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If you do construction defect coverage work, then you’ve definitely seen an endorsement, on a general liability policy, that is along the lines of this (but with more detail): If liability arises out of the insured’s use of a sub-contractor, no coverage is owed to the insured if the sub-contractor did not agree to defend and indemnify the subcontractor; and the sub-contractor did not carry liability insurance naming the insured as an additional insured. In general, courts have been enforcing these types of endorsements to preclude coverage to insureds who failed to satisfy these provisions.
An endorsement of this nature is what was at issue in Thomas v. Dion (N.J. App. Div. Oct. 23, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. Plaintiff, Michael Thomas, was injured when he fell off a scaffold while employed by Golden Hands, Inc., a subcontractor retained by general contractor, Prestigious Homes, Inc. Thomas was working as a plasterer on a housing project in Atlantic City. Thomas obtained a $750,000 default judgment against Prestigious.
Prestigious’s general liability insurer disclaimed coverage because Prestigious failed to comply with the terms of a policy endorsement--Prestigious failed to procure an indemnification agreement from Golden Hands and Prestigious was not named as an additional insured on Golden Hands’s policy.
Unable to collect on the judgment, Thomas commenced an action against Fetterman, Millinghausen & McNutt, Inc., the insurance broker that procured Prestigiouss policy, as well as Michael Dion, an insurance producer employed by FMM. Thomas alleged that the insurance broker defendants “were negligent in failing to make Prestigious [ ] aware that it needed to have certain insurance terms and requirements in the contracts it had with its subcontractors.”
Putting aside the merits – which I’ll get to in a second – I’m not surprised by a claim like this. Whenever I see an endorsement, that requires an insured to obtain a hold harmless agreement from subcontractors, and be named as an AI on its subcontractors’ policies, I always wonder if the insured knows this -- and complies. I suspect that lots of contractors, other than large ones, do not place insurance issues high on their list of things to worry about, once they have a policy in place.
This was essentially the issue here in the malpractice case against the brokers. However, the brokers were relieved of any liability because the court concluded that they did a good job of establishing that they made Prestigious aware of the policy requirements concerning the hold harmless agreement and additional insured rights.
The court stated: “Defendants provided additional explanations of the policy to Lansman and Prestigious beyond the plain language of the endorsement, further fulfilling their fiduciary duties. Dion’s unrebutted testimony was that he explained ‘the exclusion and warranty in the policy regarding the contractors and the additional insured and the hold harmless agreements ... during the quotation process’ and that Lansman ‘was made aware of the warranty in the policy’ that ‘he had to have certificates of insurance from his subcontractors and he had to have contracts and hold harmless agreements, which he said he had in the applications.’ Dion also testified that he ‘sent [Lansman] a letter reminding him to read his policies and to especially read these warranties, because that would affect his coverage.’”
The court held: “Defendants breached no duty to Prestigious, and hence they were not negligent. Since Prestigious could have no claim against defendants, plaintiff’s third-party beneficiary claim based on breach of that relationship similarly fails.”
The take-away here for brokers is obvious. Look at how much the brokers here did to make their client aware of the subcontractor requirements in its policy.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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