Gallet Dreyer & Berkey, LLP | <h2 >DON’T DEPEND UPON BLANKET ADDITIONAL INSURED ENDORSEMENTS -  <br > Just Because the Contract Directs You to be Named an Additional Insured Does Not Necessarily Mean You Are </h2 >
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Just Because the Contract Directs You to be Named an Additional Insured Does Not Necessarily Mean You Are 

1/17/2017 | By: Eugene H. Goldberg, Esq. | GDB 2017 Winter Newsletter
Construction is a risky business.  Liability insurance spreads the risk.  Millions of dollars of liability insurance is needed to protect a real estate owner or a construction manager (“CM”).  They rely on their own insurance policies and require downstream construction participants (contractors, subcontractors, second tier subcontractors, etc.) to obtain liability policies naming the owner/CM as an additional insured (“AI”).  The AI coverage, outlined in an endorsement, provides that a downstream participant’s insurer will treat the owner/CM (those “upstream”) as also being insured, and defend and settle claims brought against the owner/CM.

Blanket endorsements are now being issued providing restricted AI coverage. This issue arose in a recent court case, Gilbane Building/TDX v. St. Paul Fire & Marine Ins. Co.  A public works owner hired a contractor and required the contractor to name the owner and CM as AI.  The contractor’s insurance policy contained an unartfully crafted blanket endorsement including as AI any person/organization “with whom you have agreed to add as an additional insured by written contract…” However, the contractor entered into a contract with only the owner, not the CM.
The insurer successfully argued that the CM was not an AI because there was no direct contract between CM and contractor.  The Court majority held that the endorsement limited AI coverage: to the person with whom the contractor contracted, and did not include the persons who the contractor had agreed to add.  The dissenting judge complained that the endorsement “on its face is poorly drafted in terms of syntax” and would have deleted the word “with.” The decision obviously hinges upon the language of the blanket endorsement.

Notwithstanding that the contractor had agreed to procure AI coverage for the CM, the insurer only had to provide AI coverage to those immediately upstream, e.g. the owner.
Based on the language in this endorsement, and applying the reasoning of this court decision, AI coverage would be denied to:

  1. the owner on a subcontractor’s policy;

  2. the contractor on a second tier subcontractor’s policy;

  3. a condominium/cooperative under a unit holder/cooperator’s alteration agreement from a contractor’s insurer; and

  4. a lender (on a building loan) on a developer’s contractor’s policy.

Gilbane has other ramifications as well. Construction in a crowded city often requires the owner’s contractor to work on a neighbor’s property.  The owner and neighbor typically enter into a license agreement allowing the contractor access to the neighbor’s property.  The license agreement requires the contractor to make the neighbor an AI.  In addition, the City must be named as an AI by a contractor on non-public work under New York City Department of Buildings’ regulations.  Under the reasoning of the Gilbane decision, the contractor’s policy would not cover the neighbor or perhaps the City as an AI.
What is to be done?  Unless one retains an insurance professional to review each policy, one can no longer depend upon advice that there is a blanket AI endorsement.  We recommend that an upstream client obtain from each downstream participant an AI endorsement on ISO form CG 2010 or CG 2037 with the project and each of the intended insured’s names written on the form.  The endorsement must be transmitted directly by the insurer to the upstream client.
The benefits of blanket AI endorsements are becoming illusory.  As a result, insurers will incur expense in writing project specific endorsements.  Those upstream must be diligent in monitoring those downstream for procurement of required insurances.