March 2018  |  Volume 30, Number 3​

Recently I was driving in Los Angeles, and I came upon something I have never seen in New York: a 5-way intersection with no traffic light. While I have no problem driving in the Mad Max-Like, post-apocalyptic conditions of New York City and the outer boroughs, this intersection was a high risk free-for-all. It occurred to me that I had two options. (1) Avoid it, or (2) navigate it carefully. Both required a predicate, “knowing of its existence." I find this the perfect metaphor for insurance agents and brokers handling of additional insured issues on liability policies for their contractor insureds.

New York's Labor Law and the personal injury claims that arise therefrom play havoc with liability policies and your ability to procure coverage that can protect your insured within a reasonable price range. I know you do your best to service and assist your insureds with these issues, especially when your insured is on the bottom of the construction hierarchy, i.e. the Subcontractor, (“SubK").

Typically, construction agreements are structured like this: The general contractor, (“GC"), agrees to add the owner to its GL policy as an additional insured on a primary-non-contributory basis. (This is aside from hold harmless-contractual indemnification provisions.) In turn, the GC demands that its contract with the SubK contain a similar provision for the benefit of the GC. However, the GC often also demands that the subcontract also require that the SubK add the owner to its GL policy as an additional insured even though there is no direct construction agreement between the owner and SubK.

This standard fact pattern repeats itself in every day in the offices of insurance agents and brokers, fraught with danger and pitfalls that can easily result in either an E&O claim arising out of a serious, on-the-job, personal injury action; an unhappy insured; or most likely, both. Like with the Los Angeles intersection, the first step of dealing with these situations is knowing of the existence of the danger.

            A Certificate of Insurance Is Not Worth the Paper It Is Printed On

Even some of the best construction risk managers, those who issue and those who require and receive certificates of Insurance, (“COI") do not realize their legal ineffectuality. First the ACORD 25 COI itself negates its own efficacy with the following language that is clearly noted on it:

THE CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. THIS CERTIFICATE OF INSURANCE DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE CERTIFICATE HOLDER.​

Second, New York Courts have stated that the COI has no legal import and cannot be the basis of suing the issuing broker.[1] The First Department Appellate Court in one case ruled in favor of the broker and succinctly generally as to the COI stated that “it was unreasonable to rely on them for coverage in the face of their disclaimer language".

Yes, your GC and SubK insured's want COIs issued so that they can get the job and need them issued as part of the contract requirements, and your Owner, GC insureds want to get them for the same reasons. But without actually knowing the contents of the insurance policies referenced on those COIs, the COIs have no value.

            The Interplay between the Construction Contracts and the GL Insurance Policies

Even some of the most experienced lawyers, judges and brokers do not fully grasp the concept of the interplay between the construction contracts and the GL insurance policies. Much time is spent carefully drafting insurance procurement provisions in construction contracts, often with the assistance of the broker, to make sure that the GL policies of those contractors down the chain provide primary additional insured coverage to those up the chain so they can avoid triggering their own policies. Most often it is a waste of time, as it has no effect on the policies at issue.

A construction agreement is a bi-partite (2 party) contract with, for example, the GC and SubK as the contracting parties. Similarly, an insurance policy is a bipartite contract between the Insured and the Insurer.[2] An Insurer is never a party to a construction contract, and thus the interplay and interaction between its policy and another policy issued to someone in the construction chain cannot be affected by what the construction agreements say.[3] Simply, the language in a construction contract as to what liability goes first and in what way is a complete nullity. All that courts look at are the “other insurance" provisions contained in the insurance policies to see how they address interacting with other covering policies.[4]  

            The “All Inclusive" Additional Insured Endorsement is a Thing of the Past

“All inclusive" is a great thing at a tropical resort, but dangerous in the additional insured context. Recall above I recited a common risk-transfer device—that the SubK agrees in its contract to not only add the GC to its policy as an additional insured, but the “owner" too. The key fact is that the owner and the SubK are not in contractual privity, meaning there is no separate and executed writing between the owner and the SubK in which the SubK agrees to provide additional insured coverage. In the past, with the more generous wording of various additional insured endorsements, and the equally broad rulings of the court, this was not a problem. But, it is now becoming an issue and the trend is clear.

In the 2016 Gilbane case, (cited in footnotes), the First Department Appellate Court stated the following:

In this case, the “Additional Insured–By Written Contract" clause of the CGL policy provides additional insured coverage to “any person or organization with whom you have agreed to add as an additional insured by written contract." Contrary to Supreme Court's determination, and consistent with our prior decisions we find that the language in the “Additional Insured–By Written Contract" clause of the policy clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured.

Thus, gone is the ability of an owner to be entitled to additional insured coverage on the SubK's GL policy based on a requirement in a contract between the construction contract between the GC and the SubK. The trend is that in order for the owner to qualify as an additional insured on the SbK's GL insurance policy, there must be a written and executed agreement between the named-insured SubK and the purported additional insured-owner. ​

CONCLUSION

We are well aware of the competing, often mutually exclusive, interests at stake. Not all contractors can afford GL coverage from an insurer that will protect it from all the risks attendant when doing construction work under the Sword of Damocles known as “New York Labor Law". Thus, they risk the coverage provided by some of the insurers that often contain exclusions in their insurance policies for the very losses to which the insured is most at risk.  Often the insured is willing to “roll the dice" as they need that COI showing that they have an insurance policy in effect in order to get the job. This is all understandable.

But to reduce and avoid, if possible, your potential E&O exposure when handling this situation, like the traffic intersection mentioned above, the prudent insurance agent or broker must first know of and understand its existence. Doing so will not only help protect the customer but will also help protect the agency or brokerage.

Howard S. Kronberg, Esq.​
Keidel, Weldon & Cunningham. LLP

[1]               Greater New York Mut. Ins. Co. v. White Knight Restoration, Ltd., 7 A.D.3d 292 (1st Dept., 2004).

[2]               Gilbane Bldg. Co./ TDX Constr. Corp. v St. Paul Fire & Mar. Ins. Co. (2016 NY Slip Op 06052). “An insurance policy is a contract between the insurer and the insured". Bovis Lend Lease LMB, Inc. v Great Am. Ins. Co., 53 A.D.3d 140, 145 (1st Dept., 2008).

[3]               Gilbane Bldg. Co./ TDX Constr. Corp. v St. Paul Fire & Mar. Ins. Co. (2016 NY Slip Op 06052).

[4]               “Where the same risk is covered by two or more policies, each of which was sold to provide the same level of coverage (as is the case here), priority of coverage (or, alternatively, allocation of coverage) among the policies is determined by comparison of their respective “other insurance" clauses (see Great N. Ins. Co. v. Mount Vernon Fire Ins. Co., 92 N.Y.2d 682, 686–687, 685 N.Y.S.2d 411, 708 N.E.2d 167 [1999] [hereinafter, Great Northern ], citing State Farm Fire & Cas. Co. v. LiMauro, 65 N.Y.2d 369, 492 N.Y.S.2d 534, 482 N.E.2d 13 [1985]; see also Jefferson Ins. Co. of N.Y. v. Travelers Indem. Co., 92 N.Y.2d 363, 372, 681 N.Y.S.2d 208, 703 N.E.2d 1221 [1998]). An “other insurance" clause “limit[s] an insurer's liability where other insurance may cover the same loss" (15 Couch on Insurance 3d § 219:1)." Sport Rock Intern. Inc. v. American Cas. Co. of Reading, PA, 65 A.D.3d 12 (1^st Dept., 2009)