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In the construction industry, companies routinely transfer their liability risks to others through the use of contractual agreements and additional insured endorsements. Project owners, developers and general contractors require subcontractors at all levels to provide additional insured protections under each party’s general liability insurance policies.

The ability of required parties to obtain needed additional insured protection is established through the use of “scheduled” and “blanket”additional insured endorsements. Typically, blanket endorsements automatically name additional insureds “when required by contract.” In that regard, a majority of courts continue to interpret this requirement only when the policyholder directly contracts with the party seeking additional insured status.

In the March 2011 case Westfield Insurance Company v. FCL Builders, Inc., the court ruled a blanket additional insured endorsement issued to a second-tier subcontractor did not extend to the project’s general contractor. In this case, FCL was the general contractor for the project. The steel fabrication and erection of the building was subcontracted to Suburban Ironworks. The subcontract agreement between the parties stipulated that Suburban Ironworks would provide commercial general liability insurance for itself and FCL. The contract also required any of Suburban Ironworks’ subcontractors to maintain the same level of commercial general liability (CGL) coverage and name FCL as an additional insured under their policy.

After the start of the steel erection, a worker of one of the second-tier subcontractors was injured on the job. The injured worker later filed a tort case against FCL and Suburban Ironworks based on the duty to provide overall site safety on the project. In turn, FCL sought additional insured protection directly under the second-tier subcontractor’s policy, which was placed with Westfield Insurance. The additional insured tender was denied, citing the lack of a contractual agreement between the second-tier subcontractor and FCL. It is unclear if FCL also sought protection as an additional insured under the Suburban Ironworks CGL policy.

The appeals court determined no evidence suggested the second-tier subcontractor and the general contractor had a direct written agreement for the additional insured requirement; therefore, Westfield had no duty to provide additional insured protection. This decision was reached despite the parties’ understanding of the additional insured requirements, the incorporation of the master subcontract agreement into the second-tier subcontract and the issuance of a certificate of insurance.

In March 2013, a similar decision was reached in City of New York v. Nova Casualty Company. The blanket additional insured endorsement in this case required that coverage be agreed to in writing between the second-tier subcontractor policyholder and theproject owner who was seeking protection. According to the court’s decision:“The record contains no such freestanding agreement between the City and either Grgas or Coastal. The language in Grgas’ and Coastal’s subcontracts incorporating by reference the terms of the prime contract, which required the second-tier contractor to add the City as an additional insured under its policies, is insufficient to create that obligation.” As a result, no additional insured status was provided to the project owner under the lower tier subcontractor’s policy.

These recent decisions area stark reminder that contractual requirements and additional insured endorsements should be reviewed and coordinated for consistency among all tiers of contractors on a project. Consider the use of alternative agreements in terms of insurance obligations and additional insured requirements in order to create direct contractual relationships with all needed parties on these issues.  

Paul Primavera is senior vice president of risk practices and Scott Skifstad is vice president/risk control manager at Lockton. For more information, email pprimavera@lockton.com or scott.skifstad@lockton.com.  

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