Construction project owners usually draft contracts that require their direct contractors and their subcontractors and their suppliers to name the owner and the owner’s lenders as additional insureds in their general liability policies. When that does not happen, or when sufficient attention is not paid to the details of what is provided by lower tier subcontractors and suppliers when they arrive at the project site, upstream contractors and owners could find themselves without insurance they thought they had bargained for. Whether such coverage is in place depends upon what is stated in the lower tier subcontractor’s or supplier’s insurance policy.
In a recently reported case an owner hired a general contractor, who in turn hired a subcontractor, who in turn purchased concrete from a supplier. When one of the supplier’s workers was injured, the worker sued upstream from the supplier, including the owner. The owner demanded that the supplier’s insurance company defend and indemnify him. The supplier’s insurance company refused, so the owner commenced a declaratory judgment action against the subcontractor and its concrete supplier’s insurance company, seeking to have the lower court declare that the supplier’s insurance company must provide liability coverage to the owner as an additional insured. The insurance company moved to dismiss the action and lost, so it appealed to the Appellate Division, First Department.
The supplier’s insurance policy provided that an organization is added as an additional insured:
“when you (supplier) and such … organization have agreed in writing in a contract or agreement that such … organization be added as an additional insured on your policy.”
The supplier’s insurance company argued to the appellate court that because there was no written agreement between the owner and the supplier requiring that the owner be added as an additional insured to the supplier’s insurance policy, the policy did not require the insurance company to provide liability coverage to the owner.
The owner pointed out that the supplier’s insurance policy contained a provision with the following title:
Additional Insured – Owners, Lessees or Contractors – Automatic status when required in construction agreement with you.
This, the owner argued, automatically made the owner an additional insured because the supplier and the subcontractor had previously entered into a purchase order for the concrete, in which the supplier agreed to “assume all the obligations and risks which … (the subcontractor) assumed towards (the owner)”.
The appellate court was not persuaded, however, saying that the owner’s reliance on a title of an insurance policy provision, “cannot alter … the effect of the unambiguous language in the body of the clause itself”, which required a written agreement between the supplier and the owner requiring the supplier to name the owner as an additional insured on the supplier’s insurance policy.
The appellate court also rejected the owner’s argument that the incorporation by reference language in the subcontractor/supplier purchase order established the written agreement between the owner and supplier to name the owner as an additional insured. The court said such a reading required the court to read terms into the policy that does not exist. The supplier’s insurance policy did not say that there only be some writing. Rather, it said that there must be a written contract between the supplier and the owner requiring the supplier to include the owner as an additional insured.
Because, such a contract does not exist here, the supplier’s insurance company is not obligated to provide insurance coverage for the owner.
Situations such as the one the owner found itself in here can be avoided by proper drafting of insurance provisions, including flow-down requirements, and, equally important, by verifying that those provisions are followed before access to the project site is granted by the owner to contractors, subcontractors and suppliers.