Welby, Brady & Greenblatt, LLP
Construction, Real Estate, Labor & Employment and Commercial Law Firm
Serving New York, Connecticut & New Jersey

Sign up to receive Legal Alerts in your email!

Thanks for your interest in joining our mailing list. Please complete the information below and click Sign Up.

Have a question?

The discussion continues on:

Next Legal Alert »

« Back to Legal Alert

Indemnified For Your Own Negligence? The Loophole Narrows

By: Gregory J. Spaun
Published: June 2017

Section 5-322.1 of the General Obligations Law provides that an upstream party to a construction contract, such as an owner or a general contractor, cannot require a downstream contractor or subcontractor to indemnify the upstream party for its own negligence. The rationale is that the upstream party should not, through the use of greater bargaining power, be able to require the downstream party to serve as a substitute for its own insurance carrier. In such a situation, the upstream party would suffer none of the adverse consequences typically associated with its own negligence, such as having to incur the loss or place a claim against its own insurance policy—and the consequences typically associated with a claim, such as having to pay a deductible, having the loss present on a loss run, and having its future premium rates take the loss into consideration and impact its ability to renew (or obtain a replacement for) the policy.

When the legislature enacted Section 5-322.1, it left a significant loophole open: the situation where the construction contract requires the downstream contractor to procure insurance and name all upstream parties as additional insureds and insure and hold them harmless for all claims arising out of the downstream party’s work—including claims arising out of the  upstream party’s own negligence. I addressed this loophole in a February, 2016 article discussing the case of Burlington Insurance Co. v New York City Transit Auth. (132 AD3d 127, [1st Dept 2015]). Burlington showed that the loophole wasn’t merely theoretical, and that there were situations where the additional insured party could be the only negligent party (and the contractor who procured the insurance could be entirely without fault), all the while the innocent contractor’s policy is compelled to respond.

By way of reminder, Burlington involved a named insured that was the tunnel borer working for the NYCTA on a subway construction project. The construction contract required the tunnel borer to name the NYCTA and the lessor/owner of the property on which the project was located (which happened to be the City) as additional insureds on its general liability insurance policy, and to and have that insurance carrier hold them harmless from all claims caused in whole or in part by the borer’s work. The contract also required the NYCTA to identify all underground hazards, including buried pipes, cables, etc.

During the project, the tunnel borer bored into a live buried electrical cable, which caused an explosion and a serious injury to borer’s worker. Clearly, the borer had no way of knowing that it was boring into an unmarked electrical cable and, therefore, could not have been negligent. The NYCTA, on the other hand, was negligent in failing to identify the hazard for the borer (and also breached the construction contract in that regard).

Both owner and the NYCTA were additional insureds under the borer’s policy, as was required under the construction contract. Upon the making of the claim, the borer’s carrier accepted the tender of owner’s defense and indemnification. The borer’s carrier also initially accepted the tender of the NYCTA, but only under a reservation of rights. The borer’s carrier later disclaimed as against the NYCTA when it came out that the borer was not negligent. The borer’s carrier ultimately settled the injured worker’s lawsuit on behalf of the owner for $950,000.

When the dust settled, the borer’s carrier, as subrogee of the City/owner, sued the negligent NYCTA to recover the monies it expended in settling the underlying personal injury claim. In doing so, the carrier noted that the proximate cause of the accident was the NYCTA’s sole negligence in failing to mark the cable. In response, the NYCTA counterclaimed for coverage under the borer’s insurance policy.

After discovery, the parties moved for summary judgment. The trial court granted summary judgment to carrier, holding that the NYCTA, as the negligent party, owed it common law indemnification. The Appellate Division, however, reversed. In doing so, it held that the construction contract required the borer to procure insurance covering the NYCTA for bodily injury “caused, in whole or in part, by an act or omission” of the borer. Clearly, although the borer was not negligent, the injury was “caused” by its work—certainly, had the borer not been boring in that particular location, the accident would not have happened. The Appellate Division reasoned that the “caused by” language did not materially differ from the “arising out of” standard, and that since the injury “arose out of” named insured’s work, the additional insured NYCTA was entitled to coverage—even though it was solely negligent.

As a result of the Appellate Division’s holding, because an insurance carrier cannot seek subrogation from its own insured (even an additional insured), the carrier here could not seek to recover its loss from the truly negligent party. In other words, the NYCTA—the sole negligent party—was to be held completely harmless for its own negligence by the borer’s insurance carrier. So, while the NYCTA was to be let off scot-free, and although the borer could not be required to directly indemnify the NYCTA for its negligence, the borer was to suffer with a $1 million loss on its insurance loss run and the corresponding increase in insurance premium (and difficulty in obtaining renewal coverage).

New York’s highest court, the Court of Appeals, granted the carrier leave to appeal, and it reversed the Appellate Division’s holding. In doing so, that court retreated from the “but-for” line of causation that was previously applied to such claims, and adopted the “proximate cause” standard. Proximate cause is a term that denotes a legal causation for which a court will assign liability, as opposed to simply the event which kicked off an improbable series of events which, although the root cause, would be inequitable to hold as the legal cause. The Court held that the parties, by using the word “caused by” as opposed to “arising out of the work of”, evidenced their intent to exclude from coverage the precise situation in Burlington, where the additional insured was solely negligent. Accordingly, although the borer here was the root cause (again, if it hadn’t been boring in that location, the explosion would never have happened), the Court declined to assign legal causation sufficient to allow the solely negligent NYCTA to resort to the innocent contractor’s insurance policy.

As can be garnered from the title of this article, even with this holding the loophole is still not closed. Although the Court of Appeals deemed the term “caused by” in the insurance policy to require “proximate” (legal) causation, the Court specifically referenced the freedom to negotiate the terms of a policy. In that regard, the Court of Appeals noted that if that negotiation had resulted in a policy with “arising out of” language, such would be indicative that the parties would nevertheless still intend to cover the situation where the solely negligent party would be covered under the innocent party’s policy, and the result would have been the same as in the Court below.

As with the previous article on the subject, the lesson remains that the loophole is not merely theoretical, and that although a non-negligent party cannot be forced to directly indemnify a negligent party for such negligence, it can still be required to procure insurance (using “arising out of” language) that would cover that negligence with no consequences to the truly negligent party—and suffer the resulting effects of having to do so. Various trade organizations are currently lobbying the state legislature to completely close this loophole. In the meantime, it would be advisable to consult with experienced construction counsel to review your construction contracts while they are still in the negotiation stage to try to tailor the insurance provisions so that they only cover situations arising out of the contractee’s negligence.

If you would like more information regarding this topic please contact Gregory J. Spaun at gspaun@wbgllp.com, or call 914-607-6425.

Print this Page

 

Please understand that this column provides general information only, and should not be construed as legal advice to anyone under any circumstances. The author reserves the right to modify any questions submitted so as to broaden their appeal. While we encourage you to contact us, you should not disclose to us any information that you consider confidential unless and until we have formally established an attorney-client relationship, and agreed to represent you in your particular matter. Citations to legal authority have been omitted.