Additional Insured Coverage: Don't Overlook Auto Insurance
by Gregory Podolak
In the world of construction risk transfer, additional insured risk transfer heavily focuses on general liability insurance. Modern construction contracts typically also require a subcontractor (the downstream party) to name upstream parties as additional insureds on their auto insurance. In many scenarios, this component of the risk transfer agreement among the parties winds up being the most relevant, yet it is not always considered when developing a loss recovery agenda.
For general liability insurance, additional insured coverage is customarily obtained through a blanket endorsement to the policy. Additional insured coverage usually provides an upstream party protection from claims that "arise out of" or are "caused, in whole or in part by" the downstream party's acts or omissions. However, even if an owner or general contractor is an additional insured on their subcontractor's liability policy, these policies contain an automobile exclusion that can broadly apply to many claims involving the use of an automobile, including loading and unloading. Depending on the applicable law and relevant facts, even a minimal relationship of an auto to the alleged harm can implicate the exclusion. In this scenario, the downstream auto insurance can become a vital insurance recovery asset.
Accessing coverage on a downstream parties' auto insurance is achieved slightly differently, however. Additional insured endorsements can be added to auto policies; however, these endorsements are not always commonplace or consistently procured. Auto policies may also include designated insured endorsements, which merely provide coverage to a specifically named party "but only to the extent that person or organization qualifies as an 'insured' under the Who Is An Insured provision" of the policy.1 In a sense, these endorsements are promising nothing more than what is already provided under the policy.
Additional Insured Coverage Via Omnibus Clause
The most common approach is an omnibus clause, which recognizes a number of ways a party can qualify as an "insured." A standard provision defines an "insured" in the pertinent part as the following.
Who Is An Insured
The following are 'insureds':
You for any covered 'auto'
c. Anyone liable for the conduct of an 'insured' described above but only to the extent of that liability. ("Provision c.")
Provision a. is the most understood and utilized provision of the omnibus clause because it provides coverage for "you" (meaning, the named insured), and the named insured is the individual or company who paid for the policy. Provision c. extends coverage to other parties and, as liability and additional insured coverage are conceptually coextensive, can include those entities seeking additional insured coverage (technically, those parties would be an "Insured" in this scenario). Therefore, even in the absence of an additional insured endorsement, the policy may still provide insured status.
Additional Insured Coverage Via Vicarious Liability
In New York, for example, New York Labor Law § 240(1) holds owners and contractors vicariously liable for the operations of its subcontractors regardless of the owner or contractor's fault or negligence, or a direct contract between the parties. The New York Appellate Division has held that since Labor Law § 240 holds a general contractor liable for its subcontractor's actions, it triggers coverage for the general contractor under the provision of a subcontractor's auto policy that states an insured is "[a]nyone else who is not otherwise excluded … and is liable for the conduct of an 'insured' but only to the extent of that liability." See Paul M. Maint., Inc. v. Transcon. Ins. Co., 300 A.D.2d 209, 211, 755 N.Y.S.2d 3, 5 (N.Y. App. Div. 1st Dep't 2002) (where a subcontractor's employee was injured when a piece of equipment fell from the covered auto while it was being loaded onto the truck.).
Similarly, in Employers Ins. Co. of Wausau v. Harleysville Preferred Ins. Co., 2016 WL 815277 (S.D.N.Y. Feb. 29, 2016),2 the district court, applying New York law, found an owner and contractor to be additional insureds on a subcontractor's auto policy. The policy defined an insured as "anyone liable for the conduct of an insured … but only to the extent of that liability" and the claims against the owner and contractor included claims that the parties were vicariously liable for the subcontractor, specifically, claims under N.Y. Labor Law § 240 and 241.3 Id. at 10*.
Under Texas common law, an owner or general contractor can be held vicariously liable for physical harm caused by a subcontractor if the owner or general contractor controls the details or methods of the subcontractor's work "to such an extent that the subcontractor cannot perform the work as it chooses." See Indian Harbor Ins. Co. v. Valley Forge Ins. Group, 535 F.3d 359, 363 (5th Cir. 2008) (applying Texas law). In Indian Harbor, a general liability insurer who defended a general contractor against claims brought by the premise owner brought an action against the auto insurer of the contractor's subcontractor, seeking to recover attorneys' fees and settlement costs. The subcontractor's auto policy defined an "Insured" as "anyone liable for the conduct an insured described above, but only to the extent of that liability."
