A new decision from the Oregon Supreme Court on indemnity agreements may impact one of the most headache-inducing negotiating points in indemnity contracts: “additional insured” coverage under umbrella policies. Common assumptions about what to require as “additional insurance” may need to be re-examined as a result.
General contractors usually demand that subcontractors procure primary-layer liability insurance that names the general contractor as an “additional insured.” That means that if the general contractor is sued for something that the subcontractor was involved with, the general contractor can turn to the subcontractor’s insurance company for help. That helps the general contractor prevent its premiums from going up, because if its own insurance never gets tapped, its “loss run” looks clean.
General contractors also usually demand that the “additional” insurance be provided on a “primary and noncontributory” basis. “Primary and noncontributory” means that as between the subcontractor’s insurance and the general contractor’s own insurance, the subcontractor’s insurance will pay on behalf of the general contractor without seeking contribution from the general contractor’s insurance carrier. This further helps protect the general contractor’s insurance premiums.
Increasingly, general contractors will also demand that a subcontractor carry umbrella insurance – a layer of insurance that sits on top of the primary insurance to provide extra limits in the event of a large loss. And careful general contractors often require that the subcontractor’s umbrella coverage be specifically endorsed such that if it is called on to “drop down” and function as primary insurance (because the primary layer of insurance has been exhausted), that the umbrella insurer will also provide coverage on a primary and noncontributory basis.
The problem is that umbrella insurance policies often require that before they will “drop down,” not only the “scheduled” primary-layer insurance but also all “other insurance” must be exhausted.
General contractors argue that this “other insurance” requirement creates an opportunity for the umbrella carrier to deny the general contractor the additional insured benefits that it expected, based on the theory that the general contractor’s own insurance is “other insurance.” Essentially the problem is that the “other insurance” provision could be read in a way that conflicts with the primary and noncontributory “drop down” coverage language, giving the subcontractor’s insurer a potential “out.”
Some umbrella insurers will provide an endorsement that amends the definition of “other insurance” to specifically exclude the general contractor’s insurance, solving the problem directly and clearly. But not all umbrella insurers can do that, and those that will often do it only at great cost to the subcontractor. This can lead to protracted disputes during the negotiation of even routine construction contracts. Small subcontractors can get priced out of jobs if they have to procure expensive endorsements for each job.
Setting aside all of the other complications that often come into play in these scenarios, one question is whether an endorsement amending the “other insurance” language necessary? Put another way, is a general contractor’s own insurance “other insurance” for purposes of the subcontractor’s umbrella policy? Based on recent Oregon case law, the answer is: possibly not.
Insurance policies that do not define the term “other insurance” rely on language in their “conditions” section; this condition language provides a sort of definition for what is “other insurance.” One commonly-used “other insurance” condition reads, in pertinent part: “If other insurance applies to a loss that is also covered by this policy, this policy will apply excess of the other insurance. Nothing herein will be construed to make this policy subject to the terms, conditions and limitations of such other insurance.” Therefore, a general contractor’s own policy will be considered “other insurance” if it “applies to a loss that is also covered by [the subcontractor’s] policy.” In other words, the policy must apply to the same loss to be considered “other insurance.”
And there’s the rub: under Oregon law, a general contractor’s liability insurance may not cover the same loss as the subcontractor’s liability insurance.
In June, 2015 the Oregon Supreme Court held in Montara Owners Ass’n v. La Noue Dev., LLC, 357 Or. 333, — P.3d –, No. SC S062120, 2015 WL 3791636 (June 18, 2015), that because of Oregon’s anti-indemnity statute, the portion of an indemnity agreement in which a subcontractor agreed to indemnify a general contractor for the general contractor’s own negligence was void. However, the portion in which the subcontractor agreed to indemnify the general contractor if the general contractor is assessed damages for the subcontractor’s negligence is valid.
The natural extension of that analysis is that a contractual provision in which a subcontractor agrees to provide “additional insured” coverage for the general contractor’s own negligence is also void – that is, the additional insured coverage is limited to only that loss suffered because of the subcontractor’s negligence. Otherwise, there would be an “additional insured” loophole to the anti-indemnity statute. At least one Oregon federal court has already read the holding in Montara as mandating that conclusion.
The general contractor’s own insurance of course covers all damages assessed against the general contractor arising out of bodily injury, property damage, etc. Read broadly, that coverage includes vicarious liability for the negligence of subcontractors. But when it comes to “other insurance” conditions (which function like an exclusion) a broad reading may not be appropriate. Read narrowly, the general contractor’s insurance covers the general contractor’s negligence, not the negligence of others. The additional insured coverage, by contrast, covers a different “loss” – it covers damages assessed against the general contractor because of the subcontractor’s negligence. Because the “loss” that is covered is arguably different as between the additional insured policy and the general contractor’s own policy, the general contractor’s policy is potentially not “other insurance.” That could mean that an endorsement amending the definition of “other insurance” in a subcontractor’s umbrella policy is not necessary, because the umbrella carrier will have to “drop down” even if the general contractor’s insurance is untouched, because the general contractor’s own insurance is not “other insurance.”
This potential impact of the Montara decision (which did not involve insurance) on a collateral issue — the intersection of umbrella coverage and additional insured coverage — is an example of just how complex negotiation of indemnity and additional insured provisions has become. It also illustrates the value of understanding not only insurance law, but also how courts are dealing with thorny issues of liability. Unless the legislature weighs in with an effective fix (as it sometimes tries to do with construction-contract-related problems) this will continue to be a fertile area for disputes involving contract managers, legal counsel, and insurance brokers.