Pitfalls of Relying on Your Sub's Insurance

Whether you are a construction manager, general contractor, or a subcontractor overseeing sub-subcontractors, it is likely that your company has at some point been named as an additional insured under a downstream contractor’s insurance policy. While negotiating for coverage as an additional insured is always a good idea, we have long known that relying solely on secondary coverage can prove treacherous.  As discussed below, this lesson was recently highlighted in a decision rendered by the Kings County Supreme Court.

A masonry contractor (“Subcontractor”) entered into a subcontract with a construction manager (“Construction Manager”), which required the Subcontractor to purchase insurance and name the Construction Manager as an additional insured. During the course of the project, one of the Subcontractor’s employees was injured at the construction site and initiated a lawsuit against the Construction Manager, yet did not allege any wrongdoing by his employer. The Construction Manager sought coverage from the Subcontractor’s insurance company (“Insurer”) as an additional insured under the policy, but was ultimately denied. As a result, the Construction Manager sued the Insurer for wrongfully disclaiming coverage, and sought a declaratory judgement obligating the Insurer to defend it. The Insurer moved to dismiss the lawsuit on the grounds that the injured employee’s claims against the Construction Manager did not allege that his injuries were caused in any way by the Subcontractor and, therefore, did not constitute potentially covered claims against the Construction Manager as an additional insured under the policy. Logically, the opposite result could be seen as the additional insured being entitled to greater coverage than the primary insured party.

Following oral argument, the Court rendered a decision stating that the Insurer would have to establish that its primary insured did not commit any actions leading to and/or causing the subject injuries to successfully dismiss Construction Manager’s action seeking coverage. Unfortunately for the Construction Manager, the injured employee did not allege any wrongdoing by the Subcontractor, which would have all but guaranteed Construction Manager’s coverage as an additional insured. Nonetheless, Construction Manager was left with one remaining prospect for gaining coverage under the policy; to argue that there are additional unalleged facts that would show Subcontractor to be in some way liable and, therefore, coverage would pass to additional insureds. Due to the fact that this case was in its infancy, with discovery yet to be conducted, the Court determined that Construction Manager should have an opportunity to examine evidence which could potentially permit coverage to the additional insured, rendering the Insurer’s motion to dismiss premature.

While the Construction Manager was given a lifeline by the Court, it is important to note that this decision may end up being nothing more than a temporary reprieve.  If Construction Manager does not discover evidence showing that its Subcontractor was in some way culpable for the employee’s injuries, its action will ultimately be dismissed by the Court.  Let this be a reminder that it is often not a good idea to rely solely on downstream contractors’ insurance policies. In order to truly ensure coverage, being named as an additional insured should (if financially feasible) be treated as supplemental coverage, buttressing a contractor’s own insurance policy. However, should you find yourself in this situation, skilled construction counsel is your best bet for finding the necessary evidence in a sea of discovery.   

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487