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Insurance policies, like most contracts, are only valid betweenthe persons or entities who entered into the agreement. In somecases, other parties can be covered under an insurance policy as anadditional insured. But that coverage depends on the wording of theendorsement, state contract and insurance laws and how close therelationship is between the various parties.

One workers' compensation case recently decided by the U.S.Court of Appeals for the Second Circuit highlights these issues.The appeals court has ruled that a building owner was not anadditional insured on a subcontractor's insurance policy where theowner was not in contractual privity (that is, aclose enough relationship or party to the contract) with thesubcontractor.

The case

Jumall Little, an employee of The Kimmell Company, Inc.,allegedly was injured while repairing an HVAC system at a buildingowned by the University of Rochester Medical Center / StrongMemorial Hospital (UR). Little sued:

— UR, the owner of the building where Little allegedly wasinjured;

— LeChase Construction Corp. and LeChase ConstructionServices LLC (together, LeChase), the general contractor for theHVAC repair project; and

— J.T. Mauro Co., Inc., LeChase's subcontractor for theproject.

The HVAC repair project giving rise to that lawsuit involvedthree separate construction contracts:

1. The Prime Contract between UR and LeChase
2. The LeChase-Mauro Subcontract between LeChase and Mauro
3. The Mauro-Kimmel Subcontract between Mauro and Kimmel

Kimmel was the named insured under a policy issued byHarleysville Insurance Company and Mauro was the named insuredunder a policy issued by Cincinnati Insurance Company.

Cincinnati alleged that the Mauro-Kimmel Subcontract requiredKimmel to add Mauro, UR, and LeChase as “additional insured[s]”under the Harleysville policy, which addressed “additionalinsured[s]” in two separate endorsements: the Privity Endorsement(Endorsement CG 20 33) and the Declaration Endorsement (EndorsementCG 20 10).

The U.S. District Court for the Western District of New Yorkheld that the Declaration Endorsement did not provide additionalinsured status to either UR or LeChase, but that the PrivityEndorsement did provide additional insured status to UR. Thus, itruled, Harleysville had to defend and indemnify UR, but notLeChase, as an additional insured.

The dispute reached the Second Circuit.

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The Harleysville policy

The Privity Endorsement stated: THIS ENDORSEMENTCHANGES THE POLICY. PLEASE READ IT CAREFULLY. (Allcaps and bold were in the original document.)

The language at issue in the case said that such coverage wouldbe provided “when you and such person or organization have agreedin writing in a contract or agreement that such person ororganization be added as an additional insured on your policy.”

The Declaration Endorsement pointed to the Declaration sectionfor a schedule listing additional insured, including the RochesterInstitute of Technology under the heading “Additional Insured —Owners, Lessees Or Contractors — Scheduled Person OrOrganization.”

Beneath the Declaration heading was another heading titled“Additional Insured — Owners, Lessees Or Contractors — AutomaticStatus When Required in Construction Agreement With You”

Related: Vague policy language can derail insurancecontracts

The appeals court ruling resolved the issue of coverage foran additional insured, but the underlying personal injury claimcontinued. (Photo: Shutterstock)

The Second Circuit's decision

The Second Circuit, applying New York law, ruled that thePrivity Endorsement did not confer additional insured status on URor LeChase because the Privity Endorsement required contractualprivity, and Kimmel had not entered into a contract with UR orLeChase directly.

The circuit court explained that New York courts hadconsistently interpreted language identical to the PrivityEndorsement to require contractual privity, so that “there must bea written agreement between the insured and the organizationseeking coverage to add that organization as an additionalinsured.”

The circuit court noted that the district court had ruled thatthe Privity Endorsement conferred “additional insured” status on URbecause “[a] plain reading of the [Mauro-]Kimmel subcontractreveal[ed] that Kimmel agreed to name . . . UR as [an] additionalinsured. . . .” According to the circuit court, even if theMauro-Kimmel subcontract could give rise to a breach of contractclaim (assuming Kimmel had a contractual duty to obtain insurancefor UR or LeChase as “additional insured[s]” but failed to do so),the validity of such a claim did not mean that the Harleysvillepolicy should be rewritten to name UR as an additional insured.

Kimmel had not entered into a contract with UR, the circuitcourt observed, and, as a result, there was no contractual privitybetween Kimmel and UR and the Privity Endorsement did not confer“Additional Insured” status on UR.

Finally, the Second Circuit affirmed the district court'sdecision that the Declaration Endorsement did not confer“additional insured” status on either UR or LeChase.

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Meaning of 'Automatic Status' language

The circuit court rejected Cincinnati's contention that the“Automatic Status” heading in the Declaration section negated thePrivity Endorsement's contractual privity requirement so thatowners, lessees or contractors were “automatically entitled toadditional insured status when required in a construction agreementwith Kimmel.”

The Second Circuit ruled that the fact that the words of theAutomatic Status heading mirrored the heading of the PrivityEndorsement indicated that the Automatic Status heading was “areference” to the Privity Endorsement, “not a designation of ablanket category of unspecified additional insureds.”

If it were interpreted to designate additional insureds, “thenthe entire Privity Endorsement would be rendered meaningless,”according to the Second Circuit.

The circuit court concluded that the Privity Endorsementmodified the Automatic Status heading language in the Declarations,“not the other way around.”

The case is Cincinnati Ins. Co. v. Harleysville Ins.Co.

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Steven A. Meyerowitz, Esq., is the director of FC&S Legal,the editor-in-chief of the Insurance Coverage Law Report, and thefounder and president of Meyerowitz Communications Inc. Email himat [email protected].