Insurance coverage issues arise in almost all construction cases. Several rather recent cases that have a direct impact on tenders of defense and pursuit of coverage from subcontractors have been decided and two of them are discussed in some detail below. First in Westfield Ins. Co. v. FCL Builders, the First District of the Illinois Appellate Court interpreted an additional insured endorsement and denied coverage to a general contractor who had tendered its defense to the plaintiff’s employer, finding that the additional insured endorsement required a direct contract between the general and the employer. Since that case came out two U.S. District court cases have referenced the Westfield decision and neither followed it.
In a second, A-1 Roofing Co. v. Navigators Ins. Co., the First District of the Illinois Appellate Court interpreted an additional insured endorsement finding that coverage was afforded a general contractor despite the fact that the subcontractor and named insured providing the coverage was not named in the underlying suit and despite there being a caveat in the endorsement that coverage would not be afforded to an additional insured for its “sole negligence.” Further that court found that the carrier’s failure to act on the tender resulted in the carrier being estopped from asserting policy defenses.
Westfield Ins. Co. v. FCL Builders
In Westfield Ins. Co. v. FCL Builders, 407 Ill. App. 3d 730; 948 N.E.2d 115 (2011) FCL was a general contractor hired to build a building. FCL contracted with an iron fabricator, Suburban Iron Works, to perform all of the structural steel work. Suburban, in turn, sub-subcontracted with JAK Steel to do the erection work. The plaintiff in the underlying case was a JAK Steel employee that was allegedly injured while on the FCL job.
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FCL’s direct contract with Suburban required Suburban to name FCL as an additional insured, and also required Suburban to have all of its lower tier subcontractors also name FCL as an additional insured. Suburban’s contract with JAK required JAK to name FCL as an additional insured, and also incorporated by reference Suburban’s contract with FCL. In short, JAK was contractually required to purchase an insurance policy that would cover itself, Suburban and FCL.
JAK purchased its GL insurance through Westfield. The Westfield policy contained an additional insured endorsement which read in pertinent part:
A. Section II – Who is an Insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such a 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.
When the JAK employee was injured, FCL was sued. FCL tendered to Westfield which rejected the tender. Westfield argued that the plain language of the above additional insured endorsement extended coverage only to entities that had a direct written agreement with JAK requiring them to be added to the policy. Discovery revealed that JAK understood it was required to add FCL as an additional insured to its policy. Further a certificate of insurance was issued to FCL noting that FCL was indeed an additional insured under JAK’s policy with Westfield. Despite the foregoing Westfield denied coverage. Westfield contended that the plain language of the additional insured endorsement required a direct contract between FCL and JAK in order for FCL to get the benefit of additional insured status.
The Illinois Appellate Court for the First District agreed with Westfield and found that because there was no evidence in the record that JAK had a direct written contract with FCL for FCL to be an additional insured, Westfield had no obligation to provide FCL coverage. The court further noted that JAK’s contract with Suburban and JAK’s contractual obligations requiring FCL to be named as an additional insured had no bearing on the agreement between Westfield and JAK, (namely the policy) which the court held required a direct contract between FCL and JAK. Further, the court ruled that the certificate of insurance, which indicated it “was issued as a matter of information only and confers no rights upon the certificate holder. The certificate does not amend, extend or alter the coverage afforded by the policies below,” plainly stated on its face that it did not circumvent the coverage obligations contained within the Westfield policy or create coverage.
Within four months of that case being decided, the U.S. District Court for the Northern District of Illinois decided Ryan Companies US Inc., et al. v. Secura Insurance Co. 2011 US Dist. Lexis 79276. Interestingly Westfield was a co-plaintiff and insurer of Ryan Companies, US and it appears it and Ryan were taking the opposite position in that case as Westfield took in the Westfield case cited above. It contended that its named insured, Ryan Companies, Inc., was entitled to additional insured status on a Secura policy issued to a sub-subcontractor B&N Heating & Air Conditioning, Inc., despite the fact that Ryan had no direct contract with B&N. The endorsement on the Secura policy contained essentially the identical endorsement as the Westfield policy cited above. Secura cited the Westfield v. FCL Builders case against Westfield. However, without ever reaching a decision, the court decided that Ryan was entitled to pursue additional discovery from Secura relative to Secura’s denial of its tender of defense and to pursue a complete copy of Secura’s policy to see all possible avenues of pursuing coverage from Secura. However, the US District Court stated “as for the Westfield decision, while the case is clearly suggestive, it is equally clear that the decision is not binding here.” Thus, the Court opened up the possibility of refusing to follow the Westfield decision and giving its own interpretation to the subject endorsement.
