The Situation: The issue of whether "blanket" additional insured endorsements require direct contractual privity with an insurance policy's "named insured" has received inconsistent treatment by U.S. courts.
The Development: The New York high court's recent Gilbane decision confirms that the requirements for "additional insured" status continue to be determined by the specific language of additional insured endorsements themselves and not by the insurance requirements of parties' underlying contracts.
Looking Ahead: Prior to a project's commencement, the actual language of additional insured endorsements should be carefully reviewed to confirm its alignment with parties' contractual intent.
Is a contractual privity requirement lurking within the fine print of your "additional insured" coverage? As illustrated by the New York high court's recent decision in Gilbane Building Co./TDX Constr. Corp. v. St. Paul Fire and Marine Ins. Co., No. 22, 2018 WL 1473553 (N.Y. Mar. 27, 2018) ("Gilbane"), the answer, if overlooked, can mean the difference between being fully insured and not covered at all.
Additional Insured Endorsements and the Contractual Privity Issue
In addition to contractual indemnification provisions, many companies require that they be added as "additional insureds" to the liability insurance policies of those with whom they do business. By conferring direct rights to coverage for third-party liabilities that arise out of the performance of others' work, additional insured status provides a number of important risk management benefits. It allows the additional insured to keep these losses off of its own insurance program, thereby protecting its loss history and avoiding related premium increases. It also protects the additional insured in the event that its counterparty is unable to perform its contractual indemnification obligations.
While additional insureds can be added to a policy via a "specific" endorsement (i.e., expressly identifying the particular individual or entity to be added), parties instead frequently rely upon "blanket" (also referred to as "automatic") endorsements to do so. Designed to avoid having to create a new endorsement and obtain insurer authorization each time an additional insured is added to a policy, "blanket" additional insured endorsements generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.
As is the case in many large-scale construction and development projects (e.g., where a "downstream" subcontractor agrees in its subcontract with the project's general contractor to add the "upstream" project owner as an additional insured under the subcontractor's liability policies), the party to be added as an additional insured often is not in direct contractual privity with the named insured. The issue of whether such arrangements are sufficient to confer additional insured status under these "blanket" endorsements has received inconsistent treatment by United States courts.
As the New York high court's recent Gilbane decision demonstrates, the question of whether direct contractual privity with a policy's named insured is a prerequisite to additional insured status continues to depend on the precise language of the "blanket" additional insured endorsement used.
Gilbane involved the construction of a 15-story building at the Bellevue Hospital Campus in Manhattan for use by New York City's Chief Medical Examiner. The Dormitory Authority of the State of New York ("DASNY"), which was financing and overseeing the project, retained a joint venture formed between Gilbane Building Company and TDX Construction Corporation (the "JV") to serve as the project's construction manager.
The construction management agreement between DASNY and the JV provided that any prime contractor, whether retained by DASNY or otherwise, was required to name the JV as an additional insured under its liability insurance policies.
DASNY contracted separately with Samson Construction Company ("Samson") to serve as the prime contractor for the project's excavation and foundation work. In its prime contract with DASNY, Samson agreed to obtain a commercial general liability ("CGL") insurance policy that included several entities, including the JV, as additional insureds.
To satisfy this requirement, Samson obtained a CGL policy from Liberty Insurance Underwriters ("Liberty"), containing a blanket additional insured endorsement (titled "Additional Insured—By Written Contract") stating:
"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." (emphasis added).
During construction, Samson's excavation work allegedly caused significant structural damage to adjacent buildings. DASNY sued Samson and the project architect for negligence, and the project architect, in turn, commenced a third-party action against the JV.
When the JV looked to Liberty to defend and indemnify the JV against the project architect's third-party claim, Liberty denied coverage on the ground that the JV was not an additional insured under Samson's CGL policy.
Disagreement Between the Trial and Intermediate Appellate Courts
In the ensuing coverage dispute commenced by the JV, Liberty moved for summary judgment, maintaining that its "blanket" additional insured endorsement added as additional insureds only parties with whom Samson had a direct contractual relationship. Given that Samson and the JV were not in contractual privity, Liberty argued that its "blanket" additional insured endorsement therefore did not extend coverage to the JV.
In response, the JV maintained that Liberty's "blanket" additional insured endorsement did not require direct contractual privity between the named insured and the additional insured, but instead required only that the additional insured be identified in a written contract to which the named insured is a party. Given that Samson was required to add the JV as an additional insured in its prime contract with DASNY, the JV maintained that it was therefore afforded additional insured status under Samson's CGL policy.
Denying Liberty's motion for summary judgment, the trial court determined that the CGL policy's "blanket" additional insured endorsement "requires only a written contract to which Samson is a party" and that this requirement was met by Samson's written contract with DASNY, which obligated Samson to obtain insurance including the JV as an additional insured.
