104544 (Mich. App. 2017), the Michigan Court of Appeals reversed the trial court’s decision to dismiss a general contractor’s claim for indemnity where the plaintiff’s allegations arose “in any way” from the subcontractor’s work. The appeals court reasoned that the broad indemnity language of the parties’ agreement encompasses indemnification for the subcontractor’s conduct regardless of whether the subcontractor is foundactually negligent.

The case arose from a severe motorcycle accident in Macomb County, Michigan, during a construction project on Harper Avenue that included asphalt resurfacing and concrete reconstruction. Florence Cement Company (Florence) was the general contractor and Lois Kay Contracting Company (Lois Kay) was the asphalt subcontractor. The plaintiff was severely injured while heading southbound on Harper Avenue traveling at about 20 miles an hour; he saw friends in a local bar and attempted to turn into the parking lot. When the plaintiff turned, he encountered a 4-inch rise from the new asphalt resurfacing and lost control of his motorcycle. Plaintiff brought claims against both Florence and Lois Kay for negligence. Pursuant to its subcontract agreement with Lois Kay, Florence asserted cross-claims against Lois Kay for contractual indemnity.

The indemnity provision contained in the subcontract was broad and shifted a great deal of responsibility to the subcontractor. In pertinent part, it stated:

INDEMNIFICATION: Subcontractor agrees, and shall bind all sub-subcontractors to agree to indemnify Contractor, Owner and all other parties the Contractor is obligated to indemnity pursuant to the Prime Contract (hereinafter “Indemnities”), and to defend and hold Indemnities forever harmless from and against all suits, actions, legal and administrative proceedings, claims, demands, damages, interest, attorneys’ fees, costs and expenses of whatsoever kind or nature whether arising before or after completion of Subcontractor’s work and in any manner directly or indirectly caused or claimed to be caused by any action or negligence of Subcontractor of Sub-subcontractor, and regardless of whether directly or indirectly caused or claimed to be caused in part by a party indemnified hereunder or by anyone acting under their direction, control or on their behalf, until such time as a judgment is entered against Contractor by a court of law.

At the trial court level, Lois Kay filed a motion for summary disposition, arguing that Florence was solely negligent because plaintiff’s allegations revolved around signage, barricades, ramps, clean-up and warnings in general, and not because of Lois Kay’s milling the road surface. Relying upon Michigan’s anti-indemnity statute, Lois Kay argued that MCL § 691.991 applied and prohibited Florence from seeking indemnity for its sole negligence. The trial court agreed and dismissed the general contractor’s indemnity claim.

Cause of the injury

The Court of Appeals focused on whether the plaintiff’s injury arose from Lois Kay’s conduct. In order to make this determination, the court focused on the allegations that the plaintiff “was confronted by unclearly marked signage/cones/barrels, etc.,” as well as a differential in height of approximately inches in the asphalt. According to the plaintiff, these unreasonably dangerous conditions caused him to lose control of his motorcycle.

In construing the indemnity provision against these allegations, the appeals court examined the language of the contract according to its plain and ordinary meaning to determine whether plaintiff’s alleged injuries arose out of the subcontractor’s conduct. In reaching its decision, the court explained:

The case was not just about signage, barriers and warnings, which fell within Florence’s scope of work. Rather, plaintiff’s broad allegation that the combined defendants created an unreasonably dangerous condition included the height differential, which was the result of Lois Kay’s work. The issue is not whether Lois Kay was actually negligent; the issue is whether plaintiff’s allegations arose “in any way” from Lois Kay’s work, thereby triggering the indemnification provision.

This case illustrates the importance of paying close attention to the indemnity provisions of your contract. The failure to negotiate a fair and reasonable indemnity provision could leave you in the same position as Lois Kay – paying for the legal defense of the general contractor even when you have been absolved of liability at trial.

Missouri Court of Appeals Upholds Acceptance Doctrine to Absolve General Contractor of Premises Liability

John A. Watt | Baker Sterchi Cowden & Rice LLC | April 21, 2017

In the case of Wilson v. Dura-Seal and Stripe, the Missouri Court of Appeals for the Eastern District held that the “acceptance doctrine” is still valid law in Missouri, and bars liability against a construction contractor for the injury of a third party after the owner of the premises has accepted the work. Citing prior case law, the Court explained the law as follows: “After an owner accepts a structure, the general rule is that a general contractor is not liable to persons with whom he did not contract….In the absence of formal acceptance, constructive or practical acceptance will suffice….Acceptance of the work is attended by the presumption of the owner … made a reasonably careful inspection of the work, knows of its defects, and so accepts the defects and the negligence that caused them as his own.”

In Wilson, plaintiff brought suit against general contractor Dura-Seal for injuries she sustained when she tripped and fell in the gutter area of new asphalt, which had been applied by Dura-Seal at a public school. Wilson claimed that she fell as a result of the height differential between the gutter area and the new asphalt installed by Dura-Seal. Wilson filed a premises liability claim against the owner of the premises who then in turn added Dura-Seal as a third party defendant. Dura-Seal moved for summary judgment, stating that the owner had accepted their work and therefore bore the premises liability due to the acceptance doctrine. The plaintiff argued that there was no evidence that the owner had accepted the work.

It was undisputed that Dura-Seal had not performed any work on the drive lane for at least two months before the plaintiff’s injury and that the owner had paid Dura-Seal for all of the work. It was undisputed that the owner also had exclusive possession and use of the premises rather than the contractor. The Court of Appeals affirmed summary judgment and found that the undisputed facts showed that Dura-Seal was neither in control of the premises, nor had the right to control the premises at the time of the plaintiff’s injury.

The Court of Appeals also analyzed the “imminently dangerous” exception to the acceptance doctrine. This exception operates to impose liability on a contractor, even after the owner has accepted the contractor’s work, under the following conditions: “Where the structure was so defectively constructed as to be essentially and imminently dangerous to the safety of others; the defects are so hidden and concealed that a reasonable and careful inspection would not have disclosed them, and these things are known to the defendants but not to those who accepted them.” Here, the undisputed facts showed that the drive lane and the gutter area where Dura-Seal worked were in plain view and therefore was easily discoverable by the owner. The Court thus declined to apply the exception, and ruled in Dura-Seal’s favor, holding that plaintiff had accepted the work when it was completed and payment in full was made.

Missouri construction contractors and their counsel should be well aware of the dimensions of the acceptance doctrine, and the “imminently dangerous” exception, when defending cases of this type.