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Court of Appeals Rules that Additional Insureds Endorsement in General Contractor’s Liability Policy Requires Contractual Privity

On March 26, 2018, the New York Court of Appeals issued a decision by Judge Wilson in Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Mar. Ins. Co., 2018 NY Slip Op 02117, holding that an Additional Insured-By Written Contract endorsement in a general contractor’s liability policy did not provide coverage for a construction manager that had no written contract with the general contractor — even though the contractor was obligated under a contract with the property owner to name the construction manager as an additional insured.  Judge Stein wrote a dissenting opinion, joined by Judge DiFiore, arguing that the endorsement was ambiguous, and should therefore be interpreted in favor of coverage.

Construction project owners typically require contractors to obtain liability policies naming “upstream” parties (i.e., general contractors, construction managers, or the property owner) as additional insureds.  The contractor accomplishes this by purchasing a blanket “additional insured” endorsement from its liability insurer, providing coverage for any party “the named insured is obligated to name as an additional insured by virtue of a written contract or agreement.”  3 Couch on Insurance § 40:30. In Gilbane, the general contactor (Samson) was obligated by its contract with the property owner (DASNY) to provide liability coverage for the construction manager (Gilbane JV).  Samson obtained an additional insured endorsement from its liability carrier (Liberty) that included within the definition of “Insured” “any person or organization with whom you have agreed to add as an additional insured by written contract.”

When Gilbane JV submitted a claim for coverage under Samson’s policy, Liberty disclaimed coverage, arguing that the endorsement did not provide coverage for Gilbane JV because it did not have a written contract with the insured.  The trial court found that Gilbane JV qualified as an additional insured, holding that the policy "requires only a written contract to which Samson is a party" – a requirement that was met by Samson’s contract with DASNY.  The First Department (with one Justice dissenting) reversed, holding that the “policy clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured.”

The Court of Appeals affirmed the First Department's decision, explaining:

Gilbane JV has no written contract with Samson denominating it an additional insured, but argues no such contract is necessary, because that requirement would conflict with the plain meaning of the Liberty endorsement; with "well-settled rules of policy interpretation"; and with the parties' reasonable expectations. Alternatively, Gilbane JV argues that the Liberty endorsement is, at most, ambiguous on that point, and therefore must be construed against Liberty and in favor of coverage. Gilbane JV is incorrect; the endorsement is facially clear and does not provide for coverage unless Gilbane JV is an organization "with whom" Samson has a written contract.

Here, the endorsement would have the meaning Gilbane JV desires if the word "with" had been omitted. Omitting "with," the phrase would read: ". . . any person or organization whom you have agreed by written contract to add . . .", and Gilbane JV's position would have merit. But Samson and Liberty included that preposition in the contract between them, and we must give it its ordinary meaning. Here, the "with" can only mean that the written contract must be "with" the additional insured. Gilbane JV proposes other wordings that, in its view, would more clearly require the existence of a written contract between Samson and an additional insured, but those formulations are no clearer and, in any event, the endorsement's meaning is plain and unambiguous.

In a dissenting opinion, Judge Stein (joined by Judge DiFiore) found that the endorsement was ambiguous, and that Gilbane JV’s reading was reasonable, explaining:

The pertinent language, as written, is awkward and unclear, at the very least. Plaintiff Gilbane JV asserts that the phrase "by written contract" modifies "to add," and argues that it refers to the act of the named insured, Samson, agreeing to add an additional insured. Put differently, Gilbane JV argues that "by written contract" means only that any agreement by Samson to add an additional insured must be memorialized in a writing — not necessarily a writing between Samson and the purported additional insured. Thus, according to Gilbane JV, the contract between DASNY and Samson — under which Samson agreed in writing to procure a general liability insurance policy for the construction project and to name Gilbane JV as an additional insured — was sufficient to confer additional insured status upon Gilbane JV. Defendant, on the other hand, focuses on the phrase "with whom," arguing that the named insured must agree with the purported additional insured, in a writing between those parties, to add coverage for that entity under the policy.

Fixating on the word "with," the majority summarily concludes that the policy does not "provide for coverage unless Gilbane JV is an organization with whom' Samson has a written contract" (majority op, at 3). In so doing, the majority places the phrase "by written contract" directly after "agreed," effectively rewriting the policy while altogether failing to address Gilbane JV's proposed construction. Under this reformulation, the pertinent policy language would confer additional insured status upon "any person or organization with whom you have agreed by written contract to add as an additional insured." Of course, that is not what the policy says. Moreover, even though the majority's construction is reasonable, the policy language is ambiguous because the construction proffered by Gilbane JV is also reasonable; indeed, Gilbane JV's interpretation is consistent with the "reasonable expectations of the average insured" that would seek to procure this type of coverage, whereas defendant's interpretation is not.

In particular, given the unusual syntax of the endorsement — placing the phrase "by written contract" at the end of the sentence, a placement the majority chooses to ignore — it is reasonable for the average insured to expect that the phrase "by written contract" modifies only the immediately preceding infinitive "to add," such that the phrase prescribes only that the agreement by which the named insured commits to extend coverage to the purported additional insured must be evidenced in a contract reduced to writing. In any event, because each party's reading of this language is reasonable, the endorsement is ambiguous and thus should be interpreted in favor of coverage.  It follows, then, that the endorsement should not be interpreted as imposing a requirement of privity between Samson and Gilbane JV to effectuate additional insured coverage of Gilbane JV, and the DASNY-Samson contract was sufficient to satisfy the policy provision and entitle Gilbane JV to such coverage.

Insurance coverage is an important consideration in any construction project.  This decision underscores the need to review the policy language carefully to ensure that the necessary parties are covered.

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