Construction contracts often require one party to provide insurance for another party through the mechanism of “Additional Insured Coverage.” Such “AI” coverage frequently becomes a battleground—not only for coverage litigators but also for the people who write contracts and obtain insurance. In recent years, the shape of the battleground has changed repeatedly as insurers alter the terms of the AI Endorsements without which no-one is an Additional Insured Party* and the courts have issued many decisions that leave the reader puzzled at best.

Sometimes, however, the Courts get it right. One example of this is Worth Construction Co. Inc. v Admiral Ins. Co., decided by New York’s highest court on May 1, 2008. The irony lies in the fact that getting it right in this case required input from no less than thirteen learned jurists notwithstanding the principles involved are simple and straightforward.

The facts are not markedly different from those encountered time and again by the construction-injury bar. Plaintiff, an employee of subcontractor involved in other work at the Project, fell on a staircase. He sued the general contractor based on the unsafe nature of the stairway on which he fell.

Three subcontractors were involved in the stairway: a steel subcontractor erected the steel “pan” system; a concrete subcontractor filled the pan with concrete to create the stair’s treads; and a fireproofing subcontractor applied material to the stairs to increase their fire-resistiveness. The steel subcontractor’s work on the stairway was essentially complete, though its scope of work included the installation of handrails that would be added after the fireproofed stairway had been enclosed in walls.

The general contractor asserted third-party actions against all three subcontractors. It also asserted a claim for defense and indemnification against the concrete subcontractor’s insurance, which that insurer ignored. The general contractor’s insurance claim matured into a separate coverage lawsuit, resulting in summary judgment ordering the insurer to defend the general contractor and to cover the previously-incurred costs of the general contractor’s defense.

As the inured plaintiff’s case approached its trial date, the steel subcontractor moved for summary judgment. In its response to that motion, the general contractor conceded that any negligence claim it asserted against the concrete subcontractor lacked factual merit and should be dismissed. Thereupon, the concrete subcontractor’s insurer moved for leave to renew the summary judgment motion in the coverage case, asserting that, by its admission—that the named insured had not been negligent—the general contractor had conceded that the plaintiff’s accident did not arise out of the concrete subcontractor’s work.

* This point stands repeated emphasis: in order for a party to be an Additional Insured Party, the policy must be endorsed. Wise parties will actually take steps to Read the Friendly Endorsement when the contract is negotiated instead of waiting until a claim arises to discover that the broker “forgot” to request the endorsement.

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Herein lies one of the recurrent battles fought by the insurance industry concerning additional insured coverage. The insurance industry has tried for years to establish that the Additional Insured Party is covered only when it has been shown that the negligence of the named insured party was a cause of the occurrence. The Court of Appeals addressed precisely this issue as recently as January of this year, when it decided BP Air Conditioning Corp. v. One Beacon Insurance Group†, holding that additional insured need not show the negligence of the named insured as a condition to obtaining coverage from the insurer. Coverage depends on whether the loss arose out of the operations of the named insured, not on whether the named insured was negligent in conducting those operations.

The Supreme Court accepted the insurer’s argument, holding that the general contractor’s concession that the subcontractor was free from negligence “established as a matter of law that [plaintiff’s] accident did not arise out of [the named insured’s] operations and therefore [the insurer] was not required to defend or indemnify [the additional insured] under the terms of the policy.”

The Appellate Division modified the order appealed from, holding that the subcontractor’s insurer was required to defend the general contractor in the personal injury case because the accident occurred on the stairs:

[I]t is immaterial, for purposes of deciding additional insured coverage, whether Pacific had completed its installation of the stairs, whether Pacific's installation of the stairs was negligent, or whether Pacific or a contractor in privity with it was the injured worker's employer. It is sufficient that the injury was sustained on the stairs.

It is notable that the Appellate Division divided 3-2 on this case, with two justices insisting that there was no coverage and no obligation to defend the additional insured until and unless it was shown that the named insured had been negligent.

The Court of Appeals reversed, reinstating the order and judgment of the Supreme Court. The opinion of the court, per Judge PIGOTT, made it clear that the Supreme Court’s result was correct but its reasoning was flawed.

The Court of Appeals emphasized that the same standard applies to the coverage claim of an additional insured party as applies to the coverage claim of the named insured: the duty “arises whenever the allegations within the four corners of the underlying complaint potentially give rise to a covered claim.”‡

The Additional Insured endorsement in this case contains language that has been a standard part of this coverage since 1993: the Additional Insured party is

† 8 NY 3d 708, 715 (2007).

‡ Frontier Insulation Contrs. v. Merchants Mut. Inc. Co., 91 NY2d 169, 175 (1997).

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included as an insured “but only with respect to liability arising out of [the named insured’s] operations.” What is needed is not a showing that the named insured was negligent, but a showing that the accident was caused by the operations of the named insured, be they negligent or otherwise. In this case, the operations of the named insured consisted of installing the steel pan staircase, and those operations had been completed at the time of the accident.§ As a result, the only possible causal nexus between the operations of the named insured and the loss was found in the allegations of the complaint that the stairs had been constructed negligently. As a result, the concession that the steel subcontractor had not been negligent removed the last possible link between the steel subcontractor’s operations and the occurrence.

Thus, on the particular facts of this case, the absence of negligence meant that there was no coverage. Policyholders and their counsel are alerted to the sharply delimited holding in this case, which will no doubt be held up insurers to reinforce their oft-rejected and still-repeated argument that the additional insured has no coverage until and unless it is shown that the named insured’s negligence caused the occurrence. That is not what the policy says, and neither is it the law in New York.

§ Some additional insured endorsements cover completed operations as well as ongoing operations, and some exclude such coverage. This distinction does not appear to have been considered by any of the courts that considered the claims of Worth Construction.

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