Construction projects can be very risky for contractors. Dangers seem to lurk around every corner threatening to increase costs and drive contractors out of business. Contractors face liability for workplace injuries, property damage -- even death. In fact, according to statistics published by the United States Department of Labor (Bureau of Labor Statistics), the construction industry accounted for 20.3% of all workplace fatalities in 2003 and 21.5% in 2004 (www.bls.gov/iif/oshsum.htm). These numbers are staggering considering that, historically, the construction industry employs only about 5% of the workforce. Additional insured endorsements pose yet another “risk” for subcontractors.
Contracts with most general contractors require subcontractors to provide an additional insured endorsement in favor of the general contractor as part of the construction contract. An additional insured endorsement is a mechanism through which a general contractor is added to a subcontractor’s insurance policy. The endorsement gives the general contractor a direct relationship with the subcontractor’s insurer. The general contractor enjoys the benefits of insurance without the responsibility of paying premiums or deductibles. A claim filed against such an endorsement has the potential to significantly increase insurance premiums for the subcontractor and can make it difficult for the subcontractor to procure insurance in the future.
Historically, general contractors required subcontractors to obtain a specified amount of liability insurance prior to working on a project. This liability insurance generally provided coverage for such things as defense costs, settlements, or judgments from claims related to the subcontractor’s work. However, the subcontractor’s liability insurance did not insulate general contractors from all liability. General contractors still faced potential liability resulting from suits from injured workers, construction defect lawsuits and even vicarious responsibility for the subcontractor’s negligence. Given the risky nature of the construction industry, general contractors wanted to do everything they could to allocate some of the risk to other parties. As a result, general contractors now routinely insist on additional insured endorsements.
The Benefits for the General Contractor
Additional insured provisions provide a number of practical benefits for general contractors. First, these provisions allow a general contractor to avoid depleting its own insurance when claims are filed against a policy for which it does not pay premiums. Some jurisdictions have held that if a general contractor files a claim under the additional insured provision, its own insurer stays out of the lawsuit. This gives the general contractor the ability to choose which insurance company it wants to defend the lawsuit. If the general contractor chooses to file a claim with the subcontractor’s insurance company and does not request coverage from its own insurer, the subcontractor’s insurer will not be able to sue the general contractor’s insurer for reimbursement.
A second benefit is that the additional insured endorsement prevents the subcontractor’s insurer from bringing a subrogation claim against the general contractor. A subrogation action is generally brought by an insurance company to recover money from a third-party that caused the loss. However, an insurer cannot bring a subrogation claim against its own insured including, in most jurisdictions, additional insureds, even if the insured caused the loss.
A third benefit is that the additional insured endorsement allows the general contractor to obtain “indemnification-like” coverage without the accompanying challenges of an indemnification agreement. If a general contractor believes it has a claim under an indemnification agreement and the subcontractor disagrees, the subcontractor can refuse payment. The general contractor has to pay the claim up front and then has to spend the time and the money to bring a lawsuit against the subcontractor to enforce the challenged indemnity provision. In contrast, when a general contractor is covered by an additional insured provision, the insurer must pay for costs as they are incurred.
The Courts’ Interpretation
The problem for subcontractors is not in the language of the endorsement itself but in the courts’ interpretation of that language. The most commonly written additional insured endorsement for a comprehensive general liability policy is CG 20 10. The endorsement used to provide coverage for liability “arising out of” the subcontractor’s operations. (See discussion of amendment to CG 20 10 below.) The courts began to interpret the “arising out of” language very broadly and appeared to make every effort to interpret the language in favor of coverage for the additional insured. Courts increasingly interpreted the language to include coverage for the general contractor’s sole negligence, as long as the injury was causally connected in some way to the business relationship between the general contractor and the subcontractor. Put another way, a general contractor can make a claim against a subcontractor’s insurance policy, as an additional insured, even if the general contractor is solely responsible for the loss.
Syufy Enterprises Case
A 1999 California case illustrates the broad interpretation courts give to the “arising out of” language in the additional insured endorsements. Acceptance Ins. Co. v. Syufy Enterprises,, 69 Cal.App.4th 321 (Cal. Ct. App. 1999).
Syufy Enterprises (the “GC”) contracted with C & C Building Automation Company (the “Sub”) to upgrade the lighting and temperature controls at its theater. The Sub obtained an additional insured endorsement from its insurer, Acceptance Insurance Company (“Insurer”), that provided coverage to the GC. The endorsement included the standard language and required coverage for liability “arising out of” the Sub’s work.
Kurt Weber, one of the Sub’s employees, was performing work on the roof of the theater. A roof hatch provided the only access to and from the roof. As Weber was climbing through the roof hatch, it fell and severed one of his fingers. Weber sued the GC for damages alleging that the GC failed to maintain the hatch in a safe condition and failed to warn him that it was unsafe.
The Insurer claimed the additional insured provision did not provide coverage to the GC because Weber’s injury was not related to the Sub’s work – Weber was leaving the job site for personal reasons, neither Weber nor any other Sub employee performed work on the hatch, and the GC likely knew for several years that the hatch was defective. The Insurer argued that the endorsement did not apply because Weber’s presence on the roof to do his job was not connected to his injury. The Insurer further argued that Weber’s injury was attributable solely to the GC’s negligent maintenance of the roof hatch.
