Just because you want it, doesn’t make it so: Who is an additional insured?

The law on who can avail themselves to insurance coverage as an additional insured can be problematic. Unlike your standard insurance contract between the insurer and insured, the nature of an additional insured clause often involves third parties seeking defense and indemnification for loss. This is especially true when working on construction or real-estate development projects, when there are layers of contracts separating the parties from one another.

Importantly, unlike your standard insurance policy in which the insured is explicitly named, the same cannot always be said of an additional insured, and even when the additional insured is named there still are contractual limitations. The implications of this dynamic almost always depend on the insurance policy itself. Having different parties and different contracts inherently create several thorny issues, the purpose of this article is to analyze the following: 1. insurance contracts; and 2. what contractual requirements must be present to establish who constitutes an additional insured. Lastly, understanding additional insured clauses is vital for anyone in the casualty industry, so this article will conclude with best practices.

The case

Recently, the New York Court of Appeals reached a landmark decision in the case of Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co. [31 N.Y.3d 131, 97 N.E.3d 711 (2018)] regarding the interpretation of additional insured clauses under New York law. Notably, decisions such as this are important for surrounding states, as is often the case for insurance coverage litigation, New York serves as a potential bellwether for the rest of the country, many other states are likely to follow suit.

The facts

In 2002, the Dormitory Authority of the State of New York (“owner”) contracted with Samson Construction Co. (“general contractor”) for construction of a new forensic laboratory for New York City. The owner also contracted with a joint venture between Gilbane Building Co., and TDX Construction Corp. (collectively “construction manager”). The owner’s contract with the general contractor provided that it would obtain general liability insurance for the project, with an endorsement naming as additional insureds: “Owner, the Construction Manager and other entities specified on the sample certificate of insurance provided by Owner.” Importantly, the owner’s contract is with the general contractor and, separately, the construction manager—there is no written contract between general contractor and construction manager identifying construction manager as an additional insured. Think of a pyramid as opposed to linear.

In 2006, the owner sued the general contractor and the project’s architect alleging that they damaged the excavation support system on the project. Then, the project’s architect commenced a third-party action against the construction manager, who subsequently provided notice to the additional insurer to seek defense and indemnity under its policy as an additional insured. Upon review, the additional insurer denied the construction manager’s demand for defense and indemnification claiming that the construction manager was not an additional insured as set forth in the additional insurer’s policy. The construction manager commenced a lawsuit against the additional insurer arguing that it qualified for coverage under the policy as the additional insured and asking that the court declare as such.

The additional insurer’s policy

As is true with any insurance dispute, the court first looks to the language contained in the policy. The relevant portion of the additional insurer’s policy stated as follows: “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]

Under the terms of the additional insurer’s policy, the additional insured must be in a written contract with the insured. Herein lies the problem, even though the construction manager was listed as the additional insured in the contract between owner and general contractor, the construction manager did not enter into a written contract with the general contractor listing it as an additional insured. One would think that with the construction manager believing it was an additional insured as explicitly listed in the contract between the owner and general contractor that the court would find in favor of the construction manager. However, as is true with much of American law, looks can be deceiving. Just because the construction manager wanted to be an additional insured, and was explicitly told as such, does not make it so.

Insurance contract interpretation

The court found against the construction manager—based on interpretation of the language within the additional insurer’s policy, which taken in conjunction with a legal principle known as “privity of contract,” caused the construction manager to lose coverage as an additional insured. The reason why the Gilbane holding is so important is that what happened to the construction manager here was not fair, it was told explicitly in writing that it would be an additional insured under the contract between the owner and general contractor, yet the court found otherwise.

As to insurance contracts, the courts routinely enforce the agreement as written determining the rights or obligations of parties under the policy based on the specific language used within. Unambiguous provisions of an insurance contract are given their plain and ordinary meaning. Here, that means that regardless of the contract between the owner and general contractor, extrinsic communications or otherwise, the additional insurer’s policy required that the construction manager be in a written contract with the insured (general contractor) to be an additional insured. In essence, the additional insurer’s policy required “privity of contract” for a party to avail itself to coverage as an additional insured.

Privity of contract in the construction industry

Privity of contract is a legal principle providing that a contract cannot confer contractual rights or impose obligations upon any person who is not a party to the contract and, generally, only parties to contracts should be able to sue under the respective contract. Understanding privity of contract is vital for all insurance professionals—this is especially true if they are dealing with construction or real estate development. Due to the nature of the construction industry, owners, design professionals, general contractors and subcontractors generally lack collective privity of contract, money flows from the owner to the general contractor and then to the subcontractor, but generally not directly from the owner to a subcontractor. As it relates to Gilbane, remember that:The owner and general contractor entered into a written construction contract; they are in privity of contract.

1. The owner and general contractor entered into a written construction contract; they are in privity of contract.
2. The owner and the construction manager entered into a written construction contract; they are in privity of contract.
3. The general contractor and the additional insurer entered into a written insurance contract; they are in privity of contract.
4. However, the general contractor and the construction manager did not enter into a written construction contract, so they lack privity of contract.
5. Moreover, the additional insurer and the construction manager did not enter into a written insurance contract, so once again they lack privity of contract.

While the construction manager may have relied upon an official contract in writing between the owner and general contractor for coverage as an additional insured, the law afforded no leeway. Under the additional insurer’s policy with the general contractor, privity of contract was required, so despite the construction manager’s reliance on the representations in the contract between owner and general contractor, the construction manager was not considered an additional insured under the additional insurer’s policy. While a strong fairness argument can be made in favor of the construction manager against this holding, the same fairness argument can be made for the additional insurer; for example: How is the court to impose obligations under the contract between the owner and general contractor on the additional insurer when its contract is with the general contractor?

As is true with most landmark cases, the answer to these questions is anything but simple, the court summarizes its main holding in Gilbane as follows:

Additional insured endorsement in commercial general liability (CGL) policy issued by insurer to general contractor did not obligate insurer to defend and indemnify construction managers at job site, even though sample certificate of insurance listed managers as additional insureds; policy unambiguously provided that an additional insured was ‘any person or organization with whom [insured has] agreed to add as an additional insured by written contract,’ and there was no written contract between general contractor and managers denominating managers as additional insureds.[1]

Best practices

Insurance contracts: Cover yourself, but generally fairness does not matter. The moral of the story in the Gilbane holding for any insurance professional is that when dealing with insurance contracts, fairness generally does not matter, the courts will enforce the insurance contract as written. This is crucial to understand, because while the email, text or phone call you send to an adverse party to cover yourself may be helpful and have a substantial impact on liability in the event of a dispute, it may not matter. Review and understand the respective contract. Of course, always cover yourself in writing, but let Gilbane be a lesson to you, just because a representation is made to you in writing on an official document through official parties, it does not mean that you have contractual protection. The best practice is to always cover yourself in writing, but to understand the basics of exactly what is going on in the respective transaction, agreement or dispute. If you think something is over your head, then it probably is, and you should consider contacting an attorney immediately.

Always be aware of privity of contract. When assisting a client or otherwise, you need to have a basic understanding over who is contracting with whom and for what? If you fail to understand this basic principle, then you may run into serious trouble in the future. It does not matter if you are working in sales, underwriting, management or otherwise, the best of the best clients are highly educated and want a knowledgeable insurance professional, and if you do not have a basic grasp of understanding their needs, then they are likely to choose someone else.

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[1] Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co. [31 N.Y.3d 131, 97 N.E.3d 711 (2018)]