Blanket additional insured endorsements typically require that two main
criteria must be satisfied to trigger coverage: there must be a written
contract requiring additional insured coverage, and the loss must be connected
to the named insured's acts or omissions. Occasionally, disputes arise
regarding the written contract criteria, as it is not always clear whether any
contract will do or whether both the named insured and the intended additional
insured must be parties to the contract (i.e., whether the parties must be in
direct contractual privity to trigger the blanket additional insured
endorsement).
Acknowledgment
The author would like to acknowledge and thank
coauthor Bethany L. Barrese for her contributions to this commentary.
This issue is frequently encountered in the construction industry, where it
is common for upstream parties, such as project owners and general contractors,
to transfer risk downstream to subcontractors via contractual risk transfer and
additional insured requirements. For example, a project owner may enter into a
contract with a general contractor that obligates the general contractor and
all subcontractors to name the owner as an additional insured on their general
liability policies. Even if the general contractor, in turn, requires the
subcontractors to name the owner as an additional insured and the
subcontractors procure policies containing blanket additional insured
endorsements, it is not always clear that the subcontractor's insurer will
be obligated to provide additional insured coverage to the owner due to the
absence of a direct contract between those parties.
Nationwide, courts are split as to whether direct contractual privity is
required to satisfy certain additional insured endorsements.
Contractual Privity Is Not Required
The following cases from Connecticut, Maine, and Texas held that contractual
privity is not required to satisfy certain additional insured endorsements.
Connecticut: First Mercury Ins. v. Shawmut Woodworking
The Federal District Court for the District of Connecticut recently held
that direct contractual privity is not required in First Mercury Ins. Co.
v. Shawmut Woodworking & Supply, Inc., 48 F. Supp. 3d 158, 160-175 (D.
Conn. 2014) (aff'd, 2016 U.S. App. LEXIS 16152 (2d Cir. Aug. 29,
2016)), which concerned coverage for bodily injury claims arising out of a
construction project at a Yale facility. The general contractor, Shawmut
Woodworking, hired steel fabrication subcontractor Shepard Steel, which hired
sub-subcontractor Fast Trek Steel to perform erection work. Three employees of
Fast Trek were killed when a steel web structure collapsed during installation.
The estates of the employees filed suit against Shawmut and Shepard.
Shawmut and Shepard both tendered additional insured claims to Fast
Trek's commercial general liability (CGL) insurer, First Mercury Insurance.
The First Mercury policy contained an additional insured endorsement that
conveyed additional insured status to "any person or organization for whom
you are performing operations 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.…"
First Mercury denied coverage to Shawmut on the basis that it was not an
additional insured because it had no direct contractual relationship with Fast
Trek. Shawmut argued that a direct contractual requirement with Fast Trek was
not required and that, together, the Shawmut-Shepard contract and the
Shepard-Fast Trek contract triggered the additional insured endorsement.
The court held that, for purposes of the First Mercury endorsement, the
agreement to provide additional insured coverage can be memorialized in
separate contracts without direct contractual privity. The court noted that
nothing in the endorsement's language required direct contractual privity,
and the court declined to read in additional terms, such as "direct"
contract or have agreed "with each other."
In 2016, the Second Circuit Court of Appeals affirmed the district
court's ruling, reinforcing the idea that the additional insured
endorsement did not require the parties to enter into a "single"
contract "with each other." The Second Circuit also noted that, if
First Mercury intended for the additional insured endorsement to apply only to
parties in direct contractual privity, it could have added in language
specifying the need for a single, direct contract or agreement.
Maine: Pro Con v. Interstate Fire & Cas.