The court disagreed with the Insurer. The court noted the consistently broad interpretation given to the terms “arising out of” or “arising from” in insurance provisions. The language only requires a minimal connection or incidental relationship. “The fact that the defect was attributable to [the GC’s] negligence is irrelevant, since the policy language does not purport to allocate coverage according to fault.” Id. at 328-329.
The Effect on Subcontractors
Courts have adopted the policy of construing insurance contracts strictly against the insurer to afford maximum coverage to the insured. This policy is generally beneficial to insureds who are often at a disadvantage when dealing with insurance companies as insurers attempt to draft policies very narrowly. However, courts fail to consider the effect of such a construction on the named insured in the unique situation of the additional insured endorsement. Because the additional insured endorsement increases the number of claims against the subcontractor’s policy, a broad interpretation in favor of coverage can have a detrimental effect on subcontractors as the named insured.
The broad interpretation can result in dilution of the subcontractor’s policy limits. All money that is paid out under the policy brings the subcontractor that much closer to policy limits. Every claim made against the policy reduces the coverage available to the subcontractor. With multiple or complicated claims made against its policy, the subcontractor could find itself without sufficient coverage.
The subcontractor could also be faced with increasing premiums. A subcontractor often pays an additional premium for the additional insured endorsement. Every claim that is made against the subcontractor’s policy, whether by the subcontractor or the additional insured, will affect the rate the subcontractor is able to get in the future. The problem can be worsened because the additional insured will not hesitate to file a claim against the policy because it is not responsible for the premium.
Finally, the subcontractor may be responsible for spending thousands of dollars to satisfy deductibles. This is especially difficult for smaller subcontractors with limited resources.
The Light at the End of the Tunnel
In 2004, the Insurance Services Office, Inc. (“ISO”) revised the language of the most widely written standard additional insured endorsements, form CG 20 10. The rationale for doing so was that the interpretation of the courts was contrary to the intended purpose of the endorsement. The ISO eliminated the “arising out of” language and replaced it with language that provides coverage to the additional insured only if the liability is “caused, in whole or in part, by” the acts or omissions of the subcontractor or the subcontractor’s agent in the performance of the subcontractor’s operations for the additional insured.
Whether the revision will be effective in narrowing the scope of coverage provided by an additional insured endorsement is not yet clear. However, the decision of one Pennsylvania court (discussed below) that considered an endorsement with similar language offers hope to subcontractors, although it substantially pre-dated the ISO revision.
Consolidation Coal Case
In Consolidation Coal Co., Inc. v. Liberty Mut. Ins. Co., 406 F.Supp.1292 (W.D. Pa. 1976), a federal court considered language that is similar to the language in the revised additional insured endorsement and found the insurer was not liable for damages arising solely from the negligence of the additional insured.
Long Hauling Company (“Long”) contracted with Consolidation Coal to haul coal, coke, and coal fuel products. The additional insured endorsement taken out by Long in favor of Consolidation Coal provided coverage “but only with respect to acts or omissions of the named insured in connection with the named insured’s operations at [Consolidation Coal’s premises].” Id. at 1296. Liberty Mutual is Long’s insurer.
Raymond Mazjer, an employee of Long, drove one of Long’s trucks onto the premises of Consolidation Coal and was crossing the railroad tracks when the truck was hit by a railroad car owned by, and in the possession and control of, Consolidation Coal. Mazjer jumped from the truck before it was struck by the railroad car but was injured in the process.
Mazjer collected worker’s compensation benefits from Long and sued Consolidation Coal for damages. Mazjer argued that Consolidation Coal was solely responsible for the accident. Consolidated Coal’s insurer defended the lawsuit and then demanded reimbursement from Liberty Mutual (Long’s insurer). Consolidated Coal argued that it was entitled to reimbursement whether or not the accident was caused by Long. The court disagreed:
- The language of the disputed endorsement in this case includes the phrase ‘but only with respect to the acts or omissions of the named insured.’
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- To accept the position advanced by [Consolidation Coal] would require the court in effect to delete the qualifying phrase from the endorsement. . . . But to construe the qualifying phrase without effect would violate the rule of contract construction that ‘an interpretation which gives effect and meaning to a term is preferred over one which makes such term surplusage or without effect.’
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- This would be an inappropriate construction. The most likely meaning of the subject phrase is that it attempts to limit coverage to those instances where the acts or omissions - - the negligence - - of Long leads to Consolidation [Coal’s] liability.
Id. at 1297-1298, 1300. Given the ISO recent revision of the standard endorsement language and the Pennsylvania court’s interpretation of similar language, there is hope that subcontractor’s insurers will not be responsible for losses caused by general contractors.
In an ideal world, subcontractors would avoid additional insured provisions whenever possible. Unfortunately, simply refusing to list general contractors as an additional insured is impractical given current industry practice. However, the revised language in the standard additional insured endorsement may provide some relief. Although it is unclear exactly how the courts will interpret the new language, the revised language may be effective in eliminating claims for such things as the general contractor’s sole negligence, bringing the result closer to the intentions of the parties and the original purpose of the endorsement.