Planning Around the "Other Insurance" Clause in the Subcontractor's Policy

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.

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. ¹

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.