Additional Insured Issues
Overbroad Wrap Exclusion Can Hamper Additional Insured Risk Transfer
Gregory Podolak | September 29, 2017
Footnotes
1 Insurance Services Office, Inc., Form CG 21 54 01 96.
2 See Structure Tone, Inc. v. National Cas. Co., 130 A.D.3d 405 (N.Y. App. Div. 1st Dep't July 2, 2015).
3 See Structure Tone, Inc. v. National Cas. Co., 2014 NY Slip Op 30484(U) (N.Y. Sup. Ct. Feb. 27, 2014).
4 For example, the rule in New York is that damages are limited to out-of-pocket expenses such as premiums and any additional costs incurred including deductibles, copayments, and increased future premiums. See Amato v. Rock-McGraw, Inc., 297 A.D.2d 217, 746 N.Y.S.2d 150 (2002).
Wrap-up program usage is increasing and, therefore, so are wrap-up exclusions on subcontractors' policies. What do owners and general contractors need to know to ensure these exclusions do not obstruct risk transfer for unenrolled subcontractors?
Wraps, otherwise known as consolidated insurance programs, are insurance programs that provide coverage for all or most parties involved in a large-scale construction project. Typically, this includes the owner, general contractor, and subcontractors. Wraps provide various types of coverages for enrolled parties, including general and excess liability, workers compensation, employers liability, and occasionally builders risk. This insurance arrangement obviates the need for traditional risk transfer schemes. Instead of procuring their own individual insurance and executing corresponding trade contracts outlining the insurance requirements, parties enroll in the wrap and benefit from the single program that usually also includes a cost-savings for subcontractors.
However, not all parties enroll, and wrap scope is limited to the exposures of onsite work. For unenrolled contractors and offsite exposures (e.g., equipment lessors, those performing offsite fabrication, etc.), the general contractor and owner will rely on traditional risk transfer schemes. This includes requiring additional insured status on the unenrolled parties' individual insurance programs.
As wrap use has grown, so has the use of "wrap" exclusions. Wrap exclusions are added via endorsement to commercial general liability (CGL) policies and exclude (or, in some cases, modify) coverage for damages related to project work insured by a wrap. The intent is to avoid duplicative coverages—the idea being that if the subcontractor is insured by a wrap, its insurer under its corporate program will want to avoid providing overlapping coverage for that project. Common exclusionary language reads:
In the schedule of the endorsement, a specific project may be specified, or it may apply to all projects on a blanket basis.
While the existence of wrap exclusions on enrolled subcontractors' policies is usually of no concern to the owner and general contractor, an overly broad wrap exclusion can fundamentally frustrate the intended risk transfer. Depending on language usage and court interpretation, its existence could prevent an upstream party from accessing the additional insured coverage on the subcontractor's policy without being able to rely on the wrap insurance.
Court Interpretation—Will Clarity in the Marketplace Follow?
Courts typically engage in a straightforward application of the exclusionary language of wrap endorsements. See Certain Underwriters at Lloyds of London v. Illinois Nat. Ins. Co., No. 09 CIV. 4418 RJH, 2011 WL 723544, at *7 (S.D.N.Y. Feb. 25, 2011); aff'd sub nom, Certain Underwriters at Lloyds of London v. Illinois Nat. Ins. Co., 553 F. App'x 110 (2d Cir. 2014) (applying wrap-exclusion to deny coverage where insured was enrolled in a wrap-up); and Assurance Co. of Am. v. National Fire & Marine Ins. Co., No. 2:09-CV-1182 JCM PAL, 2011 WL 3273892, at *2 (D. Nev. July 28, 2011) (enforcing wrap exclusion, rejecting argument that it functions as an "escape clause" and finding it is "a bargained-for exclusion where secondary insurance is already in place").
Generally, this plain language interpretation produces the intended result: avoidance of duplicative coverage. However, when a court does not take into account whether the subcontractor is actually receiving coverage under the wrap-up, the intent of the exclusion is overlooked, and risk transfer is frustrated. Two recent cases illustrate two different analyses undertaken by courts and the corresponding effect of a wrap exclusion on an unenrolled subcontractor and the party seeking coverage under its policy.