The Federal District Court for the District of Maine also found that direct
contractual privity is not required in Pro Con, Inc. v. Interstate Fire
& Cas. Co., 794 F. Supp. 2d 242 (D. Me. 2011). In that case, Pro Con
was serving as general contractor for construction of a hockey rink at Bowdoin
College. Pro Con hired steel subcontractor Canatal Industries and required
Canatal to name both Pro Con and Bowdoin College as additional insureds on
Canatal's liability policies. Canatal hired sub-subcontractor CCS
Constructors to provide structural steel work and required CCS to name Pro Con,
Bowdoin, and Canatal as additional insureds on CCS's liability
policies.
To fulfill its contractual obligations, CCS purchased a CGL policy from
Interstate Fire and Casualty. The Interstate policy contained a blanket
additional insured endorsement that provided coverage to "[a]ny person or
organization for whom you are performing operations 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." A CCS
employee was injured while working on the project and sued Pro Con for his
injuries. Pro Con sought coverage under the Interstate policy, but Interstate
rejected the tender, and a declaratory judgment action followed.
In determining whether Pro Con qualified as an additional insured under the
blanket endorsement, the district court emphasized the importance of reading
what the endorsement actually said, instead of reading what it could have said.
The endorsement did not include the phrase "with you" or "with
each other" after the phrase "agreed in writing in a contract or
agreement"; it simply stated that there must be a written contract.
The court held that CCS had agreed in writing to add Pro Con as an
additional insured, thereby satisfying the blanket additional insured
endorsement. The fact that CCS had agreed to do so in a written contract with
Canatal as opposed to Pro Con was immaterial. The court also pointed out that a
certificate of insurance produced in connection with CCS's work on the
project stated that Pro Con was an additional insured on the policy, which was
consistent with the court's determination that Pro Con qualified as an
additional insured.
Texas: Millis Dev. & Constr. v. American First
Lloyd's
A similar decision was reached by the Federal District Court for the
Southern District of Texas in Millis Dev. & Constr., Inc. v. American
First Lloyd's Ins. Co., 809 F. Supp. 2d 616, 618–636 (S.D. Tex. 2011).
In that case, which concerned a construction project at the Cross Creek Ranch
Visitors and Recreation Center, general contractor Millis Development and
Construction hired subcontractor Texas Mechanical Contractors (TMC), which
hired sub-subcontractor Dynamic Air Balancing. The contract between Millis and
TMC required that TMC obtain a CGL policy and make Millis and the project
developer, Trendmaker Homes, additional insureds on that policy. An employee of
Dynamic was injured while performing work on the project and sued Trendmaker
and Millis for his injuries.
Trendmaker and Millis sought additional insured coverage from TMC's CGL
insurer, America First. The America First policy contained a provision that
conveyed coverage to "any person or organization when you and such a
person or organization have agreed in writing in a contract, agreement, or
permit that such person or organization be added as an additional insured on
your policy." America First confirmed that Millis qualified as an
additional insured on the policy but denied coverage for Trendmaker on the
basis that it did not have a contract with the named insured, TMC.
Like the decisions by courts in Connecticut and Maine, the Southern District
of Texas determined that a direct contract between the named insured and the
additional insured is not necessarily required by the plain language of the
policy. First, the court noted that the additional insured endorsement did not
include the words "direct" or "between" in reference to the
written contract or the words "with each other" or
"together" after the phrase "have agreed." The endorsement
also did not require that both the named insured and additional insured have
signed the written contract, only that they both agreed, which they did in
separate contracts. Accordingly, the court held that Trendmaker qualified as an
additional insured on the America First policy.
Contractual Privity Is Required
Unlike courts in Connecticut, Maine, and Texas, courts in New York,
Illinois, and Louisiana have held that privity is required where certain
additional insured endorsements are involved.
New York: Gilbane Bldg. v. St. Paul Fire & Marine Ins.
