Parties structuring transactions or business relationships often attempt to shift risk to their counter-party by having such party included as an additional insured on the counter-party's insurance policies. In the real estate world, for example, property owners, including cooperatives and condominiums, regularly seek to be insured by contractors and subcontractors; managing agents often seek to be insured by building owners or boards. This is most often accomplished simply by including in the contract a provision requiring the counter-party to name the party as an additional insured and relying upon the "blanket additional insured" endorsement of the policy to effectuate this agreement. However, a recent decision by the Appellate Division, First Department, highlights the perils of proceeding this way and underscores the importance of checking both the language of the contract and the policies at issue to make sure they work together to provide the desired coverage.
The First Department's Decision
On September 15, 2016, the First Department issued its decision in Gilbane Building Co. v. St. Paul Fire and Marine Insurance, 143 A.D.3d 146, 38 N.Y.S.3d 1, 2016 N.Y. Slip Op. 06052 (1st Dep't 2016). At issue was whether the construction manager of a construction project was an additional insured on an insurance policy taken out by a prime contractor working on the project. The prime contractor had entered into a contract with the Dormitory Authority of the State of New York ("DASNY"), which provided the financing for the project. That contract required the prime contractor to add the construction manager as an additional insured. The construction manager did not have a contract with the prime contractor.
The First Department reversed the lower court's holding finding for the construction manager and held that, despite the express requirement in the contract between the prime contractor and DASNY, the construction manager was not an additional insured under the prime contractor's policy. Gilbane Building Co., 2016 N.Y. Slip Op. 06052 at *2-3, *9.
The Appellate Division based its determination upon the language of the insurance policy rather than upon the language of the contract. The insurance policy provided that additional insureds included "any person or organization with whom you have agreed to add as an additional insured by written contract." Id. at *5 (emphasis added). The First Department held that the phrase "with whom" meant that a direct contract between the primary insured and each additional insured was required. Id. Since the construction manager did not have a contract with the prime contractor, the construction manager was not covered under the contractor's insurance policy.
Although the First Department was interpreting the specific language of the policy before it, it was expressly guided in part by earlier decisions interpreting different insurance policy language—language that provided that additional insureds included other organizations "when you and such . . . organization have agreed in writing in a contract or agreement that such . . . organization be added as an additional insured on your policy." Id. at *6. Those earlier decisions, like Gilbane, required a direct contract between the primary insured and the additional insured. See id. at *5-6 (citing AB Green Gansevoort, LLC v. Peter Scalamandre & Sons, Inc., 102 A.D.3d 425, 961 N.Y.S.2d 3 (1st Dep't 2013) and Linarello v. City Univ. of N.Y., 6 A.D.3d 192, 774 N.Y.S.2d 517 (1st Dep't 2004)).
Are You At Risk?
In Gilbane, the First Department interpreted specific insurance language, but made clear that, in its view, contractual privity between the primary insured and the additional insured is required in order for the usual contract clauses regarding additional insureds to be effective. Importantly, the First Department in Gilbane reiterated a principle established in earlier cases: when deciding whether someone is an additional insured, it is the language of the insurance policy, rather than the contract, that controls.
Gilbane thus makes clear that a party seeking coverage as an additional insured by virtue of a contractual provision must carefully review both the contract and the insurance policies at issue to make sure that they work together to provide the coverage sought.
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