Recently, several members of the myCOI team attended the International Risk Management Institute (IRMI) Construction Risk Conference in Orlando, Florida. During their time at the conference, they were able to learn from experienced and respected industry leaders. The IRMI conference offered broad, unbiased education, an unparalleled networking experience, and access to key decision makers in the construction risk management and insurance industries.
“Additional Insured by Contract” otherwise referred to as “Privity of Contract” was one of the items discussed at the conference, and a topic we’ll explore further in this post. By definition, IRMI defines “Additional Insured by Contract” as:
“The relationship that exists between two parties by virtue of their having entered into a contract. This concept incorporates the legal principle that a contract may not impose duties on a noncontracting party, nor may a noncontracting party claim any right or benefit as being guaranteed by the contract.”
During one of the informational lectures at the conference, several cases were explored that dealt with the very topic of additional insured by contract. In this post, we’ll explore 3 different cases and their outcomes. Each of these cases were related to the question: “Is a direct contract necessary with Named Insured?”. Let’s explore the outcomes of each, as provided by IRMI:
- Westfield Ins. Co. v. FCL Builders, Inc.
YES. In the case of Westfield Ins. Co. v. FCL Builders, Inc., 407 Ill. App. 3d 730 (Ill. App. Ct. 1st Dist. 2011), “Notably, the provision does not refer to any person or organization. By repeatedly using the terms “such” instead of “any,” the provision necessarily requires that, in order to qualify as an additional insured, an entity must enter into a direct written agreement with JAK [the sub-subcontractor] listing them as additional insured.”
- Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co.
YES. In the case of Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co. 2016 NY Slip Op. 06052, September 15, 2016, Appellate Division, First Department, “We find that the language in the ‘Additional Insured – By Written Contract’ clause of the Liberty policy clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured. Since there is no dispute that Samson did not enter into a written contract with the JV, Samson’s agreement in its contract with DASNY to procure coverage for the JV is insufficient to afford the JV coverage as an additional insured under the Liberty policy.”
- First Mercury Ins. Co. v. Shawmut Woodworking & Supply, Inc.
- In the case of First Mercury Ins. Co. v. Shawmut Woodworking & Supply, Inc., 2016 U.S. App. LEXIS 16152 (2d Cir. Conn. Aug. 29, 2016), “First Mercury and National Union contend that Shawmut does not qualify as an additional insured under the Policy because the Policy requires that Shawmut and Fast Trek ‘have agreed in writing in a contract or agreement that [Shawmut] be added as an additional insured on [the] [P]olicy.’ In its written agreement with Shepard, Fast Trek agreed to name as an additional insured not only Shepard, but also ‘the Project owner and construction manager.’”
The case goes on to say, “Shawmut was the construction manager. Moreover, Fast Trek’s agreement with Shepard incorporated ‘as part of the Subcontract Documents’ the agreement between Shawmut and Shepard, which included a requirement that Shepard and ‘each sub-subcontract’ name Shawmut as an additional insured. Hence, Shawmut and Fast Trek clearly ‘agreed in writing in a contract or agreement’ to include Shawmut as an additional insured.”
Lessons On Additional Insured By Contract
As demonstrated in the examples above, there are many reasons that Additional Insured endorsements can cause confusion. Without the right language, your organization could be at risk. To sum up the above cases, it matters how endorsements are written if there are multiple entities needing to be Additionally Insured. Typically only two parties actually physically sign a contract, yet, a condition of the contract may require that entities other than the signatories (those that do the signing) be added.
For example: A general contractor signs a contract with a subcontractor to do work on a project. Only the general contractor and the subcontractor actually sign the document, but the general contractor may require the subcontractor to not only name them as Additional Insureds, but perhaps the project owner, or lender or even architect, also. None of those parties actually sign, so if that “privity” wording is present in the endorsement, all the entities seeking coverage may not, in reality, be covered.
To review other considerations for Additional Insured and to avoid problems with compliance as it relates to Additional Insured endorsements, be sure to read our blog post entitled, “3 Considerations For Additional Insured Endorsements.”
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