Additional insured status must not be taken for granted. Frequently, subcontractors and general contractors will agree on the nature and scope of additional insurance coverage, but fail to actually satisfy the requirements of the subcontractor’s CGL policy. Such an oversight was the focus in a recent Illinois Appellate Court decision, Cincinnati Insurance Company v. Gateway Construction Company, Inc., 2007 ILL.APP.LEXIS 304 (March 28, 2007).
In Gateway, a general contractor, Harbour Contractors, Inc. (“Harbour”), contracted to build a warehouse facility for a clothing retailer. Harbour entered into a subcontract with Baker Concrete Construction (“Baker”), a concrete subcontractor, to perform concrete work at the project. Baker, in turn, entered into an oral agreement with Gateway Construction Company, Inc. (“Gateway) to provide concrete reinforcements for the project. A purported term of their oral agreement was that Gateway would name Baker as an additional insured on Gateway’s policy. Gateway mobilized and began its work at the project. On January 10, 1990, one of Gateway’s employees (“Gateway employee”) was injured on the project site. On January 26, 1990, Baker and Gateway executed a written subcontract for the work. Two months after the accident, a certificate of insurance was issued from Gateway’s insurer, National Union Insurance Company (“National”).
The Gateway employee sued Harbour, Baker and the architect. Harbour, Baker and the architect, in turn, tendered their respective defenses and indemnifications to Gateway’s insurer, National, and Gateway’s excess insurer, Lexington Insurance Company (“Lexington”). Gateway’s policy required that only those entities that Gateway promised would be “added as additional insureds under a written contract with [Gateway]” would be added as additional insureds. National and Lexington denied each of the tenders based on the lack of a written contract between Baker and Gateway on the date of the Gateway employee’s accident. The Gateway employee settled his lawsuit for $2.5 million which was paid by National and Lexington.
In a declaratory judgment action regarding the propriety of Lexington’s denial of tender, the trial court entered judgment in favor of Lexington, finding that it was not obligated to defend or indemnify any of the additional insureds because no written agreement existed on the date of the accident. On appeal, the First District Appellate Court agreed and affirmed the trial court’s entry of judgment in favor of Lexington. In affirming the trial court, the Appellate Court rejected the contention that the insurance policy term could be satisfied with an agreement that post-dated the occurrence. The Appellate Court stated that such an interpretation would render the need for a written agreement meaningless because it would allow [Gateway] to reduce an oral agreement to writing after the loss has occurred, effectively making coverage retroactive. Such an interpretation, according to the Appellate Court was improper. Because no written contract existed at the time of the accident, no coverage was available to the additional insureds.
Gateway illustrates the importance of entering written agreements prior to beginning work on a construction project. Indeed, many CGL additional insured endorsements require a written contract before an insurer’s obligation to cover additional insureds is triggered. The subtle, but more significant lesson goes beyond entering into a written contract before mobilization. Gateway exemplifies a common pitfall among contractors and subcontractors regarding insurance coverage: the failure to verify additional insured status. Many subcontractors or contactors require and collect a certificate of insurance that shows that their respective company is listed as an additional insured. A certificate of insurance, however, is not proof of additional insured coverage. In addition to a certificate of insurance, subcontractors and contractors should be inspecting the additional insured endorsement of the CGL policy in question. This endorsement will set forth the requirements for additional insured coverage or, in some cases, will even list the names of the additional insureds. Therefore, subcontractors and contractors that seek the benefit of additional insured coverage should be requiring by written contract the delivery of a copy of the additional insured endorsement. Once an additional insured endorsement is delivered, contractors and subcontractors should inspect it closely to determine whether it is covered under the endorsement. If you presume additional insured coverage, your company may end up like Baker, which probably suffered grossly increased premiums or potential non-renewal or cancellation of coverage. A careful study of the additional insured endorsement is necessary to avoid these harsh consequences.