This post is a continuation of the series “Minnesota CGL: Getting a Handle on Large Construction Defect Claims.” This post (Part VI) is the first of several posts which address additional insured (AI) coverage for a general contractor under the subcontractor’s commercial general liability (CGL) policy.
Additional insured issues frequently arise in the construction defect claims context. It is a fairly common practice for a subcontractor to agree in the subcontract agreement to both (a) indemnify the general contractor against third-party claims arising out of the subcontractor’s work and procure contractual liability insurance to insure that indemnity obligation; and (b) add the general contractor as an “additional insured” to the subcontractor’s CGL policy. While the general contractor obviously cannot collect twice for the same damages, in larger claims — particularly those involving commercial buildings and multi-unit residential complexes — it is common for the general contractor to pursue both claims at the same time: a third-party claim against the subcontractor for indemnification via the indemnity agreement (in the main action) and a claim against the subcontractor’s CGL insurer in its capacity as an additional insured (in a declaratory judgment action). Although the third-party’s damages are subject to the same policy exclusions, whether coverage is sought under the “insured contract” or “additional insured” coverages, it may be turn out that the indemnity agreement is unenforceable for one reason or another or that the additional insured endorsement is not sufficiently broad to cover the general contractor as an additional insured. Consequently, in construction defect claims, the general contractor typically advances both claims to make certain that it receives the benefit of any existing liability coverage.
In some cases, the entity claiming coverage as an “additional insured” is clearly designated either by naming that entity specifically as an additional insured, or by indicating in an otherwise clear and unequivocal manner that the entity asserting the entitlement to coverage qualified as an “additional insured” under the policies at issue. However, many CGL insurers use blanket additional insured endorsements (AIE) which do not specifically identify the organizations qualifying as additional insureds under the policy. Blanket AIE forms are generally used when the named insured is faced with repeated demands to add others to its policy, as is the case in the construction industry context. The first step in assessing whether an additional insured exposure exists, then, is to determine whether the subcontractor was, in fact, contractually obligated to obtain additional insured coverage for the general contractor. To properly address this issue, one must appreciate the distinction between a subcontractor’s promise to hold harmless and indemnify a general contractor and obtain liability insurance to cover that risk (the “insured contract” coverage described in previous posts) and a promise to add the general contractor as an additional insured to the subcontractor’s CGL policy. See, e.g., Hurlburt v. Northern States Power Co., 549 N.W.2d 919, 923 (Minn. 1996); A.F. Lusi Const., Inc. v. Peerless Ins. Co., 847 A.2d 254, 256-266 (R.I. 2004) (agreement did not require subcontractor to obtain insurance for general contractor and provided no support for contention that general contractor was an additional insured under subcontractor’s policy). Insured contract coverage, while ultimately benefiting a general contractor, does not extend additional insured status to a general contractor. Rather, it protects the subcontractor against the liability it may have to the general contractor under the indemnity clause of the subcontract agreement. An AIE, by contrast, provides direct liability insurance to any organization qualifying as an additional insured thereunder.
The Massachusetts Court of Appeals correctly addressed the issues in detail in RCS Group, Inc. v. Lamonica Const. Co., Inc., 916 N.E.2d 381, 386-387 (Mass. App. Ct. 2009). In this case, RCS Group contended that the subcontract agreement obligated Lamonica Construction, the subcontractor, to add RCS Group as an additional insured to its CGL policy and breached the subcontract by failing to obtain the required coverage. The subcontract provided that “[Lamonica] shall maintain, at its own cost, such insurance as will protect it and [RCS Group] from . . . any claim for bodily injury, including death, and whether such [w]ork or performance are by [Lamonica] or any of [its] subcontractors or anyone directly or indirectly employed by [it], said insurance to be in the limits as set forth in the [c]ontract [d]ocuments.” Thus, whether a breach occurred turned on whether the subcontract required Lamonica to purchase liability insurance that directly covered RCS Group as an additional insured, or whether the subcontract permitted Lamonica to satisfy its contractual obligations with insurance covering its own liabilities, in the process “protecting” RCS from the listed claims. The question turned on the key language is “as will protect.” RCS Group argued that a liability insurance policy cannot “protect” someone unless it provides that person with direct coverage and, hence, that this language required Lamonica to buy a liability policy naming RCS Group as an additional insured. The Massachusetts Court of Appeals correctly rejected this argument, noting that liability insurance purchased in Lamonica’s own name would “protect” RCS Group fully so long as it covered Lamonica’s indemnification obligations (as the insurance contract purchased by Lamonica in fact did).
The court went on to note as follows:
When examined in this context, the parties easily could have viewed the insurance policy that Lamonica purchased as one that would “protect” RCS Group, even though the policy did not include RCS Group as an additional insured. Under the commercial general liability policy that Lamonica purchased, there was an exclusion for contractual liability, but that exclusion did not apply to an “insured contract,” which was defined to include “[t]hat part of any other contract or agreement pertaining to your . . . under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. * * * Thus, we conclude that the contract did not require Lamonica to name RCS Group as an additional insured (or otherwise to provide RCS Group with direct coverage under its liability policy). * * * We see no unfairness in this result given that RCS Group expressly could have required that Lamonica include it as an additional insured, as is commonly done. See 9 Couch, Insurance § 126:7 (3d ed. 1997) (“Contractors commonly require their subcontractors to carry liability insurance naming the contractor as an additional insured”).
In short, the obligation to add the general contractor as an additional insured to the subcontractor’s CGL policy is separate from the subcontractor’s obligation to obtain insurance to insure its promise to indemnify the general contractor. If the subcontract agreement does not specifically obligate the subcontractor to obtain and maintain “additional insured” coverage for the general contractor, it is likely that no such obligation will be found to exist.
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