The Use of Excess Clauses in Additional Insured Endorsements

By Glenn A. Kaminska and Brendan T. Fitzpatrick

With a split in the appellate divisions realized, the Court of Appeals has made its first determination pertaining to the use of excess clauses in additional insured endorsements. The use of these excess clauses had become an industry-wide practice for some time. In the construction site accident litigation context, the excess language sought to limit the exposure of carriers who wrote business for subcontractors. These endorsements, combined with the benefits of the Workers’ Compensation Reform Act of 1996, served as a cushion for these carriers. In Pecker Iron Works of New York, Inc. v Travelers Insurance Co., [i] the Court of Appeals has decided that at least one of these endorsements will apply on a primary basis. The question that remains, however, is whether the Pecker decision squarely addressed the split in the judicial departments.

At issue in Pecker was the Travelers additional insured endorsement that provides as follows:

1. WHO IS AN INSURED (SECTION II) is amended to include as an insured any person or organization (called hereafter “additional insured”) whom you have agreed in a written contract, executed prior to loss, to name as additional insured, but only with respect to liability arising out of “your work” or your ongoing operations for that additional insured performed by you or for you.
   
   
2. With respect to the insurance afforded to Additional Insureds the following conditions apply:
   
   * * *

   b. This insurance is excess over any valid and collectible insurance unless you have agreed in a written contract for this insurance to apply on a primary or contributory basis.

Background

On October 18, 1996, James Jansen, an employee of Upfront Enterprises, Inc., sustained personal injuries when he fell at a job site. Previously, on September 17, 1996, Pecker Iron Works, Inc., entered into a contract with Upfront to perform work at the site. The contract provided, in pertinent part, that:

“You are to furnish [Pecker] with Certificates of Insurance for Liability and Workers’ Compensation and name Pecker Iron Works, Inc. as an additional insured.”

In combining the language of the contract with the language of the policy, Travelers argued that Pecker was entitled to coverage but only on an excess basis. The trial court agreed with this assessment and granted Travelers summary judgment. The Appellate Division, Second Department, reversed finding that:

“…there is no basis for the insurance company’s contention that it was not obligated to provide primary coverage unless the terms of the subcontract specifically provided that the insurance applied on a primary basis…”

The Court of Appeals has now affirmed. The court determined that it was undisputed that Travelers provided Upfront with primary coverage and that Upfront agreed to make Pecker an additional insured. The court found that an additional insured is a recognized term in insurance contracts, and the understood meaning of the term is “an ‘entity enjoying the same protection as the named insured.’”[ii] It further held that when Pecker engaged Upfront as a subcontractor whereby Upfront agreed in writing that it would name Pecker as an additional insured, the parties agreed that Upfront’s carrier would provide Pecker with primary coverage on the risk. As Travelers’ policy was written to provide primary coverage to any party with whom Upfront had contracted in writing for insurance apply on a primary basis, the agreement by Upfront to name Pecker as an additional insured satisfied the policy provision.

‘Specifically Requires’

Interestingly, in affirming the Second Department, the court did not directly address the split that has arisen in the judicial departments. The reason for this may be simply that the split in the departments was not before the court. In both Hartford v LoBrutto,[iii] and Maxwell v Toys R’ Us[iv], the policy provisions stated that the coverage provided to the additional insured “was excess over any other valid and collectible insurance available to the additional insured…unless a contract specifically requires that the insurance be primary”. The same policy language was also addressed in Jackson v County of Monroe [v], wherein the Fourth Department granted summary judgment in favor of the carrier. The “specifically requires” language was not contained in the Travelers endorsement.

At oral argument, the Court of Appeals was made aware that the split in the appellate divisions was not truly before it. Counsel pointed that the language of the Travelers endorsement, at issue, was weaker than the “specifically requires” language. It was presented that the court did not need to decide whether or not the “specifically requires” language meant that the word “primary” must appear in the insurance procurement portion of the subcontract in order for the endorsement to apply. The court may have accepted this invitation to ignore the split in the Departments and limit its ruling to the Pecker case. In fact, the court may have attempted to limit the scope of its decision when it stated that:

Pursuant to the policy provision at issue, Travelers agreed to provide primary insurance… (emphasis added)

If the decision is to be limited to only that endorsement at issue, then it is questionable whether or not the “specifically requires” language contained in other additional insured endorsements has been ruled upon. Accordingly, the effect of the Pecker decision on these other endorsements cannot be clearly established.

There is language in the Pecker decision that hints how the Court may decide the split in the Departments when it is presented. Specifically, that portion of the decision wherein the court found that an agreement whereby the subcontractor agrees to name the general contractor as an additional insured is tantamount to an agreement to allow the entity to enjoy the same protection as the named insured. This apparently means “primary coverage”. Accordingly, it can be argued that a request for additional insured status by its very nature “specifically requires” primary coverage. This, combined with the Judges’ questioning as to the equity of allowing a carrier to attach an excess endorsements where the purported additional insured would have no knowledge of same, hints that the court may not allow the excess language of such an additional insured endorsement in the future.

Carriers will argue that the clear and unambiguous language of the endorsements should be honored. The policy should benefit from the rules regarding insurance contract interpretation.[vi] Even if this means that the named insured/subcontractor is found to have failed to procure the insurance it had agreed to purchase and is liable for the attendant damages.[vii]

Conclusion

The Court of Appeals has taken the first step in clarifying the effect of excess language in additional insured endorsements. However, with the split in the judicial departments still looming, and with literally millions of dollars at stake, another step will be needed to end the debate. Whether the “specifically requires” language has any effect or whether underwriters will need to go back to the drawing board awaits a final determination.

This article is reprinted from the May 8, 2003 of the New York Law Journal. © 2003 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.