Planning Around the "Other Insurance" Clause in the Subcontractor's Policy1
April 2000
In the 2001 case of In John Burns Constr. Co. v Indiana Ins. Co.,
the Illinois Supreme Court decided that when a general contractor's risk transfer
plan is thwarted by the subcontractor's other insurance clause, the general
contractor can neutralize the subcontractor's other insurance clause simply
by making his own liability insurance "unavailable." There are better ways to
neutralize the subcontractor's other insurance clause, and these methods must
be employed before the loss, not after.
by Joseph
P. Postel
Liberty Mutual Insurance Group
It is often said that those who fail to plan, plan to fail. While this is
as true for contractual risk transfer schemes as for anything else, the Illinois
Supreme Court recently gave additional insureds who fail to plan a way to avoid
the failure that would otherwise result from the "other insurance" clause in
the subcontractor's commercial general liability (CGL) insurance policy.
In John Burns Constr. Co. v Indiana Ins. Co.,
2000 WL 46031 (Jan. 21, 2000), the Illinois Supreme Court held that when a general
contractor's risk transfer plan is thwarted by the subcontractor's other insurance
clause, the general contractor can neutralize the subcontractor's other insurance
clause simply by making his own liability insurance "unavailable."
The key to the decision is the meaning of the word "available," which is
contained in the other insurance clause of every Insurance Services Office,
Inc. (ISO), CGL policy. Both the 1993 and the 1998 versions of the CG 00 01
form—the basic CGL coverage form—at Section IV, Commercial General Liability
Conditions, 4. Other Insurance, use the word "available" in the same way:
If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of
this Coverage Part, our obligations are limited as follows:
a. Primary Insurance
This insurance is primary except when b. below applies. If this insurance
is primary, our obligations are not affected unless any of the other insurance
is also primary. Then, we will share with all other insurance by the method
described in c. below. [Emphasis supplied.]
The John Burns court reasoned that in order
for the general contractor's own insurance to be available, it would have to have been invoked by the insured, i.e., the
general contractor. It is important to note that this does not mean that a mere
failure to tender the general contractor's defense to its own insurer makes
that insurance unavailable. Or, put another way, it is not true that until the
insured tenders its defense to the insurer, that insurer's insurance is unavailable.
The Illinois Supreme Court made that clear in Cincinnati
Cos. v West American Ins. Co., 701 NE2d 499 (1998), where the court held
that mere notice was sufficient to trigger a policy, regardless of whether a
tender had been made to the insurer. But the Cincinnati court attached an important proviso to that pronouncement: provided the insured has not knowingly foregone
the insurer's assistance.
So, the rule emerging from these two cases is now clear—so long as the insured
has not knowingly foregone its own insurer's assistance (i.e., "deselected"
its own policy, or instructed its own insurer not to defend, or "elected" the
subcontractor's policy to furnish the exclusive defense and indemnification),
the insured's own insurance is available,
i.e., reachable by means of the other insurance clause in the subcontractor's
policy, as long as the general contractor's insurer received notice. When the
general contractor's own policy is available,
its risk transfer scheme will be frustrated, because it will have to pay a proportionate
share of the defense and loss costs along with the subcontractor's insurer.
However, the general contractor has a way to make his own policy unavailable, thus solving the problem. The
general contractor can simply "deselect" its own policy by informing its insurer
in writing that it does not wish for its own policy respond to the claim (or
suit), but rather, that the subcontractor's own policy do so instead. The general
contractor can add, in the letter, that it would like its own policy to respond
solely to the extent necessary to protect its interests while it goes about
securing an exclusive defense and coverage from the subcontractor's insurer,
and that it would like its own policy to apply only upon exhaustion of the subcontractor's
policy.
More importantly, the general contractor can, and should, make those wishes
known to the subcontractor's insurer. Even if the general contractor has failed
to do this at the outset, however, it can do so later, as an earlier appellate
court case, which was approved by the John Burns court, made clear. See Alcan United, Inc. v West
Bend Mut. Ins. Co., 707 NE2d 687 (Ill App 1999). That is because there
is no requirement in the ISO CGL policy that a claim be tendered at all, let
alone tendered at any particular time. Thus, there is no such thing as a "late
tender" defense, although there is a "late notice" defense.
If the holding in John Burns sounds familiar,
it is because the Illinois Appellate Court had reached the same conclusion,
albeit without the same analysis of the word "available," in Institute of London Underwriters v Hartford Fire Ins.
Co., 599 NE2d 1311 (Ill App 1992). Some insurers subsequently attempted
to undo London Underwriters by adding manuscript
language to their "Duties in the Event of Occurrence, Claim or Suit" clauses,
requiring the insured to tender to all other insurers.
In the only published case so far deciding whether this language requires
an additional insured to tender to its own insurer, the Illinois Appellate Court
said it does. See American Country Ins. Co. v Kraemer
Bros., Inc., 699 NE2d 1056 (Ill App 1998). In addition to providing prompt
notice of any occurrence, claim, or suit, and cooperating with the insurer,
the manuscript language in that case required that the insured:
Promptly tender the defense of any claim made or "suit" to any other insurer
which also has available insurance for a loss which we cover under Coverage
A or Coverage B of this coverage part. [Emphasis supplied.]
Note the use of the word "available" in that clause. In light of the John Burns court's analysis of "available," Kraemer Bros. is probably questionable authority
and may have been implicitly overruled. However, that won't stop other insurers
from trying to draft their way out of a John Burns tender.
Note, however, that the ISO CGL policy "Duties in the Event of Occurrence,
Claim or Suit" clause does not require an additional insured to tender its defense
and indemnification to its own insurer. See Employers
Ins. of Wausau v James McHugh Constr. Co., 144 F3d 1097 (7th Cir 1998).
