Keeping track of numerous requests to add parties as additional insureds on an insurance policy can get complicated. Humans being fallible, sometimes mistakes are made in how parties are listed in additional insured (AI) endorsements. When that happens, a court has the equitable power to reform the insurance policy to correct such mistakes so that the policy reflects the parties' contractual intent.
A case in point is Ebasco Constructors, Inc. v. Aetna Ins. Co., 260 A.D.2d 287, 692 N.Y.S.2d 295 (App. Div. 1st Dept. 1999). In that case, the Subcontractor was required under the terms of a subcontract to name the General Contractor as an AI on the Sub's commercial general liability (CGL) policy in connection with a project to construct a new utility plant. There were two AI endorsements to that policy.
Landlord Endorsement. The first endorsement provided AI coverage to listed parties for "liability arising out of the ownership, maintenance or use of that part of the premises leased to [the Subcontractor]."
Contractor's Endorsement. The second endorsement provided AI coverage to listed parties for liability arising out of subcontracted work.
The underwriter goofed up. He or she listed the General Contractor as an AI on the Landlord Endorsement and the landlord as an AI on the Contractor's Endorsement.
The agent testified that she discovered the error for the 1990 policy period and asked the underwriter to correct it. However, the underwriter made the same mistake when the policy was reissued for the 1991 policy period.
During the 1991 policy period, one of the Subcontractor's employees slipped and fell at the job site. A jury determined that the General Contractor was 100 percent at fault and awarded $3.5 million in damages.
To avoid paying such a large claim, the Subcontractor's CGL insurer tried to stand on the underwriter's mistake, arguing that the General Contractor was not an AI on the Landlord Endorsement because the job site was not leased to the Subcontractor.
The appellate court held, however, that this was an obvious "scrivener's error." The parties clearly intended that the General Contractor should have been listed as an AI on the Contractor's Endorsement, and the court reformed the 1991 policy to correct the mistake.
The court further held, though, that the General Contractor had not sufficiently established that the insurer acted in bad faith.
So, if you discover that somebody in your office has made a clerical error in filling out an additional insured endorsement, all is not lost. Courts have shown themselves to be willing to consider the situation, determine what happened, and correct such mistakes if need be. Expensive, yes. Fatal, no.
Insurers should not rely on obvious mistakes like this when handling claims. While it may be tempting to take advantage of the mistake to delay a claim payment longer than otherwise would have been possible, a court will probably not allow you to get away with it indefinitely. Although this particular court was unwilling to find bad faith, an insurer may not be so lucky next time. In the end, the higher indemnity payments, potential for a bad faith award, and damage to your brand, would probably outweigh any additional investment income you might earn on the float. This is one of those situations where doing the right thing is the better business decision.
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