The New York Appellate Division First Department held that a wrap-up exclusion contained in a subcontractor's CGL policy barred additional insured coverage for a wrap-up project's general contractor, even though the subcontractor was not enrolled in the wrap-up. 2 The wrap exclusion contained in the subcontractor's policy included standard wording, excluding coverage where a "consolidated (wrap-up) insurance program has been provided by the prime contractor/project manager or owner of the construction project in which you are involved." (emphasis added)
Notwithstanding the fact that the subcontractor was not enrolled in the wrap-up program, the Appellate Division affirmed the lower court's reasoning that "[t]he language of the Exclusion does not require that [the subcontractor] be enrolled in the wrap-up program, but that the wrap-up insurance program exist and cover a bodily injury that arose from [the subcontractor's] operations." 3(emphasis added) This holding is not reflective of the underwriting intent of the exclusion and does not accomplish the avoidance of duplicative coverage.
However, a recent case from the United States District Court for the District of Connecticut, interpreting Georgia law, addressed the breadth of a wrap-up exclusion contained in a liability policy and reached a favorable outcome for policyholders. Thompson v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 3:14-CV-00259-WWE, 2017 WL 1330182, at *1 (D. Conn. Apr. 6, 2017), concerned coverage issues arising out of the Kleen Energy Systems power plant explosion in Connecticut. Following the explosion, individuals and estates obtained a judgment against one of the subcontractors on the project, Bluewater Energy Systems, Inc. Bluewater was insured by a commercial umbrella policy issued by National Union Fire Insurance Company, which denied coverage on the basis that the power plant was insured under a contractor-controlled insurance program (CCIP) and its policy contained an exclusion for "any liability arising out of any project insured under a 'wrap up' or similar rating plan."
The court defined CCIPs as "centralized, project-specific insurance policies sponsored and overseen by the general contractor for the project." Because the National Union policy did not define "wrap-up" or "similar rating plan," the court found the policy language to be ambiguous and construed it against the insurer to find coverage.
Notably, the CCIP did not provide coverage for all of the project's participants, nor did it provide property damage or builders risk coverage. The court stated: "If the defendant wanted to exclude coverage for any project that 'involves' a wrap-up or is 'in any way' affiliated with a consolidated insurance program, it should have explicitly included such limitations and defined the term 'wrap-up.'" Ibid., 8. Whether this decision will prompt insurers to revise their endorsements to contain more specific language remains to be seen, but it is a promising step toward promoting clarity in the market.
Considerations for Upstream Parties
Given the influx of these exclusions, the importance for upstream parties in vetting their subcontractors for this coverage is starting to be on par with confirming additional insured coverage. Upstream parties may contractually prohibit wrap exclusions; however, this may not be practical and may not always produce the intended result. It may set the party up for a breach of contract claim for failure to procure insurance, but in some jurisdictions, the damages may be limited to out-of-pocket expenses. 4Instead, general contractors and owners should start an up-front dialogue to educate their lower tiers and insurance advisors on the effects of wrap exclusions. Fixes can include agreeing that the unenrolled party will endorse their policy to state that an existing wrap exclusion will not apply to the particular project, require a wrap excess endorsement instead of a wrap exclusion, and/or requiring the subcontractor supply a certificate of insurance including the forms list and declarations page from their CGL policy at the outset. Where the subcontractor provides a wrap exclusion with a schedule, the language in the schedule should be reviewed with scrutiny as a casual approach to filling it out could lead to an inaccurate application, even where the body of the endorsement otherwise presumably presents no issues.
Policyholders should also be aware of the potential coverage gaps should the wrap insurer become insolvent and the corresponding argument this may create against the application of wrap exclusions. Proactive steps to mitigate these future issues include familiarization with the relevant state's insurer insolvency fund (most relevantly: high net worth insured prohibitions and caps on recovery) and exploring the possibility of obtaining excess coverage that drops down in the event of insolvency. The event of insolvency of a wrap insurer may also present a unique loophole to the application of wrap exclusions: a wrap exclusion may no longer apply where the wrap insurer has gone insolvent, given that arguably, the project is no longer insured by the wrap. Therefore, the upstream parties may still have a shot at accessing subcontractors with otherwise overly broad wrap exclusions if the wrap-up insurer is insolvent.
With a marked increase in the use of wraps generally as well as for public projects (where some states have traditionally prohibited their use on such projects), owners and general contractors should take proactive steps to protect themselves against gaps created by unenrolled subcontractors' coverages.
Acknowledgment
The author would like to acknowledge and thank coauthor Grace V. Hebbel, for her contributions to this commentary.
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