In the world of construction risk transfer, additional insured risk transfer
heavily focuses on general liability insurance. Modern construction contracts
typically also require a subcontractor (the downstream party) to name upstream
parties as additional insureds on their auto insurance. In many scenarios, this
component of the risk transfer agreement among the parties winds up being the
most relevant, yet it is not always considered when developing a loss recovery
agenda.
Acknowledgment
Many thanks to Celia B. Waters, an associate
with Saxe Doernberger & Vita, P.C., for her assistance with this
article.
For general liability insurance, additional insured coverage is customarily
obtained through a blanket endorsement to the policy. Additional insured
coverage usually provides an upstream party protection from claims that
"arise out of" or are "caused, in whole or in part by" the
downstream party's acts or omissions. However, even if an owner or general
contractor is an additional insured on their subcontractor's liability
policy, these policies contain an automobile exclusion that can broadly apply
to many claims involving the use of an automobile, including loading and
unloading. Depending on the applicable law and relevant facts, even a minimal
relationship of an auto to the alleged harm can implicate the exclusion. In
this scenario, the downstream auto insurance can become a vital insurance
recovery asset.
Accessing coverage on a downstream parties' auto insurance is achieved
slightly differently, however. Additional insured endorsements can be added to
auto policies; however, these endorsements are not always commonplace or
consistently procured. Auto policies may also include designated insured
endorsements, which merely provide coverage to a specifically named party
"but only to the extent that person or organization qualifies as an
'insured' under the Who Is An Insured provision" of the
policy.1 In a sense, these endorsements are
promising nothing more than what is already provided under the policy.
Additional Insured Coverage Via Omnibus Clause
The most common approach is an omnibus clause, which recognizes a number of
ways a party can qualify as an "insured." A standard provision
defines an "insured" in the pertinent part as the following.
- Who Is An Insured
The following are 'insureds':
- You for any covered 'auto'
[***]
c. Anyone liable for the conduct of an
'insured' described above but only to the extent of that liability.
("Provision c.")
Provision a. is the most understood and utilized provision of the omnibus
clause because it provides coverage for "you" (meaning, the named
insured), and the named insured is the individual or company who paid for the
policy. Provision c. extends coverage to other parties and, as liability and
additional insured coverage are conceptually coextensive, can include those
entities seeking additional insured coverage (technically, those parties would
be an "Insured" in this scenario). Therefore, even in the absence of
an additional insured endorsement, the policy may still provide insured
status.
Additional Insured Coverage Via Vicarious Liability
In New York, for example, New York Labor Law § 240(1) holds owners and
contractors vicariously liable for the operations of its subcontractors
regardless of the owner or contractor's fault or negligence, or a direct
contract between the parties. The New York Appellate Division has held that
since Labor Law § 240 holds a general contractor liable for its
subcontractor's actions, it triggers coverage for the general contractor
under the provision of a subcontractor's auto policy that states an insured
is "[a]nyone else who is not otherwise excluded … and is liable for the
conduct of an 'insured' but only to the extent of that liability."
See Paul M. Maint., Inc. v. Transcon. Ins. Co., 300 A.D.2d 209, 211,
755 N.Y.S.2d 3, 5 (N.Y. App. Div. 1st Dep't 2002) (where a
subcontractor's employee was injured when a piece of equipment fell from
the covered auto while it was being loaded onto the truck.).
Similarly, in Employers Ins. Co. of Wausau v. Harleysville Preferred
Ins. Co., 2016 WL 815277 (S.D.N.Y. Feb. 29, 2016),2 the district court, applying New York law, found an owner and
contractor to be additional insureds on a subcontractor's auto policy. The
policy defined an insured as "anyone liable for the conduct of an insured
… but only to the extent of that liability" and the claims against the
owner and contractor included claims that the parties were vicariously liable
for the subcontractor, specifically, claims under N.Y. Labor Law § 240 and
241.3 Id. at 10*.
Under Texas common law, an owner or general contractor can be held
vicariously liable for physical harm caused by a subcontractor if the owner or
general contractor controls the details or methods of the subcontractor's
work "to such an extent that the subcontractor cannot perform the work as
it chooses." See Indian Harbor Ins. Co. v. Valley Forge Ins.
Group, 535 F.3d 359, 363 (5th Cir. 2008) (applying Texas law). In
Indian Harbor, a general liability insurer who defended a general
contractor against claims brought by the premise owner brought an action
against the auto insurer of the contractor's subcontractor, seeking to
recover attorneys' fees and settlement costs. The subcontractor's auto
policy defined an "Insured" as "anyone liable for the conduct an
insured described above, but only to the extent of that liability."
