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Privity Required for AI Coverage

April 16, 2018

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In a recent decision, the New York Court of Appeals highlighted the perils of awkward policy wording in additional insured endorsements on construction contracts.  The Court's focus on one word in the endorsement meant that the owner's construction manager was not entitled to additional insured status on the general contractor's policy.  In light of the inconsistent treatment regarding whether "blanket" additional insured endorsements require direct contractual privity, parties should be very conscious of the particular language in their additional insured endorsements going forward.
In <em>Gilbane Building Co./TDX Constr. Corp. v. St. Paul Fire and Marine Ins. Co.</em>, the contract between the owner and the construction manager required the general contractor, whether retained by either party, name the construction manager as an additional insured s.  Ultimately, the owner retained the general contractor, and as such, was not in direct contractual privity with the construction manager.  The general contractor's policy endorsement stated that additional insureds included "any person or organization <strong>with whom</strong> you have agreed to add as an additional insured by written contract . . ." (emphasis added).  After the excavation work on the project resulted in structural damage, the owner sued the architect, who in turn sued the construction manager.  When the construction manager sought coverage under the general contractor's policy, the insurer denied coverage on the ground that it was not an additional insured under the policy.
The Court of Appeals held that the blanket endorsement was "facially clear" and the phrase "with whom" "can only mean that the [named insured's] written contract must be 'with' the additional insured."  Thus, because the general contractor did not enter into a contract "with" the construction manager, the construction manager was not someone "with whom" they had agreed to include as an additional insured.  Significantly, the court also said that, absent the word "with", the construction manager would have been covered under the policy.
This ruling emphasizes the importance of specific wording in additional insured endorsements.  Going forward, project managers retained by owners may insist on reviewing the insurance procured by the owners' contractors to avoid a similar result.  At the very least, the parties need to carefully review the scope of their coverage before the commencement of a project to avoid unintended consequences.
Thanks to Douglas Giombarrese for his contribution to this post.
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