By: Laurie A. Stanziale Partner, Fox Rothschild LLP.
Most construction contracts contain insurance provisions setting forth the insurance required of the contractoror other downstreamparties.Some provisions are detailed and lengthywhileothers 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 whetheror notthere is coverage.It ispossiblethat certificates receivedwillmatch 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 endorsem*nts or exclusions to the policy can make the certificates worthless pieces of paper.
There are many exclusionsthat cancancel coverage for the work a contractor may perform.Height exclusions,residential exclusions, EFIS exclusionsand 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.
Thecross-party exclusionis common,but manydo not focuson it or understanditsimplications.This exclusion prohibits an insured party from suing another insured party under the same policy.There are two maininstancesthis comes up: (i) when an owner and contractor are bothnamedinsured 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 firstcase, 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 damageto a third partyand 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 sayingifthe purpose of the insuranceisto cover the insureds, how can it be that there is no coverage?You are not alone.Why would anyone purchase such a policy?In somecirc*mstances,it is to save money.No money, however,will be saved when there is personal injury or property damage to a third partywithoutcoverage.While thecross-party exclusion seem to go against the grain,it was created so that the parties would not waste time and money on needless litigationsincethe damaged party can simplylook to the indemnity in the wrap-up policy to cover them.The exclusionalsohelps avoidcompeting 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 sueeachother 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 shouldmakea 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 foracontractor to perform certain work.The contractorsubcontracts all or part of the work to one or more subcontractorsand requires in the subcontract that the subcontractor name the owner and the contractor as additional insureds underits policy.So what happens when a subcontractor’s employee is hurt on the job?The owner wouldlook tothecontractor, and thecontractorwouldlook tothesubcontractor andthesubcontractor’sinsurancepolicyto providecoverage.But,if thesubcontractor’s policy contains a cross-liability exclusionthatbars coverage for the ownerandthecontractor,the owner, contractor and subcontractor (and its employees) are allin trouble.The cross-partyexclusion 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 (1stDep’t 2011) andAmerisure Insurance Co. v. Scottsdale Insurance Company,795 F.Supp.2d 819 (U.S.D.C Ind. Div. 2011).
In oneattempt by an additional insured to argue that there was an expectationofcoverage and that the additional insured did not have an opportunityto negotiate or bargain for the coverage (or lack thereof), the court foundthis argument to no avail in thatthe 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 endorsem*nt 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 endorsem*nt, “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 agreement1that 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 aninsured,creating an even broader exclusion for an injured subcontractor employee asdeterminedin the casesabove.
Conclusion
Requiring additional named insured or additional insured status is nice to have in your contract,butit could mean there isno coverageif the underlying policy has a cross-party exclusion.Drafting contracts to expressly state that the policies required do not contain cross-party exclusionsis prudent practice.However,itismost importantto reviewthe policy to ensure that thecross-partyexclusion does not exist because you cannot “create” coverage where none exists through a contractual requirement. Italwayscomesdown 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, visitfoxrothschild.com/construction.
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