Construction professionals in New York face new hurdles in ensuring they are covered as additional insureds under other parties’ commercial general liability insurance policies.

In 2002, a New York City agency contracted with a general contractor and a construction manager to construct a forensic laboratory. The owner’s contract with the GC required that the GC obtain general liability insurance for the project containing an endorsement naming the owner and the construction manager as additional insureds.

Four years later, the owner sued the GC and the project architect, claiming they negligently damaged the excavation support system. In 2010, the architect commenced a third-party action against the construction manager, which promptly notified its insurance carrier seeking defense and indemnity under the GC’s policy. The carrier refused, and in 2012, the construction manager filed a lawsuit, arguing that it indeed qualified for coverage.

In a brief opinion last year, Gilbane Building Co./TDX Construction Corp., et al. v. St. Paul Fire and Marine Insurance Company, the New York Court of Appeals found the construction manager was not covered as an “additional insured” by the GC’s policy. One small phrase in the insurance policy sealed its fate: “with whom.”

The “Who is an Insured” section of the policy read: “any person or organization with whom you have agreed to add as an additional insured by written contract.” The New York Court of Appeals held that the phrase “with whom” clearly meant that a party qualified as an additional insured only if it had a contract directly with the holder of the policy. Because the construction manager had no direct contract with the general contractor, it was out of luck.

This holding makes a potential minefield out of a once reliable method of allocating risk among the various entities involved in complex construction contracts. All parties should read their policies carefully to ensure that coverage for additional insureds does not require privity of contract.

What language will be sufficient to cover designated entities as additional insureds? A few options are available:

• A blanket additional insured endorsement, such as the CG 20 33 04 13, provides additional insured coverage to “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 agreement that such person or organization be added as an additional insured on your policy.” This endorsement would have been effective in Gilbane. Rather than requiring contractual privity between the construction manager and the general contractor, it would only require the construction manager to be named as an additional insured in the contract between the general contractor and the owner.
• A similar blanket additional insured endorsement, such as the CG 20 38 04 13, includes the same language as the previous example, plus a provision including as an additional insured “any other person or organization you are required to add as an additional insured under the contract or agreement described . . . above.” This endorsement would also have been effective in Gilbane because the general contractor was required by its contract with the owner to include the construction manager as an additional insured.
• A scheduled endorsement, such as the CG 20 10 07 04, provides additional insured coverage to “any person(s) or organization(s) shown in the Schedule.” This endorsement would have been effective in Gilbane as long as the construction manager properly appeared on the Schedule for the general contractor’s policy. The risk with this option is that a clerical or other error might result in the omission of a party from the Schedule.
• Language in the construction contract may also be effective to satisfy the contractual privity requirement. For instance, a subcontract might include language such as: “The Subcontractor agrees, for the purposes of additional insurance coverage only, that the Work is being performed for all the Additional Insureds, and that the Subcontract is an agreement between the Subcontractor and all the Additional Insureds to provide additional insured coverage.” Such a provision effectively creates a contractual relationship between the party providing the insurance coverage and any additional insureds under the policy.

Owners should ensure that the right language is included to properly reflect its intent that an additional insured need not have a direct contract with the insured party. General contractors will likewise want to ensure that the right language flows to downstream parties if the owner so requires.