In August of 2011, the United States District Court for the Southern District of Texas, in Millis Development & Construction and Mt. Hawley Ins. Co. v. American First Lloyds Ins. Co., 2011 US Dist. Lexis 90022, cited and disagreed with the Westfield decision under circumstances similar to the Westfield v. FCL case discussed above. Interpreting the same additional insured endorsement, the Texas U.S. District Court “rejects the notion that plain meaning can be derived from a policy provision by adding words and requirements that limit coverage.” The Texas Court stated that by adding the word “between” and interpreting the use of the word “such” as requiring a direct contract between the sub-subcontractor and the general contractor the Westfield Court was modifying the terms of the endorsement circumventing coverage. The Texas Court ruled that the same endorsement did not contain the words “direct” or “between” and found that because the general contractor and its subcontractor had a written agreement requiring that the sub-subcontractor name the general as an additional insured, and because the subcontractor and the sub-subcontractor had a written agreement requiring the general contractor be named as an additional insured, the two separate contracts complied with the letter of the endorsement. In other words, they interpreted the endorsement language “when you and such a person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured,” as not requiring one agreement directly between the two parties, but that the provision could be met with two separate contracts agreeing to the obligation. The Texas Court stated that because the general contractor had agreed in writing that it would be named on the employer’s policy, and the employer had agreed in writing that the general contractor would be named on its policy, that triggered the additional insured endorsement, and there was no specific wording within that paragraph that required the contracts to be with one another directly. Based upon its interpretation of the same additional insured endorsement as was interpreted in the Westfield case, the United States District Court for the Southern District of Texas found that coverage was provided to the general contractor.
A-1 Roofing Co. v. Navigators Ins.,
A-1 Roofing Co. v. Navigators Ins., 2011 Ill. App. LEXIS 656, June 24, 2011, Decided, As Corrected November 21, 2011. A-1 was a general contractor for a roof surfacing job and A-1 hired Jack Frost to perform certain work on the site. Its contract required the procurement of an additional insured endorsement for the benefit of A-1. The plaintiff was an employee of a sub-subcontractor of A-1 killed on site when a boom lift he was operating flipped over while working on the project. The boom had been leased by still another subcontractor, Bake’s Steel Erectors. Plaintiff’s estate brought suit against A-1, Bake’s and two other defendants. Frost was neither sued nor mentioned in the complaint. A-1 tendered its defense to A-1’s carrier, Navigators. Navigators additional insured endorsement indicated that coverage was not afforded for any claim arising out of “the sole negligence of any additional insured or their agents/employees.” Based on its interpretation of the endorsement and the fact that the suit did not name Frost, Navigators denied A-1’s tender, asserting A-1 was sued for its own negligence. The trial court found Navigators had no duty to defend or indemnify because the complaint did not state a cause of action against the named insured Frost. A-1 contended that they were entitled to coverage for any liability arising out Jack Frost’s work, including that arising from lower tier subcontractors such as Bake’s.
The Appellate Court reversed the lower court, agreeing with A-1 on appeal. First, the Appellate Court held that the “arising out of” language in the policy applied to the lower tier subcontractors triggering the policy endorsement. Further, because the plaintiff had sued other parties, including Bake’s and two other entities, the allegations in the face of the complaint were not based “solely” on the acts or omissions of A-1. A-1 was the only additional insured on Jack Frost’s policy. By the terms of the endorsement for the sole negligence provision to apply the underlying negligence allegations needed to be exclusively, entirely or single-handedly attributable to A-1. Because three other parties were named in the underlying case, the policy language excluding coverage when the accident was solely, exclusively, entirely or single-handedly due to A-1’s conduct did not apply. As such, the court found that coverage was afforded.
Further, A-1 had asserted that Navigators should be estopped from disclaiming coverage because they took no action in response to A-1’s tender other than to deny it. The court reiterated the rule set forth in 1999 in The Employer’s v. Ehlco Liquidating Trust, 186 Ill. 2nd 127, 150, 708 N.E.2d 1122 (1999), that an insurer that believes an insured is not covered under its policy cannot simply refuse to defend the insured. Rather, the insurer must either defend the suit under a reservation of rights or seek a declaratory judgment action that there is no coverage. Because Navigators failed to do either one, and because their decision was wrong, the court found Navigators was estopped from asserting policy defenses to coverage against A-1.
The lessons to be learned from the foregoing is for contractors to seek copies of the actual additional insured endorsements affixed to subcontractor and lower tier contractor insurance policies so that they can make sure that said endorsements match the requirements of the contract and, where necessary, contracts can be drawn up that conform to the language of endorsements such that the endorsements provide the benefit desired. Given the nature of many endorsements being added to policies to “provide” additional insured coverage and given that certificates of insurance typically contain disclaimers, seeing a certified copy of the actual policies with endorsements should provide the most complete information for confirming that the coverage sought and required by contract is the coverage actually being provided.