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).
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.
The author would like to acknowledge and thank coauthor Bethany L. Barrese for her contributions to this commentary.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.