The district court, applying Texas law, notes that this definition creates
insurance coverage for anyone who is vicariously liable for the conduct of the
subcontractor. Id. at 363. However, when analyzing the underlying
complaint, the district court found that the complaint did not plead sufficient
facts to allege that the contractor was vicariously liable for the
subcontractor's conduct. Id. at 364. Accordingly, the auto insurer
had no duty to defend the contractor.
Similarly, the circuit court in Category 5 Mgmt. Group LLC v. National
Cas. Ins. Co., 480 Fed. App'x 536, 538 (11th Cir. 2012), applying
Georgia law, held that under Georgia law, "liable for the conduct of an
insured" is synonymous with vicarious liability. However, the circuit
court held that since the complaint did not allege or give notice of vicarious
liability, the insurer had no duty to defend the party seeking additional
insured coverage.
Accordingly, in states that recognize common-law vicarious liability when an
owner or contractor asserts a certain amount of control over its
subcontractor's work, the allegations of such control should satisfy
Provision c. of the auto policy and pave the way to a duty to defend. In both
Indian Harbor and Category 5, the courts were looking to the
pleadings to determine whether the facts pled were enough to allege vicarious
liability. Likewise, a pleading of a statute that creates vicarious liability
of an owner or general contractor for the actions of its subcontractors, like
New York Labor Laws, may be enough to obtain a defense under a
subcontractor's auto policy.
Additional Insured Coverage Via the Relationship
Importantly, the analysis of this provision can vary from jurisdiction to
jurisdiction. Some courts require evidence of a direct contract or a
principal-agent relationship between the named insured and the party seeking
additional insured coverage.4 Other courts have
interpreted this provision to grant coverage merely when the party seeking
coverage is or is alleged to be vicariously liable for the actions of the named
insured.
In Progressive Cas. Ins. Co. v. Brown's Crew Car of Wyoming,
Inc., 27 F. Supp. 2d 1288 (D. Wyo. 1998), for example, Brown's
Crew Car of Wyoming, Inc. ("Brown"), entered into a contract with
Corporate Lodging Consultants, Inc., d/b/a Crew Transport Service Company
("CTS"), to provide transportation services for Union Pacific
Railroad Company's ("UP") employees.5
The CTS/Brown Contract required Brown to maintain insurance for the benefit of
UP. Subsequently, UP's employees were injured during Brown's
transportation, and the employees sued both Brown and UP for
negligence.6 Brown and UP argued that UP was an
insured on Brown's auto policy under the provision of the policy, which
states an "insured" is "[a]nyone liable for the conduct of an
insured described above …" because UP was acting as Brown's principal
and is liable for Brown's negligence. Id. at 1292. The federal
district court, applying Wyoming law, did not find a principle-agent
relationship to exist because "Brown had no direct contractual or
employment relationship with UP whereby UP could control Brown's
actions" and "[w]ithout a contractual or employment relationship with
Brown where UP exerted some measure of control, Brown should not be considered
UP's agent." Id. Therefore, the court did not find coverage
for UP on Brown's auto policy.
Although Progressive is not a construction case, the contractual
relationships between the parties in Progressive are similar to the
relationships found within the construction industry, an owner/upstream party
requiring the general contractor/downstream party and all other parties the
general contractor contracts with (subcontractors) to name the owner as an
additional insured on its insurance policies. The district court in
Progressive focused on a principal-agent relationship to obtain
coverage under the policy and that such relationship required a direct contract
between the parties. In many scenarios, like the one in Progressive,
the party seeking additional insured coverage does not have a principal-agent
relationship and may not have a direct contract with the named insured.
However, some states have common laws or statutes that create vicarious
liability among certain parties within the construction industry where a direct
contract does not exist. Vicarious liability created by these laws may trigger,
at the very least, defense coverage for an additional insured under Provision
c. on an auto policy.
Ultimately, when an accident occurs on a construction site involving any
form of automobile, it is important to recognize the significance to downstream
risk transfer. General liability insurance may not be available but auto
insurance may. The downstream parties' auto insurance should be
incorporated into the insurance recovery agenda, put on notice, and treated as
an insurance asset directly available to the upstream party (including
consideration of all rights and obligations). Do not be deterred if the policy
lacks a dedicated additional insured endorsement; coverage may still be
available through Provision c.