While the John Burns case is a nice arrow
for the general contractor to have in its quiver, it is questionable whether
any court outside Illinois will follow this case. There is at least some case
law from other jurisdictions subscribing to the view that the right of equitable
contribution among insurers is absolute, and the insured can do nothing to impair
it. See the following cases.
- Tops Markets, Inc. v Maryland Casualty Co.,
700 NYS2d 325 (NY App 1999) (owner's self-insured retention did not preclude
contractor's insurer, which settled claim by contractor's employee against
owner, from obtaining equitable contribution from owner's insurer)
- Fireman's Fund Ins. Co. v Maryland Cas. Co.,
77 Cal Rptr 2d 296 (Cal App 1998) (insured's release of nonsettling insurer
did not bar settling insurer from obtaining equitable contribution)
Courts subscribing to the "absolute right" approach are very unlikely to
go along with John Burns. Certainly, a prudent
general contractor outside Illinois would never bank on this decision as a substitute
for good risk transfer planning through careful subcontract drafting and monitoring
of subcontractor insurance.
Of course, it is always good to remember that where the general contractor
has an enforceable indemnity agreement, i.e., one that is narrow enough that
it does not run afoul of any applicable anti-indemnity statute and yet is broad
enough to encompass the general contractor's liability (no mean feat), the other
insurance clause in the subcontractor's policy does not apply in the first place.
This was explained by the California Supreme Court in Rossmoor Sanitation, Inc., v Pylon, Inc., 532
P2d 97 (1975). The same analysis can be found in J.
Walters Constr., Inc., v Gilman Paper Co., 620 S2d 219 (Fla App 1993),
and U.S. Fidelity & Guaranty Co. v CNA Ins. Cos.,
618 NYS2d 465 (NY App 1994).
The 1998 amendments to the "other insurance" clause of the CG 00 01 coverage
form are designed to solve the problem of the subcontractor's other insurance
clause. Under the 1993 and previous versions of the CG 00 01 form, the named
insured's own policy furnished primary coverage, that shared with other insurance.
(The language of the other insurance clause is reproduced above.) But the 1998
version makes the named insured's coverage excess over any other policy on which the named insured is made an additional insured
by endorsement. It now provides, at Section IV, Commercial General Liability
Conditions, 4. Other Insurance:
This insurance is excess over:
* * *
(2) Any other primary insurance available to you covering liability for
damages arising out of the premises or operations for which you have been
added as an additional insured by attachment of an endorsement.
Thus, so long as the subcontractor's policy contains only the ISO CG 00 01
"Other Insurance" clause and no language is added to the CG 20 10 (or other)
additional insured endorsement to the subcontractor's policy, that policy should
furnish sole primary coverage to the general contractor, so long as the general
contractor is added as an additional insured to that policy by endorsement,
and so long as its own policy contains the 1998 CG 00 01 coverage form. No other
drafting needs to be done.
Note, however, that two factors can frequently frustrate the intent behind
the 1998 CGL excess-over-additional-insured-coverage clause. First, the subcontractor's
insurer might, and frequently will, add an excess clause of its own to the additional
insured endorsement that applies to the general contractor. The result is that
in the vast majority of states, the two policies will prorate coverage for the
general contractor. This is not what the general contractor intended.
There are at least two insurers—St. Paul and CNA—that frequently add just
such an excess provision to their additional insured endorsements. But the St.
Paul and CNA excess clauses contain an important exception (which insulates
their named insureds from uninsured breach of contract liability): the additional
insured coverage applies on whatever basis any contract between the named and
additional insureds requires.
Thus, in the event that the general contractor finds that it is added as
an additional insured by means of an endorsement with a St. Paul or CNA-style
excess clause, it will want to prepare for the situation by inserting language
in its subcontract requiring sole primary coverage to be provided by the subcontractor.
The St. Paul and CNA excess clause automatically conforms the policy's coverage
to any such requirement.
The second factor is the Lamb-Weston rule,
named for a 1959 Oregon Supreme Court case. Under the Lamb-Weston rule, all "other insurance" clauses,
i.e., all clauses that seek to in any way diminish the insurer's share of a
loss (e.g., excess clauses, escape clauses, or pro rata clauses), are considered
mutually repugnant and are not enforced.
There is little doubt that the 1998 CGL excess-over-additional-insured-coverage
clause would not be given its intended effect in Lamb-Weston jurisdictions. However, there is also little doubt that an other insurance clause
in the subcontractor's policy, which makes its coverage for the additional insured
sole primary, would not run afoul of the Lamb-Weston rule and would be enforced, because such a clause does not attempt to diminish
the insurer's share of the loss. Instead, it attempts to accept all of the loss.
Thus, in Lamb-Weston jurisdictions, it is
especially critical to provide in the subcontract that the additional insured
coverage for the general contractor be sole primary, and to be sure that the
subcontractor, and its insurer, have complied with that requirement before a
loss occurs.2
Where the general contractor has failed to plan for the subcontractor's other
insurance clause, it might try a John Burns targeted
tender. This should work in Illinois, and it just might work outside Illinois.
But in Illinois or anywhere else, there is just no substitute for good planning.
There are better ways to neutralize the subcontractor's other insurance clause
than a John Burns tender, and these methods must
be employed before the loss, not after. There are also other obstacles to contractual
risk transfer, such as manuscript language limiting the scope of additional
insured coverage, and self-insured retentions that apply to additional insureds,
to name just two. We will consider those and other obstacles, as well as ways
to plan for them, in future columns on this site.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.