In a decision that is sure to have substantial reverberations in construction coverage disputes, the First Department, Appellate Division recently ruled that blanket AI endorsements require contractual privity between the named insured and the party seeking additional insured status. In short, the decision upsets the status quo for AI coverage; where coverage is usually triggered as long as the named insured agrees in a contract to name the person/organization as an AI.

The facts surrounding Gilbane are standard fare as coverage disputes go: a construction manager, Gilbane Building Co./TDX Construction Corp. (TDX), was hired by the Dormitory Authority of the State of New York (DASNY) to provide services in connection with the construction of a 15-story building for use by the City of New York. DASNY also contracted with a general contractor to perform work on the project, and the contract required the GC to procure additional insured coverage for TDX and DASNY. The GC’s work caused structural damage to adjacent properties, which required DASNY to incur additional costs.

Thereafter, the GC and architects were sued for the negligent work, and the construction manager was impleaded by the architects. TDX then tendered to Liberty, the GC’s CGL carrier, seeking coverage as an additional insured. Liberty denied the tender, stating that it had not been provided with a contract whereby its named insured entered into a contractual relationship with TDX for additional insured coverage. The Liberty policy contained a relatively standard blanket AI endorsement naming as additional insureds “any person or organization with whom you have agreed to add as an additional insured by written contract…” TDX then commenced a DJ for a declaration that Liberty is obligated to provide defense and indemnification in connection with the underlying action.

The lower court denied Liberty’s summary judgment motion because the AI endorsement “requires only a written contract to which [the GC] is a party,” and the DASNY-GC contract satisfied this requirement. On appeal, the First Department reversed the Supreme Court’s decision, holding that the language in the Liberty AI endorsement “clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured.” Interestingly, the cases cited by Liberty and relied on by the Court were previous decisions in which the AI endorsement granted coverage “when you and such organization have agreed in writing in a contract or agreement.”  TDX argued that this language materially differs from that included in the Liberty policy because it requires contractual privity, whereas the Liberty policy simply requires a written contract, any written contract, where the GC agreed to name TDX as an AI.

The Appellate Division rejected this argument because it “place[s] undue emphasis on the phrase ‘by written contract’ and completely ignore[s] the inclusion of the words ‘with whom’ as the object of the verb phrase ‘you agree’.” After a short grammar lesson, the court held the plain meaning of the Liberty AI endorsement is indistinguishable from the substance of the language in other endorsements. TDX also argued that was obvious from the DASNY-GC contract there was a clear intent for TDX to be named as an AI on the Liberty policy. The court noted that although this may be true, it does not mean “the policy issued by Liberty can be judicially rewritten to cover TDX.”

It’s also worth noting that the decision contains a lengthy dissenting opinion by Justice Kahn. In brief, the dissent would have found coverage for TDX for two reasons: 1) the DASNY-GC is a written contract where the GC agreed to name TDX as an AI, therefore triggering coverage; and 2) viewing the endorsement as ambiguous, all extrinsic evidence supports finding that TDX is an additional insured under the Liberty policy.  Last, the dissent makes a rather foreboding warning that “the majority’s unduly narrow reading of Liberty’s policy provision on additional insureds would upend the established customs and practices of the construction industry and its insurers.” Although the majority claims this dire prediction “rings hollow,” it nevertheless underscores the likelihood of increased coverage disputes pertaining to AI coverage.

Although the decision is recent, its potential effects cannot be understated. Many AI endorsements contain language identical to that in the Liberty policy. It is also commonplace for construction agreements, such as those promulgated by the AIA, to require a plethora of parties/entities as additional insureds.  If the CGL policy contains an AI endorsement similar to Liberty, this now requires that the contractor enter into separate contracts with all of those entities in order for additional insured status to extend.

It would not be surprising to see the Court of Appeals grant certification if TDX decides to appeal, particularly in light of the lengthy dissent. Nevertheless, over the past decade, courts have frequently expanded the scope and breadth of additional insured coverage. The decision in Gilbane may be a sign that there is a ceiling to an insurer’s assumption of risk under a blanket AI endorsement.

Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please call or email Brian Gibbons at Brian Gibbons for additional information.