In New York, trial level courts have inconsistently decided the issue of
whether direct contractual privity is required for certain additional insured
endorsements. However, a recent decision from the Appellate Division of the New
York State Court confirms that New York courts tend to interpret additional
insured endorsements to require direct contractual privity. In Gilbane
Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co., 2016
N.Y. App. Div. LEXIS 5930 (N.Y. App. Div. 1st Dep't Sept. 15, 2016), the
Dormitory Authority of the State of New York (DASNY) hired Gilbane Building/TDX
Construction, a Joint Venture (JV), as construction manager and Samson
Construction as prime contractor. During the course of the construction
project, Samson's excavation and foundation work caused adjacent buildings
to sink. DASNY filed suit against Samson and the project's architect, and
the architect brought a claim against Gilbane/TDX JV.
Per the construction management contract between DASNY and Gilbane/TDX JV,
any prime contractor was required to name the construction manager as an
additional insured. Accordingly, Gilbane/TDX JV sought additional insured
coverage from Samson's insurer, Liberty Mutual. Samson's Liberty policy
contained an endorsement that provided additional insured status to "any
person or organization with whom you have agreed to add as an additional
insured by written contract.…"
Liberty filed summary judgment, seeking a declaration that it had no duty to
defend Gilbane/TDX JV because it did not have a direct contract with the named
insured, Samson. At the trial level, the court denied summary judgment, finding
that the endorsement required only a written contract to which Samson was a
party (i.e., the contract between DASNY and Samson) and, because that contract
obligated Samson to name the construction manager as an additional insured,
Gilbane/TDX JV was entitled to additional insured coverage under the Liberty
policy.
On appeal, the New York Appellate Division, First Department, reversed the
trial court's holding, relying on two New York cases: AB Green
Gansevoort, LLC v. Peter Scalamandre & Sons, Inc., 102 A.D.3d 425, 961
N.Y.S.2d 3 (N.Y. App. Div. 1st Dep't 2013), and Linarello v. City Univ.
of N.Y., 6 A.D.3d 192, 774 N.Y.S.2d 517 (N.Y. App. Div. 1st Dep't
2004). Both of those cases involved endorsements that conveyed additional
insured coverage "when you and such … organization have agreed in writing
in a contract or agreement that such … organization be added as an additional
insured on your policy." In both cases, the First Department found that
direct contractual privity was required. Although the language in the Liberty
policy differed from that in AB Green Gansevoort and
Linarello, the First Department found those cases controlling and held
that the Liberty policy also required direct contractual privity.
In a lengthy dissent, Judge Kahn opined that AB Green Gansevoort
and Linarello were indeed distinguishable because they involved
"when you and such person" language as opposed to the "with
whom" language found in the Liberty policy. Furthermore, Judge Kahn
pointed out the poor syntax of the Liberty endorsement, where the word
"whom" is the object of both preposition "with" and
infinitive "to add." Judge Kahn opined that, to correct the syntax,
the endorsement should be read without the unnecessary "with," which
would cause the endorsement to provide coverage for "any person or
organization whom you have agreed to add as an additional insured by written
contract.…" Finally, Judge Kahn stated that the Liberty endorsement was
ambiguous due to the poor syntax and as illustrated by the fact that certain
New York trial and district courts interpreting similar language have held that
no contractual privity is required.
Illinois: Westfield Ins. v. FCL Builders
The Illinois Appellate Court has also held that certain additional insured
endorsements require direct contractual privity. In Westfield Ins. Co. v.
FCL Builders, Inc., 407 Ill. App. 3d 730 (Ill. App. Ct. 1st Dist. 2011),
FCL Builders was acting as general contractor on a construction project. FCL
subcontracted steel fabrication and erection work to Suburban Ironworks, which
in turn subcontracted steel erection work to JAK Ironworks. The contract
between FCL and Suburban required Suburban to obtain CGL insurance that would
provide coverage for FCL and to require any subcontractors Suburban hired to do
the same. When Suburban hired JAK, it incorporated the terms of the
FCL-Suburban contract into the Suburban-JAK contract. Therefore, JAK was also
obligated to procure insurance and include FCL as an insured. JAK did so by
purchasing a CGL policy from Westfield Insurance.
