While it can be a headache, Commercial General Liability Insurance (“CGL”) is a necessity in construction. Generally, every party involved in a construction project is required to obtain insurance not just for themselves, but also for many other entities involved in the project. Most contractors and owners are diligent in procuring the additional insurance coverage required under their contracts. But inevitably, when a claim is made during or after the project and the insurance companies get involved, contractors, subcontractors and owners often find themselves with limitations and restrictions on the coverage they thought they had.
Take, for instance, the recent decision of New York’s Appellate Division, First Department, in the case of Gilbane Bldg. Co./TDX Const. Corp. v. St. Paul Fire & Marine Ins. Co.1 Gilbane/TDX was a joint venture that contracted with the Dormitory Authority of the State of New York (“DASNY”) to be the construction manager on a New York City public project for construction of a DNA lab at the Bellevue Hospital Campus in Manhattan (the “Project”). Under the Construction Management Agreement between Gilbane/TDX and DASNY, any prime contractor, whether retained by DASNY or otherwise, was required to name Gilbane/TDX as an Additional Insured under its CGL policies. DASNY contracted directly with a prime contractor, Samson, for excavation and foundation work on the Project. Pursuant to its contract with DASNY, Samson was to procure CGL insurance specifically naming, among others, Gilbane/TDX as an Additional Insured. Samson obtained a policy from Liberty Insurance Underwriters (“Liberty”) with the following Additional Insured endorsement:
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.”
During the Project, Samson’s work allegedly caused adjacent buildings to sink, resulting in significant structural damage to those buildings. DASNY commenced a lawsuit against Samson and the Project architect, which, in turn, led to a third-party action being filed against Gilbane/TDX. Gilbane/TDX thereafter provided notice to Liberty and sought defense and indemnification as an Additional Insured under Samson’s policy. Liberty denied coverage to Gilbane/TDX, and Gilbane/TDX commenced a declaratory judgment action to force Liberty to provide Gilbane/TDX with coverage as an Additional Insured under Samson’s policy. The motion court held that Samson had a written contract with DASNY to provide Additional Insured coverage to Gilbane/TDX and, thus, held that Gilbane/TDX was an Additional Insured under the language of Samson’s policy with Liberty. Liberty appealed.
The appellate court reversed the motion court’s decision, focusing on the specific language of the Additional Insured endorsement contained within the policy of insurance issued by Liberty. The appellate court held that the endorsement required that the party seeking Additional Insured coverage (Gilbane/TDX) must have a written contract with the Insured (Samson) under whose policy it was seeking coverage as an Additional Insured. The Court focused on two words in the Additional Insured endorsement, “with whom”, and determined that those words required a contract between the Insured (Samson) and the entity seeking Additional Insured coverage (Gilbane/TDX) to trigger such coverage. The appellate court held that since Samson, the insured, only had a contract with DASNY and not Gilbane/TDX, no Additional Insured coverage existed for Gilbane/TDX under the policy procured by Samson from Liberty.
As an aside, the appellate court noted that Gilbane/TDX could possibly recover from Samson on a breach of contract theory based on Samson’s failure to obtain the insurance required in its contract with DASNY. However, no such claim was made in this action. Accordingly, the end result was that Gilbane/TDX was left without any coverage.
TAKEWAY: Every insurance policy contains different language which could lead to differing levels of coverage. Unfortunately, the contractor procuring the insurance may not realize the effect of the language used in the policy until it’s too late. Courts uniformly hold that the language of the insurance policy, and not that of a contract or an insurance certificate, governs the insurance coverage provided by an insurance carrier. This may lead to situations in which contractors, subcontractors and owners may be exposed to liability, such as: (1) if you were supposed to have the benefit of the additional insurance, you do not have the coverage you bargained for—and thought you had—in your contract(s) due to the actual language used in the insurance policy (thus exposing yo to direct claims); and (2) if you were supposed to have provided the additional insurance, you have breached your contract because you have not provided the correct coverage required. In order to best avoid these situations, contractors, subcontractors and owners should have their insurance policies reviewed by their attorneys and insurance brokers (and their contracts reviewed by their attorneys) to ensure that proper coverage is provided.
1 2016 NY Slip. Op. 06052; 2016 WL 4837454 (1st Dept Sept. 15, 2016)