Policyholders are cautioned to continue to scrutinize the insurance policies of retained contractors and subcontractors before the commencement of work.
Construction projects commonly transfer the risk of third-party claims through indemnification and additional insured coverage under commercial general liability policies. A recent decision out of the New York Supreme Court Appellate Division – Second Department further restricted access to additional insured coverage by imposing a privity of contract requirement.
The court in New York City Housing Authority v. Harleysville Worcester Insurance interpreted an additional insured endorsement to require privity of contract between the named insured and the party seeking additional insured status. 226 A.D.3d 804, 807 (2d Dep't 2024). In this case, the site owner, Oceanhill LLC, entered into a contract with general contractor Blue Sea Construction. Subsequently, the general contractor entered into a contract with A&R Electrical Maintenance, a subcontractor, to perform electrical services in connection with the project. Under the subcontract, A&R agreed to defend, indemnify and hold the general contractor and site owner harmless for any claims arising from the negligence or omission of A&R. The subcontractor also agreed to procure and maintain a general liability policy naming the site owner, general contractor and another defendant as additional insureds.
An individual was injured while working for the subcontractor. He brought an action for bodily injury against A&R, the general contractor and the site owner. Id. at 806. Subsequently, the general contractor, site owner and the noncontractor parties brought an insurance coverage action seeking a ruling that the subcontractor’s insurance was obligated to defend and indemnify them as additional insureds in the underlying action. The trial court ruled against the insurance company, but on appeal, the Second Department reversed the trial court. The Second Department ruled that the subcontractor’s insurance endorsement included the prepositional phrase “for whom,” and therefore privity of contract was required with the named insured in order for the owner to be afforded additional insured status. Since the general contractor had a direct contract with the subcontractor, the general contractor qualified for additional insured status but the site owner was not afforded coverage despite being listed as an obligatory additional insured in the subcontract. This case similarly follows the New York Court of Appeals ruling in Gilbane Building Co./TDX Construction v. St. Paul Fire & Marine Insurance, 31 N.Y.3d 131 (2018), whereby the Court of Appeals confirmed the First Department’s finding that the prepositional phrase “with whom” also required privity of contract in order for a party to be afforded additional insured status.
Policyholders are cautioned to continue to scrutinize the insurance policies of retained contractors and subcontractors before the commencement of work. In addition, both owners and contractors should mandate that subcontractors not use, or at a minimum disclose, any insurance endorsement forms that contain a prepositional phrase relating to privity of contract as a condition of additional insured status. Endorsements that include a schedule for a designated location where the policyholder is performing or has performed work "for that additional insured," without referring to the need for a written contract, should not run afoul of the decision.
For More Information
If you have any questions about this Alert, please contact Kenneth H. Lazaruk, Brian A. Shue, Michelle Ranello, Michael C. Ferri, any of the attorneys in our Construction and Engineering Industry Group or the attorney in the firm with whom you are regularly in contact.
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