During the course of the construction project, an employee of JAK was
severely injured when he fell off a steel beam. The worker sued FCL and
Suburban, which tendered the lawsuit to Westfield for defense as additional
insureds. The Westfield policy included as an additional insured "any
person or organization for whom you are performing operations when you and such
a 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." However, Westfield denied FCL's tender, claiming that it was
not an additional insured, and a declaratory judgment action followed.
The Illinois Appellate Court found that direct contractual privity between
the named insured and additional insured was required, stating that "[t]he
policy explicitly and unambiguously requires a direct, written agreement to
that effect in order to cover anyone other than JAK under the policy." The
court emphasized that the endorsement provided coverage "when you and
such a person or organization" enter into a contract, not when you
and "any" person enter into a contract. Because there was no such
agreement directly between JAK and FCL, FCL could not qualify as an additional
insured on the Westfield policy.
Louisiana: Venable v. Hilcorp Energy
The same reasoning held true in a case before the Federal District Court for
the Eastern District of Louisiana in Venable v. Hilcorp Energy Co.,
2010 U.S. Dist. LEXIS 42629 (E.D. La. Apr. 29, 2010), which concerned injuries
sustained by a worker on a drilling barge owned by Hilcorp Energy. Hilcorp
hired Greene's Energy Group to perform work on the barge, and an employee
of Greene's suffered a heart attack while working aboard the barge. Hilcorp
had separately hired HTK Consultants to work on the project, which hired Heard
Consulting. The worker sued a number of entities involved in the project,
including HTK and Heard, which sought coverage from Greene's general
liability insurer Nautilus Insurance.
The Nautilus policy contained an additional insured endorsement that stated,
"where required by written contract, a person, firm or organization is
included as Additional Insured but only in respect of liability for Bodily
Injury … arising out of operation performed by or on behalf of the named
Insured under written contract with such additional insured…." Nautilus
argued that HTK and Heard were not additional insureds on the policy because
they did not have a direct contract with Greene's, and the court agreed.
The court stated that the additional insured endorsement, "while not a
paragon of clarity, does require that a party have contracted directly with the
Named Insured in order to attain additional insured status." Because
neither HTK nor Heard entered into a direct contract with Greene's, they
could not be additional insureds on the Nautilus Policy.
Contractual Privity Solutions
Recall the scenario discussed at the beginning of this article where a
project owner hires a general contractor, and the general contractor hires a
subcontractor that is obligated to provide additional insured coverage for the
owner and the general contractor. If the subcontractor's insurer denies
additional insured coverage for the owner due to lack of contractual privity,
all parties are now at a disadvantage: (1) the owner is denied additional
insured coverage on the subcontractor's policy, (2) the general contractor
is likely obligated to provide additional insured coverage for the owner and
can no longer pass that obligation downstream to the subcontractor, and (3) the
subcontractor is exposed to a potential claim for breach of contract for
failure to procure additional insured coverage for the owner.
In 2013, Insurance Services Office, Inc., published a new blanket additional
insured endorsement, CG 20 38 04 13, with the goal of eliminating the
contractual privity problem. The new endorsement extends additional insured
coverage to the following.
- Any person or organization for whom you are performing operations 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; and
- Any other person or organization you are required to add as an additional
insured under the contract or agreement described in Paragraph 1 above.
The second paragraph of the 2013 endorsement clarifies that a party can be
an additional insured where the named insured agreed in writing to provide
coverage, even if the intended additional insured is not in direct contractual
privity with the named insured.
A denial of additional insured coverage based on lack of direct contractual
privity leaves all involved parties at a disadvantage. To avoid this issue, all
parties, and especially those doing business in jurisdictions that enforce the
direct contractual privity requirement, should review their own policies and
the policies of any downstream parties to ensure that their additional insured
endorsements do not require contractual privity and establish a hierarchy of
coverage based on clear policy language.