The district court, applying Texas law, notes that this definition creates insurance coverage for anyone who is vicariously liable for the conduct of the subcontractor. Id. at 363. However, when analyzing the underlying complaint, the district court found that the complaint did not plead sufficient facts to allege that the contractor was vicariously liable for the subcontractor's conduct. Id. at 364. Accordingly, the auto insurer had no duty to defend the contractor.
Similarly, the circuit court in Category 5 Mgmt. Group LLC v. National Cas. Ins. Co., 480 Fed. App'x 536, 538 (11th Cir. 2012), applying Georgia law, held that under Georgia law, "liable for the conduct of an insured" is synonymous with vicarious liability. However, the circuit court held that since the complaint did not allege or give notice of vicarious liability, the insurer had no duty to defend the party seeking additional insured coverage.
Accordingly, in states that recognize common-law vicarious liability when an owner or contractor asserts a certain amount of control over its subcontractor's work, the allegations of such control should satisfy Provision c. of the auto policy and pave the way to a duty to defend. In both Indian Harbor and Category 5, the courts were looking to the pleadings to determine whether the facts pled were enough to allege vicarious liability. Likewise, a pleading of a statute that creates vicarious liability of an owner or general contractor for the actions of its subcontractors, like New York Labor Laws, may be enough to obtain a defense under a subcontractor's auto policy.
Additional Insured Coverage Via the Relationship
Importantly, the analysis of this provision can vary from jurisdiction to jurisdiction. Some courts require evidence of a direct contract or a principal-agent relationship between the named insured and the party seeking additional insured coverage.4 Other courts have interpreted this provision to grant coverage merely when the party seeking coverage is or is alleged to be vicariously liable for the actions of the named insured.
In Progressive Cas. Ins. Co. v. Brown's Crew Car of Wyoming, Inc., 27 F. Supp. 2d 1288 (D. Wyo. 1998), for example, Brown's Crew Car of Wyoming, Inc. ("Brown"), entered into a contract with Corporate Lodging Consultants, Inc., d/b/a Crew Transport Service Company ("CTS"), to provide transportation services for Union Pacific Railroad Company's ("UP") employees.5 The CTS/Brown Contract required Brown to maintain insurance for the benefit of UP.
Subsequently, UP's employees were injured during Brown's transportation, and the employees sued both Brown and UP for negligence.6 Brown and UP argued that UP was an insured on Brown's auto policy under the provision of the policy, which states an "insured" is "[a]nyone liable for the conduct of an insured described above …" because UP was acting as Brown's principal and is liable for Brown's negligence. Id. at 1292. The federal district court, applying Wyoming law, did not find a principle-agent relationship to exist because "Brown had no direct contractual or employment relationship with UP whereby UP could control Brown's actions" and "[w]ithout a contractual or employment relationship with Brown where UP exerted some measure of control, Brown should not be considered UP's agent." Id. Therefore, the court did not find coverage for UP on Brown's auto policy.
Although Progressive is not a construction case, the contractual relationships between the parties in Progressive are similar to the relationships found within the construction industry, an owner/upstream party requiring the general contractor/downstream party and all other parties the general contractor contracts with (subcontractors) to name the owner as an additional insured on its insurance policies. The district court in Progressive focused on a principal-agent relationship to obtain coverage under the policy and that such relationship required a direct contract between the parties. In many scenarios, like the one in Progressive, the party seeking additional insured coverage does not have a principal-agent relationship and may not have a direct contract with the named insured. However, some states have common laws or statutes that create vicarious liability among certain parties within the construction industry where a direct contract does not exist. Vicarious liability created by these laws may trigger, at the very least, defense coverage for an additional insured under Provision c. on an auto policy.
Ultimately, when an accident occurs on a construction site involving any form of automobile, it is important to recognize the significance to downstream risk transfer. General liability insurance may not be available but auto insurance may. The downstream parties' auto insurance should be incorporated into the insurance recovery agenda, put on notice, and treated as an insurance asset directly available to the upstream party (including consideration of all rights and obligations). Do not be deterred if the policy lacks a dedicated additional insured endorsement; coverage may still be available through Provision c.