Many subcontracts contain a catch-all provision requiring the subcontractor to do everything the prime contractor is obligated to do under the prime contract. This is known as an “incorporation” clause because it adopts or incorporates legal rights and duties spelled out elsewhere. Here is an example of an incorporation clause: “The Subcontractor shall be bound by the terms of the Specifications, General Conditions and Supplemental Conditions and Addenda in the Contract between the Contractor and the Owner, shall confirm to and comply with the Drawings and Specifications and Addenda, and shall assume toward the Contractor all the obligations and responsibilities that the Contractor assumes toward the Owner.”
This provision, and how broadly to read it, was explored by the Second Circuit in a decision released last week in Amerisure Insurance Company v. Selective Insurance Group, Inc., 2023 WL 3311879 (2nd Cir. 2023). The specific issue was whether the owner was an additional insured under the subcontractor’s insurance policy. The insurance policy did not name the owner as an additional insured, and the insurance provision in the subcontract required only that the prime contractor – but not the owner – be named as an additional insured. That’s where the incorporation clause came into play.
The plaintiff argued that the owner should nonetheless be deemed an additional insured under the subcontractor’s insurance policy because (1) the prime contractor had an obligation under the prime contract to name the owner as an additional insured and (2) under the incorporation clause, the subcontractor had assumed all obligations and responsibilities that the prime contractor had to the owner. The Second Circuit rejected this argument. Under the law chosen by the parties (Virginia), incorporation clauses do not require subcontractors to assume all obligations of the prime contractor, only those relating to the nature or scope of the work undertaken. Because the insurance clause in the prime contract did not directly relate to the nature or scope of masonry work to be performed by the subcontractor, it was not incorporated into the subcontract and assumed by the subcontractor. The Second Circuit noted that it would have reached the same result under New York law since the insurance provision to be incorporated did not relate to the “scope, quality, character, and manner of the work to be performed by the subcontractor.”
Here’s the lesson for prime contractors and subcontractors alike: If there’s an important obligation that you want to make sure is assumed by your subcontractor (or sub-sub), you should attempt to incorporate it expressly.