GCs: You're Not as Insured as You Think You Are

Recent court decision could reduce or eliminate a general contractor's coverage

By William A. Bogdan

In a decision likely to spark controversy (and its identical twin, litigation), a California court has ruled (St. Paul Fire and Marine Ins. Co. v. American Dynasty Surplus Lines Ins. Co.) that a general contractor is no longer guaranteed coverage in an injury suit filed by a subcontractor's employee, even though it is an additional insured on the subcontractor's policy. By reading the additional insured endorsement in light of the subcontract indemnity clause, there may be no coverage unless the subcontractor's employee was injured while performing some act directly related to the work leading to the injury.

Sasco Electric promised to indemnify general contractor ARB for all claims arising out of Sasco's acts or omissions during the performance of the work, even if ARB's negligence contributed to the harm. Sasco agreed to name ARB as an additional insured for claims "which may arise out of or result from Subcontractor's operations under this agreement." Sasco's carrier American Dynasty issued an endorsement for ARB only with respect to liability arising out of [Sasco's] ongoing operations performed for [ARB].

As Sasco's employee Casados fed line through a conduit, ARB was testing a fuel tank pipe. Casados heard a hissing noise and ran from his worksite. The pipe exploded, injuring Casados. Neither Sasco's nor Casados' conduct contributed to the explosion.

Casados filed suit against ARB. ARB's carrier St. Paul tendered ARB's defense to Sasco's carrier. American Dynasty denied coverage. St. Paul settled the claim, then filed an action against Sasco and American Dynasty. The trial court found in St. Paul's favor, but the Court of Appeal in St. Paul Fire and Marine Ins. Co. v. American Dynasty Surplus Lines Ins. Co. (2002) 101 Cal.App.4th 1038 reversed the entire judgment.

The St. Paul holding broke no new ground on the general contractor's inability to get indemnity for the general contractor's sole negligence from a subcontractor. The Court held that the contract language required more than the subcontractor's "mere presence" on the job site to trigger the duty to defend or indemnify. To require indemnity because the injury had some connection to work "effectively rewrites the subcontract by placing all of the emphasis on Sasco's commitment to indemnify for all liability 'arising out of' or 'resulting from' the work," and ignores the requirement that the incident "arise from . . . any act or omission of" Sasco.

The St. Paul Court strayed from tradition by excluding the general contractor's sole negligence from the additional insured endorsement. The endorsement which limited coverage "to liability arising our of Sasco's ongoing operations performed for ARB" was ambiguous: Either ARB had coverage for any liability arising while Sasco was on the premises, or only for liability arising from Sasco's actual performance of the work. To resolve the ambiguity, the Court read the endorsement in light of the subcontract. The indemnity clause set forth the extent of the indemnity protection: indemnity for all claims arising out of Sasco's acts or omissions during the performance of the work. The insurance clause in the subcontract provided the means of doing so: "that is, by purchasing insurance for that purpose." Thus, the Court found the endorsement incorporated the more specific and narrower language of the indemnity clause.

The Court felt it necessary to "apply a little common sense" to show ARB had no reasonable expectation of coverage. The explosion had nothing to do with Sasco's performance. Casado's presence was incidental to ARB's activity. The subcontract limited Sasco's indemnity duty to claims arising from Sasco's acts or omissions. It excluded indemnification for claims arising solely from the acts or negligent misconduct of ARB.

The Court held that ARB had no expectation of coverage unless the claim arose from some act or omission on the part of Sasco. "[The] injury-causing act must somehow be related or connected to Sasco's performance of the work under the subcontract beyond its mere presence on the job site." The endorsement provided coverage to ARB only for liability arising from Sasco's activities in its performance of the subcontract.

The additional insured endorsement, combined with the restrictive indemnity language, converted a policy that on its face insured ARB's sole negligence to one that excluded that coverage. Prior cases had found coverage for general contractors under similar circumstances, on the basis that a subcontractor's compensation is intended in part to finance coverage for the general contractor's sole negligence. It would appear that ARB did not get what it paid for.

The St. Paul Court failed to acknowledge that California law permits a general contractor to obtain coverage from a subcontractor's insurer for sole negligence. Civil Code Section 2782 protects a subcontractor from any contractor requiring indemnity for its sole negligence, or any public agency for its sole or active negligence. Insurance Code Section 11580.04 prohibits any public agency from requiring the subcontractor's carrier to provide coverage for the public agency's sole or active negligence. However, there is no corresponding provision in the Insurance Code prohibiting a general contractor from obtaining coverage for its sole negligence from the subcontractor's carrier.

Prior to the St. Paul decision, the law provided certainty: if the subcontractor's employee sued the general contractor, it was the subcontractor's policy that would be responsible to indemnify the general contractor. Now, every subcontractor may argue the incident did not arise out of its work, even though its employee was injured in the course and scope of employment. The St. Paul Court has established a fact-based standard which will at the very least delay acceptance of the general contractor's tender, and may require litigation to resolve the issue.

Read the Endorsement: The most finely crafted subcontract means nothing if no one confirms that the endorsement complies with the contract requirements. The failure to object to a deficient endorsement may waive any future attempt to enforce the insurance requirements. Confirm that the correct limits are provided for the correct additional insureds, without any limiting language that undercuts the coverage demanded. If you wait until an accident to see if you have adequate coverage, you have waited too long.

Use Specific Language in the Subcontract: Specify the appropriate ISO form to be used. State in no uncertain terms that the insurance applies to any and all claims arising out of or in connection with the subcontractor's work, regardless of cause.

Segregate Insurance from Indemnity: Specify that the insurance provisions are not limited or controlled by the indemnity clause. Include language that requires the subcontractor to obtain insurance to cover its contract obligations.

Make Sure There is an Endorsement Behind the Certificate: An Acord form indicating coverage means nothing if it is contradicted by the terms of the additional insured endorsement. A certificate issued by a broker is unenforceable against the insurance company if it is issued without the company's knowledge or approval.

Bogdan is an attorney with Lynch, Gilardi & Grummer, San Francisco.