Years ago, there was a Bell Labs facility behind my house, and on Sunday afternoons, the engineers (mostly Indian and Pakistani) would get together and play cricket on the large lawn. I watched the matches quite a bit, but I never could get a grip on the rules. Then a British friend told me that it was all quite simple. That phrase (“it’s all quite simple”) and its variants always send a chill down my spine, because I know that I’m about to be hit with an involved explanation. And I was. And I still don’t understand the rules of cricket.
Here’s where I’m going with this. Additional insured coverage should be pretty simple, right? Basically, Party X adds Party Y to its general liability coverage as an additional insured. But somehow, this area is fertile ground for befuddlement and complications, especially given the variations in “additional insured” language contained in insurance policies and ISO endorsements. It gets to the point where I can’t assure my clients that they can rely on additional insured coverage without the potential for coverage litigation.
Here’s what happened in a recent case in federal district court in Connecticut. A steel web structure was installed on a construction project at Yale University. The general contractor (Shawmut) retained a subcontractor (Shepard) for steel fabrication and construction in connection with the structure. Shepard subcontracted installation work to a second subcontractor (Fast Trek).
The structure collapsed, injuring several ironworkers, and tragically causing the death of one of them. Personal injury litigation resulted.
Fast Trek’s general liability policy contained a blanket additional insured endorsement. The endorsement provided in part that coverage was extended to “any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” Shawmut (the GC) argued that it was an “additional insured” under Fast Trek’s policy, which had been sold to Fast Trek by First Mercury Insurance Co.
First Mercury disclaimed coverage, contending that there was no direct contractual relationship between Shawmut and Fast Trek. In response, Shawmut argued that privity of contract was unnecessary, and pointed to the language in Shawmut’s contract with Shepard, which required Shepard to obtain additional insured coverage for Shawmut on a primary, non-contributory basis. Shawmut also argued that Shepard’s contract with Fast Trek expressly incorporated the language in Shawmut’s contract with Shepard, which included a requirement that sub-subcontractors assume the same obligations to Shepard that Shepard assumed with respect to Shawmut.
The Court agreed with Shawmut and found coverage, writing: “Fast Trek and Shawmut could agree that Shawmut would be added as an additional insured and both parties’ agreement could be memorialized in separate contracts without requiring a direct contractual relationship between the two parties. Nothing in the text of the Additional Insured Endorsement explicitly requires a direct contractual relationship between Fast Trek and an additional insured…If First Mercury wanted to limit its coverage in this way to only those in direct contractual privity with Fast Trek it readily could have done so with explicit contractual language to that effect.”
First Mercury also argued that additional insured coverage should be restricted to situations of vicarious liability, and here, there were allegations that Shawmut itself was negligent in failing to supervise the project properly. The Court again disagreed, writing: “That Shawmut’s and Shepard’s ‘liability’ must be ‘caused, in whole or in part’ by Fast Trek’s acts or omissions means that coverage under the Additional Insured Endorsement is not limited to Shawmut’s and Shepard’s vicarious liability for Fast Trek’s acts or omissions but instead refers more broadly to liability that is caused, at least in part, by Fast Trek, but excludes situations involving only the independent acts of negligence of the additional insureds.”
Perhaps the trouble could have been avoided by a simple e-mail to the carrier at the outset of the project confirming that Shawmut was an additional insured. While Shawmut won this skirmish, the bottom line is that coverage litigation (an expensive proposition with an uncertain ending) was required. That fact alone should make anyone relying on “additional insured” coverage uncomfortable. Never make assumptions: always review the contracts, the policies, and the project with your insurance professional so you can fully assess the risks and coverage. I know, I know, who has the time for that? Let me ask: Would you rather spend your time trying to prove coverage before a Court?
You can read the full decision by clicking here.