‘Pecker’: Contract Interpretation and Contribution Among Insurers

By Brendan T. Fitzpatrick and Glenn A. Kaminska

When the New York Court of Appeals speaks, lower courts and litigants tend to listen. But what happens when the message is subject to different interpretations, and one of those interpretations will effectively overrule past precedent and years of case law even though the state’s highest court neither cited the prior decisions nor explicitly stated an intention to render a global change?

This is precisely the conundrum judges and litigants face following the Court of Appeals’ decision in Pecker Iron Works v Travelers.¹ In Pecker, the Court made in-roads as to the interpretation of additional insured endorsements that contain excess clauses.² In making those in-roads, however, the Court may have eviscerated long-standing rules involving contract interpretation and contribution amongst insurance carriers.

Background

The facts of the case were simple enough. The general contractor, Pecker Iron Works, Inc., engaged subcontractor, Upfront Enterprises Inc., to perform work on a project. The contract between the parties required Upfront to “furnish [Pecker] with Certificates of Insurance for Liability and Workers’ Compensation and name Pecker Iron Works, Inc. as an additional insured”. In interpreting this contractual requirement, the Court of Appeals held that this meant Upfront’s carrier would provide Pecker with primary coverage:

When Pecker engaged Upfront as a subcontractor and in writing provided that Upfront would name Pecker as an additional insured, Pecker signified, and Upfront agreed, that Upfront’s carrier—not Pecker’s—would provide Pecker with primary coverage on the risk. Pursuant to the policy at issue, Travelers agreed to provide primary insurance to any party with whom Upfront had contracted in writing for insurance to apply on a primary basis. When Upfront agreed to it, the policy provision was satisfied.

Now, almost a year removed from the decision, litigants are making arguments and courts are basing their rulings upon this language. Attorneys representing general contractors and owners are citing the Pecker for the proposition that the subcontractor’s carrier, which provides additional insured coverage for the general contractor or owner, must provide primary non-contributory coverage for the general contractor or owner.

In at least one published decision, this primary non-contributory argument has found favor. In Pepco Construction of New York, Inc. v CNA Insurance Co.,³ the state Supreme Court in Brooklyn determined that the insurer for a subcontractor that was obligated to procure insurance naming the general contractor was obligated not only to defend the general contractor in the underlying action, but to reimburse the general contractor's carrier “for all legal fees, costs and expenses.”

In making this decision, the Court cited Pecker and ruled that the subcontractor agreed to list the general contractor as an additional insured on its policy and, in doing so, signified that its own carrier would provide the general contractor with primary coverage on the risk. In requiring the subcontractor’s carrier to reimburse the general contractor’s carrier for all costs and fees, the court did not delve into any co-insurance analysis.

Other Insurance Clause

The Pepco decision appears to be at odds with the long-standing rule in New York that where two carriers provide coverage for the same risk, courts should look to the “Other Insurance” clauses to determine the priority of coverage.

Under this rule, where two policies provide for primary coverage for an occurrence under the standard “Other Insurance” clause, there is a manifest “intent for the application of contribution by equal shares under the circumstances.”⁴ When the “Other Insurance” clauses differ, each should be analyzed to determine the priority of coverage.⁵

One question raised by the Pecker decision is whether or not the rules regarding the analysis of “Other Insurance” clauses have now been abandoned. The Pepco decision seems to imply that one interpretation of Pecker is that every subcontractor’s insurance carrier that has agreed to provide coverage to another party must provide such coverage on a primary non-contributory basis regardless of what the terms and conditions of the respective policies involved provide. Such a determination appears to contradict not only the existing precedent regarding contribution among carriers, but also that regarding contract interpretation.

The rules regarding the interpretation of insurance policies in New York are well established. Where the provisions of a policy are clear and unambiguous, they must be given their plain and ordinary meaning, and the court should refrain from rewriting the agreement.⁶

Moreover, the courts have “long and consistently ruled against any construction which would have rendered a contractual provision meaningless or without force or effect.”⁷ Forcing subcontractors’ carriers to take on a super-primary or non-contributory burden results in a windfall for the other carriers and runs contrary to these rules of policy interpretation. The reading of Pecker in this manner renders not just the “Other Insurance” clause contained in the subcontractor’s policy meaningless, but also the identical clause contained in the general contractor or owner’s policy. Under such an interpretation, there would be no need to compare the “Other Insurance” clauses, thus rendering them without force or effect.⁸

Another reason why this interpretation of the Pecker decision is untenable is simply a result of the parties involved in the litigation. A review of the parties demonstrates that only an owners group, the general contractor, subcontractor, and the subcontractor’s carrier were involved in the litigation. The carrier for the general contractor was not a party before the court.

For that matter, the general contractor’s policy of insurance was not contained in the record on appeal. Accordingly, the Court of Appeals could not have reached the co-insurance issue under the traditional rules. It could not have determined the amount of contribution owed by the carrier providing primary coverage for the general contractor as its named insured. That carrier and its policy were not involved. The Court could have only determined the coverage available under the Travelers policy. To that end the Court found the endorsement provided primary coverage.

Conclusion

In Pecker, the Court of Appeals has spoken and has said that an additional insured is a party that enjoys the same rights as a named insured.⁹ However, these rights are not greater than the named insured.

There can be no question that the named insured is subject to any effect the “Other Insurance” clause contained in its policy of insurance may have with regard to any particular claim. The same must certainly be true with regard to an additional insured. To find to the contrary could result in the additional insured having different and/or superior rights than the named insured.

The state’s highest appellate court has ruled on one version of an additional insured endorsement containing an excess clause. That endorsement provides coverage on a primary basis.

What is not clear is whether the Court meant to overrule years of precedent regarding contribution between carriers and contract interpretation by its decision. The bench and the bar will continue to listen for the Court’s next pronouncement.

This article is reprinted from the February 23, 2004 of the New York Law Journal. © 2003 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.