New York Insurance Coverage Law Update

June 29, 2023 | Alan C. Eagle | Insurance Coverage

Second Circuit Finds That Subcontract Did Not Incorporate GC’s Obligation To Obtain Additional Insured Coverage For Owners And That GC’s Primary Policy Was Primary To GC’s Additional Insured Coverage Under Sub’s Umbrella

The owners hired a general contractor (GC) insured by Amerisure to build a movie theatre, and the GC hired a masonry subcontractor (Sub) insured by Selective under a primary and umbrella policy.  The Sub’s employee was injured, and he sued the owners and the GC.  The Sub’s insurer defended the GC as an additional insured, but maintained that its umbrella policy was excess to the GC’s own primary policy and denied additional insured coverage to the owners.  A declaratory judgment action ensued, and the Second Circuit agreed with the Sub’s insurer.

The court held that the Sub’s insurer did not owe additional insured coverage to the owners because the Sub’s policy only provided additional insured coverage where required by written contract, and the “text of the Subcontract” did not require that the Sub name the owners as additional insureds.   Although the GC’s contract with the owners obligated the GC to obtain additional insured coverage for the owners, and the Sub agreed to be bound by and to assume certain obligations in the GC’s contract, the court stated that New York law “narrowly construes incorporation clauses in subcontracts” that purportedly bind a subcontractor to provisions in the general contract that do not relate to the work to be performed by the subcontractor.

The court also found that GC’s additional insured coverage in the Sub’s umbrella policy would be excess to the GC’s own primary policy because a “traditional priority of coverage analysis” based upon a comparison of the policies’ “other insurance” clauses supported this result.  The court rejected the argument that the Sub’s agreement to indemnify the GC in the Subcontract should “effectively require” the Sub’s umbrella policy to provide coverage primary to the GC’s policy under the Second Circuit’s earlier decision in Century Surety Company v. Metropolitan Transit Authority, 2021 U.S. App. LEXIS (2d Cir. Oct. 5, 2021).   The court acknowledged that its earlier decision concluded that a trade contract could override a traditional priority of coverage analysis as a matter of “judicial economy” because “an indemnitee’s insurer should not have to bring a separate suit to enforce an indemnity agreement that would nullify the court’s earlier decision regarding priority of coverage.”  However, the court distinguished its earlier decision because, here: (i) the indemnity agreement was not raised by the GC’s insurer at the trial court level, and (ii) the court in the underlying personal injury action found the indemnity provision void, and the GC’s insurer provided “no credible reason” to disagree with this finding.  [Amerisure Ins. Co. v. Selective Ins., 2023 U.S. App. LEXIS 11332 (2d Cir. May 9, 2023).

First Department Holds That Additional Insured Endorsement Should Be Reformed To Identify Current Owner Of Premises

This coverage action arose out of a personal injury action filed against the current owner of premises located in New York City.  Pursuant to the tenant’s lease with the prior owner, the tenant added the prior owner of the premises as an additional insured under its policy with Fulmont Mutual Insurance Company.  However, the additional insured endorsement was not updated to identify the current owner when the premises was sold.  Fulmont disclaimed coverage to the current owner on the basis that it was not an additional insured under its policy.   The Appellate Division, First Department, affirmed summary judgment to the current owner and its insurer reforming the policy to replace the prior owner with the current owner as an additional insured, reasoning that the policy “always extended coverage” to the owner of the building as an additional insured so “the fact that the endorsement was never updated by the tenant to reflect a mere change in ownership is of no moment.”  The court also held that Fulmont failed to timely disclaim based on an exclusion in its policy.  [Wesco Ins. Co. v. Fulmont Mut. Ins. Co., 2023 N.Y. App. Div. LEXIS 2650 (1st Dep’t May 11, 2023).]

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