You have a contract that requires your counterpart to add your company as an “additional insured” on its liability insurance policy. But unless you know what that insurance policy actually says about additional insured coverage, you could find that the protection you thought you were getting is illusory.
Should you ask to be “named and waived,” i.e., named as an additional insured with waivers of subrogation? Most owners/developers and general contractors on construction projects should respond by saying, “___ yes!” But does being named and waived also mean that you are insured? The answer to that important question varies from jurisdiction to jurisdiction and typically turns on the wording of the policy in question, which may vary widely, making coverage both uncertain and highly variable, as illustrated by recent decisions of three different courts.
On February 13, 2014, the Supreme Court of Hawaii issued a decision addressing the question of which carrier (the project developer’s own carrier or the subcontractor’s carrier providing “additional insured” coverage) had the obligation to defend the general contractor against a claim. Nautilus Insurance Co. v. Lexington Insurance Co., __ P.3d__, Case No. SCCQ-12-0000977 (Hawaii Feb. 13, 2014). As is now typical, the coverage provided to the developer/additional insured was limited to its vicarious liability for the negligence of the subcontractor. The developer tendered its defense to its own carrier, Lexington, which invoked the “excess” other insurance clause in its policy in an effort to shift its duty to the additional insurer, Nautilus. As it turned out, the jury ruled that the subcontractor was not negligent, thereby relieving Nautilus from having to provide indemnity under the additional insured clause—Lexington paid the adverse judgment. However, Lexington adhered to its position that as an “excess insurer,” it had no obligation to pay any of the defense costs.
Policyholders should not be “whipsawed” by carriers and then left holding the defense costs bag
Answering several certified questions addressing this issue, the Hawaii court ruled otherwise. While the case actually involved an action by Nautilus for recovery of the defense costs it had incurred, the court effectively recognized that relieving the additional insured’s own carrier from any defense obligation could, in some cases, shift the burden of defense to the insured/ additional insured. The court ruled that a “primary insurer” (here Lexington) cannot look to another insurer to assume the defense obligation, noting that even when it “has no duty to defend by operation of its ‘other insurance’ clause, …[it] must still defend in the action… rather than leaving the defense up to other insurers or potentially up to the insured, where the insured has contracted for primary insurance coverage.” Policyholders named as additional insureds should not be “whipsawed” between two carriers (the additional insurer and the policyholder’s own carrier), who may point to each other as having the obligation to defend, thereby leaving the insured holding the defense costs “bag.” The language of the Hawaii Supreme Court’s ruling may help to avoid this problem.
The Fifth Circuit recently issued a less policyholder-friendly ruling in a “construction defect” case in which the additional insured general contractor on a Mississippi construction project sought coverage for post-completion damage caused by negligent foundation work that damaged the floor of a parking garage. Carl E. Woodward, L.L.C. v. Acceptance Indemnity Co., __F.3d __, Case No. 12-60561 (5th Cir. Feb. 11, 2014). The additional insured clause insured against liability arising out of the subcontractor’s “ongoing operations” and not against post-completion damage. Thus, the court decided that the “central issue” in the case was whether or not the additional insured’s liability “arose out of [the additional insured’s] ongoing operations or its completed operations.” Rather than focus on evidence regarding the timing and nature of the damaging occurrence at issue, the court focused on the nature of the claims that had been alleged.
The court concluded that allegations that the foundation piers were not built in conformity with the plans and specs and that project blueprints had been altered as part of a cover up asserted claims for “construction defects” and not for “any faulty workmanship in violation of industry standards….” The court ruled that claims for construction defects arise out of a subcontractor’s “completed operations” rather than the “ongoing operations,” thereby negating any coverage under the additional insured clause in the foundation subcontractor’s policy. Interestingly, the court also cited the proposition that the “your work” exclusion prevented the typical CGL policy “‘from morphing into a performance bond covering an insured’s own work’” (citation omitted). The court cited this proposition in the abstract, without discussing how the additional insured coverage, limited to “ongoing operations,” would ever cover a construction-related loss if the policy contained the standard “your work” exclusion.
The cases highlight the importance of obtaining, if possible, a copy of the policy providing the sought-after additional insured coverage
The final case of this additional insured trilogy, decided by the Third Circuit under New Jersey law, may provide a potential answer to the question of how to avoid the “your work” exclusion in seeking coverage for an additional insured’s liability arising out of its subcontractor’s “ongoing operations:” By arguing that the exclusion, as separately applied, should be limited to claims against named insured subcontractor arising out of the named insured’s work.
In Arcelormittal Plate, LLC v. Joule Technical Services, Inc., ___ F.3d ___, Case No. 13-1212 (3d Cir. February 18, 2014), the court addressed an all too common situation in which an employee of a subcontractor (here a temporary services company) is injured while working for a company named as an “additional insured” on the subcontractor’s CGL policy. In this case, in defense of the coverage claim by the additional insured, the carrier invoked the policy’s “employee exclusion, “ which barred coverage for claims by an “employee” of the insured “‘arising out of and in the course of … employment…..’” Such clauses prevent double dipping by claimants who are eligible for and obtain (or should obtain) workers’ compensation benefits, but who sue based on ordinary tort liability theories. Apparently, the workers’ compensation law did not bar the injured worker from recovering a $1 million judgment against the additional insured. Applying a choice of law analysis that picked favorable New Jersey law and citing the policy’s “severability” clause providing that the policy applies “‘separately to each insured against whom claim is made…” the court concluded that the employee exclusion would only bar coverage for a claim by one of the additional insured’s “own employees.” As a result, the court ruled that the exclusion did not bar coverage for a claim brought against the additional insured by an employee of the subcontractor.
These three cases highlight the importance of obtaining, if possible, a copy of the policy providing the sought-after additional insured coverage. A copy (not just an ACORD insurance certificate) is needed to make sure that the coverage provided is the coverage that is needed. It is equally important to consider the law of the jurisdiction governing coverage . For instance, a “severability” clause might not avoid a “your work” exclusion limiting coverage for course of performance property damage to a construction project ; but such a clause may, in the right jurisdiction (the Joule court noted that the outcome would have been different if Pennsylvania law had applied) assist an additional insured in actually obtaining the coverage it sought when it asked to be “named and waived.”