Acknowledgment
The author would like to acknowledge and thank
coauthor H. Scott Williams, Esq., for his contributions to this
commentary.
However, across the country, disputes have arisen as to the necessary scope
of that written contract and whether certain language requires that there be a
direct contract between the named insured (i.e., "you") and each
additional insured (i.e., "such person or organization"). This can
become problematic in effectuating the intended risk transfer.1 In these situations, courts are split on whether direct
contractual privity is required to satisfy certain additional insured
endorsements.
New York's high court recently weighed in on this issue in the highly
anticipated Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire &
Marine Ins. Co., 2018 NY Slip Op 02117, decided on March 27, 2018.
Ultimately, the court held that a direct contractual relationship was required
when interpreting manuscript language modeled after the ISO blanket additional
insured endorsement.
Strong additional insured contractual requirements and endorsement review
have always been critical in the New York market, and this decision serves as a
stark reminder of that fact. As is often the case for insurance coverage
litigation, New York also serves as a potential bellwether for the rest of the
country, and owners/contractors operating in multiple jurisdictions should
likewise take note.
The Facts and Decision in Gilbane
Despite conflicting authority nationally, and conflicting opinions between
the New York trial court and the Appellate Division, the New York Court of
Appeals found that the language of the blanket additional insured endorsement
at issue—"with whom you have agreed"—was "facially
clear" and did not confer additional insured status unless an organization
has a direct written contract with the named insured policyholder.
As background, in Gilbane Bldg. Co./TDX Constr. Corp., the
Dormitory Authority of the State of New York (DASNY) hired Gilbane Building/TDX
Construction, a joint venture ("Gilbane/TDX 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 for the damage, 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 a blanket additional insured endorsement that provided:
WHO IS AN INSURED (Section II) is amended to include as an insured any
person or organization with whom you have agreed to add as an additional
insured by written contract but only with respect to liability arising out of
your operations or premises owned by or rented to you.
Liberty filed a motion for 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.
The New York trial court denied Liberty's motion for 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. Specifically, the trial court held that the endorsement
"requires only a written contract to which Samson is a party. It does not
require that Liberty be a party to such a contract. Thus, there is no merit to
Liberty's argument that plaintiff cannot be additional insureds because
they are not in privity with Liberty."
Both the New York State Supreme Court, Appellate Division (intermediate
court), and the New York Court of Appeals (high court) disagreed. The New York
Court of Appeals' majority opinion focused on the "reasonable
expectations" of the insured and found that the language in the
endorsement was not ambiguous, meaning that it was not reasonably susceptible
to more than one interpretation. Specifically, the court focused on the word
"with" in the phrase "with whom," and concluded that, when
read by the average insured, the phrase "can only mean that the written
contract must be 'with' the additional insured." Notably, the
majority evaluated the language in relative isolation and without specific
consideration given to the expectations of construction professionals in the
construction industry.2
The New York Court of Appeals' dissenting opinion objected to the
majority's narrow view of the language based upon the single word
"with" and asserted that "the majority focuses on a single word
in the blanket additional insured endorsement at issue while ignoring others,
thereby finding clarity where none exists." The dissenting opinion found
that the blanket additional insured provision was susceptible to "more
than one reasonable interpretation" because the language could also be
read to simply require a "written contract" under which a party is
promised additional insured coverage.3 Moreover,
the dissenting opinion addressed the significance and purpose of blanket
additional insured endorsements in the construction industry and the negative
impact that the majority's decision could have on an industry that is so
reliant on transferring risk to those parties that are closest to that
risk.
How To Be Prepared Post-Gilbane
Importantly, in this author’s view, this decision does not reflect an
upstream versus downstream issue; it’s purely a coverage question. In the
construction setting, it is the common expectation of all parties that
downstream insurance will be available to upstream parties for appropriate
risks. Outcomes like this are unexpected and can frustrate those risk transfer
goals. There are a few fundamental solutions for avoiding this outcome and
establishing appropriate downstream risk transfer in similar scenarios. First,
know which additional insured endorsements do not require contractual
privity—CG 20 38 04 13 is a prime example—and make sure the relevant contract
expectations are explicit. Second, conduct a careful review of additional
insured endorsements, and learn to spot troublesome language. When you see
"with whom" in the contractual requirements of an additional insured
endorsement, think about this ruling, and recognize the exposure that not all
upstream parties may be afforded the intended risk transfer. Allocating
resources to this kind of meticulous contract review is always a struggle, but
sometimes there's simply no substitute for diligence.