Automatic additional insured endorsements to a commercial general liability insurance policy typically cover a third party as an additional insured when the named insured and the third party "have agreed in writing in a contract or agreement" that the policy will do so. Many construction projects are based on written contracts, so there should be no problem with the coverage, right? Well, maybe. A Manhattan trial court issued a decision last month on the question of whether a written contract actually included an agreement that a subcontractor would cover a building owner.
It's the same old contractual risk transfer love story. Building owner hires general contractor to do some work. GC hires subcontractor to restore the building's exterior facade. Subcontractor's employee slips and falls due to ice and snow on the building's roof and gets hurt. Employee sues building owner. Building owner looks to GC's insurer for liability coverage. GC's insurer looks to subcontractor's insurer to cover the building owner. Sub's insurer sees things differently. GC's insurer sues, seeking a court order for the sub's insurer to:
- Cover the owner as an additional insured under the CGL policy
- Hold the owner harmless under the exception to the contractual liability exclusion in the CGL policy
- Reimburse the CG's insurer for its defense costs.
The sub's CGL policy provided additional insured coverage to entities as "required by written contract." The court noted that the contract between the GC and the sub required the sub to provide additional insured coverage for the GC. "However," the judge wrote, "nowhere in the (subcontract) does it expressly or explicitly state that (Sub) shall provide additional insured coverage to (Owner). Indeed, (Owner) is not mentioned at all." The GC's insurer argued that the subcontract referred to an American Institute of Architects model contract. The model stipulates that the subcontractor shall cover the owner as an additional insured. The judge concluded that the AIA document was not a "written contract," even if that's what the two parties intended. Apparently, she felt that a reference in the main contract to it was not enough to make it part of the contract. Because the contract did not require the sub to provide the coverage, the judge ruled that the sub's insurer had no obligation to defend the owner.
The court also declined to make the sub's insurer provide contractual liability coverage. Because the owner and the sub were not parties to the lawsuit before the court (which was, after all, between two insurance companies), the judge held that the question of the sub's obligations to the owner should be determined in a separate action. Because the court found no obligation to provide either additional insured or contractual liability coverage, the judge also rejected the GC insurer's demand that the sub's insurer reimburse its defense costs.
The moral for insurance agents? Simply be aware that automatic additional insured endorsements require a written contract that specifically requires additional insured coverage. A contract referring to a generic document that mentions additional insured coverage will not cut it. These endorsements pick up a lot of exposures, but they don't cover everything. I don't see anything that the subcontractor's agent did wrong here. The problem is that the GC believed that the requirements in the AIA document would be binding, and they weren't.
The GC's beef might be with its own contract attorney, assuming it had one. (Side note: A lot of IIABNY members contact me to get sample contracts. I provide samples if I can find them, but I always caution members to have qualified attorneys look them over. It's not hard for me to imagine that this GC created its contract without a proper legal review.)
This decision is less than a month old. It's possible that the GC's insurer will appeal. For now, though, the sub's insurer is off the hook for this loss.