The Words Matter: Insurance Carrier has Duty to Defend Upstream Contractor
By Suzanne Sutherland
Last month, a federal court ruled that a second tier subcontractor’s insurance carrier had a duty to defend and indemnify a general contractor under an additional insured (AI) endorsement. The court reached this conclusion even though the second tier subcontractor was not a party to the lawsuit. The court also looked beyond the complaint to determine whether actions of the second tier subcontractor as named insured could result in liability for the general contractor and first tier subcontractor. The court broadly interpreted the AI endorsement in determining that coverage was not limited to the additional insured’s vicarious liability for actions of the named insured.
In First Mercury Insurance Company v. Shawmut Woodworking & Supply, Inc. , three iron workers were injured and a fourth was killed during installation of a steel web structure at Yale University. All four were employed by Fast Trek Steel, the second tier subcontractor and named insured. The general contractor, Shawmut Woodworking & Supply, subcontracted steel fabrication to the Shepard Steel Company (the first tier subcontractor). Shawmut and Shepard sued Fast Trek’s insurance carrier, First Mercury, alleging that First Mercury had a duty to defend and indemnify both Shawmut and Shepard under the AI endorsement.
Using ISO form language, the AI endorsement required that each additional insured “agreed in writing in a contract” to be covered as an additional insured. The court reasoned that multiple writings satisfied this requirement. The court determined that reading in a single writing requirement would improperly narrow the scope of the coverage. Taking both the Shawmut-Shepard and Shepard-Fast Trek contracts together constituted the necessary agreement that Shawmut was an additional insured. The court stated that if First Mercury intended that the “in writing in a contract” language required a single contract, or contractual privity, between the named and additional insureds, the endorsement must use words like “direct” or “between” in reference to the contract.
The endorsement stated that coverage would be provided if an additional insured was held liable for the acts or omissions of the named insured. Because the underlying complaint alleged facts establishing that the injury arose out of the named insured’s operations performed for the general contractor, the court held that the named insured need not be a party to the lawsuit. The allegations in the complaint created potential for finding a situation where the injuries were caused, at least in part, by the acts or omissions of the named insured. Therefore, investigative reports and other documents beyond the complaint itself could properly be considered. Finally, the ISO form language used in the AI endorsement did not limit coverage to vicarious liability of the named insured. The court focused on the requirement that liability be “caused in whole or in part” by the named insured. Because it is impossible to be partially vicariously liable, the endorsement’s use of the phrase “in part” mandated broader coverage. The court suggested that First Mercury could have included different language had they intended to limit coverage to vicarious liability.
In conclusion, the exact wording of the Additional Insured Endorsement is critical to whether the insurance carrier will have a duty to defend and indemnify an upstream contractor. This recent case suggests that at least some courts favor a broader interpretation of the AI Endorsement.1 First Mercury Ins. Co. v. Shawmut Woodworking & Supply, Inc., No. 3:12CV1096, ___ F. Supp. 3d ___ (D. Conn. Sept. 23, 2014).