By: Laurie A. Stanziale Partner, Fox Rothschild LLP.
Most construction contracts contain insurance provisions setting forth the insurance required of the contractor or other downstream parties. Some provisions are detailed and lengthy while others are short and sweet, but all are of critical importance and should be fully understood by the contractor before signing the contract. Also, every insured should understand not only what the contract requires but more importantly what the actual policy states, as the policy, not the contract, will govern whether or not there is coverage. It is possible that certificates received will match the contractual requirements, but much of what the policy covers is not reflected on a certificate. Lurking behind the certificate is the policy, which is where the actual coverage lies. The endorsements or exclusions to the policy can make the certificates worthless pieces of paper.
There are many exclusions that can cancel coverage for the work a contractor may perform. Height exclusions, residential exclusions, EFIS exclusions and many more, focus on the type of work or materials that the contractor is performing or using. One exclusion, however, focuses on who is insured and that exclusion alone can eliminate all coverage.
The cross-party exclusion is common, but many do not focus on it or understand its implications. This exclusion prohibits an insured party from suing another insured party under the same policy. There are two main instances this comes up: (i) when an owner and contractor are both named insured under the same policy, sometimes referred to as a “wrap-up policy” or “mini-wrap policy”; and (ii) when a party is named as an additional insured under the policy of another.
In the first case, it is common for the project owner to purchase (or allow the contractor to purchase and reimburse the contractor) a policy that covers both the owner and contractor. However, what happens if there is property damage to a third party and the owner sues its own contractor? A cross-party exclusion voids any coverage to either the owner or the contractor, rendering the policy essentially useless to either party. A typical cross-party exclusion states: “This insurance does not apply to any claim or suit initiated, alleged, brought by, or caused to be brought by any Named Insured against any other Named Insured.” You may be scratching your head now saying if the purpose of the insurance is to cover the insureds, how can it be that there is no coverage? You are not alone. Why would anyone purchase such a policy? In some circumstances, it is to save money. No money, however, will be saved when there is personal injury or property damage to a third party without coverage. While the cross-party exclusion seem to go against the grain, it was created so that the parties would not waste time and money on needless litigation since the damaged party can simply look to the indemnity in the wrap-up policy to cover them. The exclusion also helps avoid competing policies and subrogation. However, where the relationship breaks down between the insureds and/or an insured claims they went out of pocket to cover costs to a third-party, they may sue each other only for both to find there is no coverage. A party under these types of policies with a cross-party exclusion should be wary of thinking they will recover for the contractor’s negligence by suing the contractor. A policyholder should make a claim against the policy for an insured’s negligence without claiming against another named insured.
In the second scenario, the owner and contractor enter into a contract for a contractor to perform certain work. The contractor subcontracts all or part of the work to one or more subcontractors and requires in the subcontract that the subcontractor name the owner and the contractor as additional insureds under its policy. So what happens when a subcontractor’s employee is hurt on the job? The owner would look to the contractor, and the contractor would look to the subcontractor and the subcontractor’s insurance policy to provide coverage. But, if the subcontractor’s policy contains a cross-liability exclusion that bars coverage for the owner and the contractor, the owner, contractor and subcontractor (and its employees) are all in trouble. The cross-party exclusion bars claims between insureds. See, 385 Third Avenue Associates v. Metropolitan Metals Corp., 916 N.Y.S.2d 95, 2011 N.Y. Slip Op. 00787 (1st Dep’t 2011) and Amerisure Insurance Co. v. Scottsdale Insurance Company, 795 F.Supp.2d 819 (U.S.D.C Ind. Div. 2011).
In one attempt by an additional insured to argue that there was an expectation of coverage and that the additional insured did not have an opportunity to negotiate or bargain for the coverage (or lack thereof), the court found this argument to no avail in that the cross-party exclusion was unambiguous regardless of expectations and was clearly stated in the policy. Transcontinental Contracting, Inc. v. The Burlington Ins. Co., 2010 WL 40554157.
Typical language in an additional insured endorsement states that “Who is an insured is amended to include as an additional insured, the person(s) or organizations (s) shown in the Schedule” or in the case of a blanket additional insured endorsement, “Who is an insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement1 that such person or organization be added as an additional insured on your policy”. Further, under standard ISO policies, an employee of an insured is also an insured, creating an even broader exclusion for an injured subcontractor employee as determined in the cases above.
Conclusion
Requiring additional named insured or additional insured status is nice to have in your contract, but it could mean there is no coverage if the underlying policy has a cross-party exclusion. Drafting contracts to expressly state that the policies required do not contain cross-party exclusions is prudent practice. However, it is most important to review the policy to ensure that the cross-party exclusion does not exist because you cannot “create” coverage where none exists through a contractual requirement. It always comes down to what is actually in the policy.
Fox Rothschild LLP is home to one of the deepest Construction Practice Groups in the United States. With offices in major construction hubs nationwide, Fox’s experienced team advises on major construction and infrastructure projects, including drafting and negotiating contracts and litigating disputes involving such projects. Harnessing the combined strength of a nationally recognized construction practice and a deep bench of lawyers focused on Federal Government Contracts, we provide business-friendly advice to help our clients complete projects in the United States and internationally. Fox construction law practice is backed by a national firm of 950 attorneys providing a comprehensive suite of legal services from 27 offices coast to coast. For more information, visit foxrothschild.com/construction.
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