Parties structuring transactions or business relationships often attempt to shift risk to their counterparty by having themselves included as an additional insured on the counterparty's insurance policies. For example:
- parties involved in construction projects typically want to be covered as additional insureds on insurance policies taken out by entities downstream from them;
- project owners seek to be covered as additional insureds on insurance policies taken out by the general contractor and subcontractors; and
- general contractors seek additional insured coverage on their subcontractors' policies.
This is most often accomplished by including in the contract a provision requiring the counterparty to name the party as an additional insured and relying upon the 'blanket additional insured' endorsement of the policy to effectuate this agreement. However, a recent decision of the New York Supreme Court Appellate Division, First Department highlights the perils of proceeding this way and underscores the importance of checking both the language of the contract and the policies at issue to make sure that they work together to provide the desired coverage.
On September 15 2016 the First Department issued its decision in Gilbane Building Co v St Paul Fire and Marine Insurance.(1) At issue was whether the construction manager of a construction project was an additional insured on an insurance policy taken out by a prime contractor working on the project. The prime contractor had entered into a contract with the Dormitory Authority of the State of New York (DASNY), which provided the financing for the project. That contract required the prime contractor to add the construction manager as an additional insured. The construction manager did not have a contract with the prime contractor.
The First Department reversed the lower court's decision finding for the construction manager and held that, despite the express requirement in the contract between the prime contractor and DASNY, the construction manager was not an additional insured under the prime contractor's policy.(2)
The First Department based its determination on the language of the insurance policy rather than the language of the contract. The insurance policy provided that additional insureds included "any person or organization with whom you have agreed to add as an additional insured by written contract".(3) The First Department held that the phrase 'with whom' meant that a direct contract between the primary insured and each additional insured was required.(4) Since the construction manager did not have a contract with the prime contractor, the construction manager was not covered under the contractor's insurance policy.
Although the First Department was interpreting the specific language of the policy before it, it was expressly guided in part by earlier decisions interpreting different insurance policy language, which provided that additional insureds included other organisations: "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."(5) Such earlier decisions, like Gilbane, required a direct contract between the primary insured and the additional insured.(6)
In Gilbane, the First Department interpreted specific insurance language, but made clear that in its view, contractual privity between the primary insured and the additional insured is required in order for the usual contract clauses regarding additional insureds to be effective. Importantly, the First Department in Gilbane reiterated a principle established in earlier cases: when deciding whether someone is an additional insured, it is the language of the insurance policy, rather than the contract, which takes precedence.
Gilbane thus makes clear that a party seeking coverage as an additional insured by virtue of a provision in a construction contract must carefully review both the contract and the insurance policies at issue to make sure that they work together to provide the coverage sought.
For further information on this topic please contact Jonathan P Wolfert or Owen Wolfe at Seyfarth Shaw LLP by telephone (+1 212 218 5500) or email ([email protected] or [email protected]). The Seyfarth Shaw website can be accessed at www.seyfarth.com.