Over a vigorous dissent, the intermediate appellate court reversed, holding that the CGL policy's "blanket" additional insured endorsement "clearly and unambiguously requires [that] the named insured execute a contract with the party seeking coverage as an additional insured." Differentiating between the phrases "with whom" and what it viewed as the more-expansive phrase "for whom," the intermediate appellate court reasoned that the "plain meaning" of the words "any person or organization with whom you have agreed to add as an additional insured by written contract," as used in the "blanket" additional insured endorsement, required a direct contractual relationship between the named insured and additional insured.
New York Court of Appeals Finds a Contractual Privity Requirement In a 5-2 opinion affirming the intermediate appellate court's decision, the New York Court of Appeals determined that the CGL policy's "blanket" additional insured endorsement was "facially clear" and the phrase "with whom," when afforded its ordinary meaning, "can only mean that the [named insured's] written contract must be 'with' the additional insured."
Finding the "blanket" additional insured endorsement unambiguous, the New York high court determined that extrinsic materials such as the insurance procurement requirements of the Samson–DASNY prime contract could not be used to "rewrite" the CGL policy, and instead merely conferred the JV with potential third-party beneficiary standing under the prime contract to sue Samson for its breach.
Tips to Avoid Unintended Consequences
The New York high court's recent Gilbane decision underscores the need for parties to carefully review the scope of their additional insured coverage prior to a project's commencement. To that end, the following tips will help to avoid unintended consequences like those in Gilbane and ensure that additional insured coverage aligns with parties' contractual intent:
- Avoid "Contractual Privity" Requirements. Where parties to be added as additional insureds lack a direct contractual relationship with the policy's named insured, "specific" endorsements, or "blanket" additional insured endorsements that do not require direct contractual privity with the named insured, should be used. In particular, parties should avoid "blanket" additional insured endorsements like the one at issue in Gilbane (e.g., ISO Form CG 20 33 04 13) and instead consider broader forms, such as ISO Form CG 20 38 04 13 ("Additional Insured—Owners, Lessees or Contractors—Automatic Status for Other Parties When Required in Written Construction Agreement"), which provide additional insured status to both the party with whom the named insured directly contracts in writing to perform operations, as well as "any other person or organization [the named insured is] required to add as an additional insured under the contract or agreement."
- Require Additional Insured Coverage to be "Primary And Noncontributory." Parties should consider whether to require that additional insured coverage be provided on a "primary and noncontributory" basis and have named insureds obtain endorsements to their liability policies providing the same (e.g., ISO Form CG 20 01 04 13, "Primary and Noncontributory—Other Insurance Condition"). Doing so ensures that contribution will not be sought from the additional insured's own insurance policies (i.e., that the additional insured's own insurance policies will apply in excess of, and not subject to pro-rata allocation with, the named insured's liability policy).
- Specify "Completed Operations" Coverage Requirements. Many standard form additional insured endorsements provide coverage only for "ongoing operations." In addition, while "completed operations" coverage for additional insureds is available via separate endorsements (e.g., ISO Form CG 20 37 04 13, "Additional Insured—Owners, Lessees or Contractors—Completed Operations), these endorsements may provide only completed operations coverage for occurrences during the policy period, which may be of insufficient duration. Additional insureds seeking completed operations coverage should accordingly consider requiring downstream parties to purchase project-specific completed operations coverage for a specified period following the project's substantial completion (e.g., through the applicable state's statute of repose).
- Evaluate the Scope of Coverage for Additional Insureds' Sole Negligence. Parties should consider whether the particular language of their additional insured endorsements will provide coverage for the additional insured's sole negligence (i.e., for liabilities that are not at least partially caused by the named insured's own acts or omissions). Given courts' inconsistent treatment of this issue, parties should be familiar with how their insurance policy language has been construed under applicable state law, as well as with any state anti-indemnity statutes that may further restrict the availability of coverage for an additional insured's sole negligence.
- Do Not Rely on "Certificates of Insurance" as Proof of Coverage. Parties should keep in mind that additional insured status is created only by an actual endorsement issued and approved by the insurer, and cannot be obtained via a "certificate of insurance." To confirm their additional insured status, parties therefore should not rely upon "certificates of insurance" (which do not constitute adequate proof of coverage) and should instead require that they, at a minimum, be provided with copies of the policy's declarations pages, schedule of forms, and the additional insured endorsement itself.
Three Key Takeaways
- In many large-scale construction projects, parties frequently rely upon "blanket" endorsements, which generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.
- In these situations, however, the party to be added as an additional insured often is not in direct contractual privity with the policy's named insured. As illustrated by the Gilbane decision, whether such arrangements are adequate to confer additional insured status under "blanket" endorsements depends on the precise language of the endorsement used.
- Prior to a project's commencement, the actual language of additional insured endorsements should therefore be carefully reviewed to confirm its alignment with parties' contractual intent.