Privity and Additional Insured Coverage
When a worker is injured on a construction job and sues the relevant parties, a side battle often ensues over which carrier has the duty to defend and indemnify the owner, general contractor or subcontractor based on the language in the various construction contracts requiring some or all of those parties to be named as additional insureds. When there are multiple subcontracts cascading down to the injured worker’s employer, determining whether the employer’s policy must defend and indemnify other parties as additional insureds can be confusing. In a recent Summary Order, which does not have precedential effect, the Second Circuit Court of Appeals weighed in on this issue under New York law.
In Cincinnati Ins. Co. v. Harleysville Ins. Co., an employee of a sub-subcontractor was injured and sued the building owner, general contractor and subcontractor. The sub-subcontractor’s construction contract with the subcontractor required the sub-subcontractor to add the subcontractor, general contractor and owner as additional insureds to the sub-subcontractor’s insurance policy. The subcontractor’s carrier sued the sub-subcontractor’s carrier arguing that the latter carrier had to defend and indemnify the additional insureds. The district court granted the subcontractor’s carrier’s summary judgment motion in part by finding that the sub-subcontractor had a duty to defend and indemnify the building owner as an additional insured, but not the general contractor. On appeal, the Second Circuit reversed in part and held that the sub-subcontractor’s carrier had no duty as neither the building owner nor the general contractor were additional insureds under the policy.
According to the court, the sub-subcontractor’s policy had 2 endorsements that addressed additional insureds. The first was the “Privity Endorsement,” which grants additional insured coverage “when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” The second was the “Declaration Endorsement,” which refers to the declarations section of the policy for a schedule of additional insureds.
In reversing, the court held that the Privity Endorsement did not confer additional insured status on the building owner or general contractor because there was no contractual privity between them and the sub-subcontractor. Simply put, the sub-subcontractor had no direct construction contract with the owner or the general contractor. The court noted that the law in New York was clear on this point and that New York courts had interpreted the identical provision to require contractual privity. The court stated that it did not matter if the sub-subcontractor’s construction contract required the owner and general contractor to be named as additional insureds (this was a matter for breach of contract), that contract could not modify the insurance policy because the Privity Endorsement was clear on its face that the construction contract had to be between the insured and the purported additional insureds. Because the insured had no construction contract with the owner or the general contractor there was no contractual privity and no coverage.
As to the Declaration Endorsement, the court noted that neither party were listed on the schedule as additional insureds. The court also found that a reference to a heading on the Declaration Endorsement that was the same as the Privity Endorsement did not expand the additional insured coverage grant automatically to every party when required in any construction agreement with the insured. Essentially, the court refused to write the Privity Endorsement out of the insurance policy. The court held that the Privity Endorsement modified the automatic status heading language in the declarations, not the other way around. In essence, the court held under New York law that in insurance contracts that require privity for additional insured coverage, the lack of a direct contract between the insured and the party seeking the additional insured coverage precludes extending additional insured coverage.