PRIORITY OF LIABILITY INSURANCE COVERAGE AND HORIZTONTAL AND VERTICAL EXHAUSTION

Posted on May 9, 2020May 9, 2020 by Edward Garber

Recently, I participated in a webinar involving the horizontal and vertical exhaustion of insurance coverage. Say what?

This pertains to the PRIORITY of liability insurance coverage and the interface between a general contractor’s (or upstream party’s) primary insurance and the subcontractor’s (or downstream party’s) excess insurance, particularly when the general contractor is required to be indemnified by the subcontractor and named as an additional insured under the subcontractor’s liability policies.

For instance, let’s assume the general contractor has a $2M primary policy and a $5M excess policy. Its subcontractor has a $1M primary and a $5M excess policy. The general contractor is an additional insured under the subcontractor’s policies and the subcontractor is required to contractually indemnify the general contractor. An issue occurs caused by the subcontractor’s negligence resulting in a $5M judgment against the general contractor and the subcontractor.

A. Horizontal Exhaustion

Under the horizontal exhaustion approach, the court will look primarily to the “other insurance” provision in the policies–specifically, the subcontractor’s excess policy–which will take precedence over the contractual indemnification language. Since the “other insurance” provision in excess policies typically state it is excess over the exhaustion of primary policies, under the horizontal exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from subcontractor’s primary policy;
2) $2M from general contractor’s primary policy; and
3) $1M from the general contractor’s excess policy and $1M from the subcontractor’s excess policy, as the excess policies share in coverage after the primary coverage is exhausted.

The general contractor and its insurers do not perceive this to be equitable as it dilutes the indemnification and additional insured requirement. Further, it results in the general contractor’s carriers subrogating to the rights of the general contractor to pursue a separate action against the subcontractor, which gets sent right back to the subcontractor’s excess insurer (as its primary insurance was exhausted) for reimbursement. Under the above example, the subcontractor’s excess insurer still had a remaining $4M in coverage to reimburse the general contractor’s primary and excess insurer. This is known as a circular chain of events because the priority of coverage under horizontal exhaustion invariably results in a separate subrogation claim for reimbursement.

B. Vertical Exhaustion

Under the vertical exhaustion approach, the court will look primarily to the contractual indemnification and additional insured language, irrespective of the “other insurance” provision in the excess policy, to avoid the circular chain of events with the general contractor’s carriers pursuing a separate subrogation claim. Under the vertical exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from the subcontractor’s primary policy; and
2) $4M form the subcontractor’s excess policy.

The subcontractor’s primary and excess policies would be exhausted BEFORE the general contractor’s primary policy comes into play. This is designed to avoid the the separate subrogation claim since the subcontractor’s insurance coverage is being exhausted first.

C. Priority of Insurance Coverage

The priority of insurance coverage can become a very significant consideration in sizable claims. There is a reason parties contractually negotiate insurance coverage in the contract. For this reason, during the contract negotiation, it is important to appreciate this consideration on the frontend. Consult with counsel and an insurance broker as to the following:

 The contractual indemnification language – make sure it is enforceable in your jurisdiction;
 The additional insured language and applicable insurance endorsements – make sure you get the right endorsement for ongoing and completed operations that covers issues wholly or partially caused by the subcontractor’s (or downstream party’s) negligence;
 The primary and noncontributory language and applicable endorsements in the primary and excess policy-this modifies the “other insurance” provision from a priority of coverage standpoint and you want this in both the primary policy and excess policy; and
 The “other insurance” language in the general contractor’s (or upstream party’s) policy — the objective is to maximize vertical exhaustion of coverage to avoid the circular chain of events discussed above so this may result in manuscript language to the general contractor’s “other insurance” language to reflects its priority.

Claims that involve or rely on construction insurance claim can become complex. But, insurance is crucial in order to properly assess risk, flow down risk, and manage risk. In order to evaluate associated risk, it requires consultation with lawyers and insurance brokers and understanding the type of claim exposure relative to the project, and maximizing value of insurance–primary and excess insurance–for which you are an additional insured.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

GENERAL CONTRACTORS: CONSIDER IMPORTANCE OF “PRIMARY AND NONCONTRIBUTORY” LANGUAGE

Posted on February 5, 2017February 5, 2017 by Edward Garber

In prior articles, I reinforced the importance of general contractors including “primary and noncontributory” language in subcontracts and requiring the subcontractor to provide an analogous “primary and noncontributory” endorsement. As a general contractor this is important, particularly since you are going to require the subcontractor to (i) indemnify you for claims relating to personal injury, property damage, or death, and (ii) identify you as an additional insured under its commercial general liability (CGL) policy for claims arising out of the subcontractor’s scope of work. The “primary and noncontributory” language in your subcontracts allows you to maximize the value of your additional insured status.

A recent opinion explains why I reinforced the importance of this language.

The case of Zurich American Insurance Co. v. Amerisure Ins. Co., 2017 WL 366232 (S.D. Fla. 2017) involved an underlying construction defect lawsuit where a condominium association sued a general contractor. The general contractor hired subcontractors and required them to identify the general contractor as an additional insured. This is all routine, right? A few of the subcontractors had CGL policies issued from the same insurer (Amerisure). They contained the same additional insured endorsement that included the following “other insurance” clause:

Any coverage provided in this endorsement is excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent, or on any other basis unless the written contract, agreement, or certificate of insurance requires that this insurance be primary, in which case this insurance will be primary without contribution from such other insurance available to the additional insured.

When the general contractor was sued it, as it should, tendered the defense of the lawsuit to the responsible subcontractors as an additional insured under their policies demanding both a defense and indemnification from the association’s claims. The insurer, however, refused to defend the general contractor. The general contractor’s insurer (Zurich) defended the general contractor in the action.

Thereafter, the general contractor’s CGL insurer sued the subcontractors’ CGL insurer. (The general contractor had also assigned its additional insured rights under the policies to its CGL insurer.) The general contractor’s CGL insurer was seeking reimbursement for the attorney’s fees and costs expended in the defense of the general contractor in the underlying construction defect lawsuit. The subcontractors’ CGL insurer moved to dismiss the claims based on the clause above—that the subcontractors’ CGL insurance operated as excess insurance over the general contractor’s CGL insurance. In other words, the subcontractors’ CGL insurance was not primary and noncontributory. There was no allegation that the subcontract included language requiring the subcontractor’s CGL insurer to be primary and noncontributory.

The first reason this is an important point is because “when an insurance policy defines its coverage as secondary or “excess” to a primary policy, the excess insurer has no duty to defend the insured—so long as the primary policy provides for a defense and its coverage has not been exhausted.” Zurich American Ins. Co., supra, at *4. If the subcontractors’ CGL policy is excess, then than their CGL insurer does not have a duty to defend if the primary policy is not exhausted. This means they have no duty to defend the additional insured – not very helpful to a general contractor tendering the defense of the claim to responsible subcontractors.

The second reason this is an important point is because of what is known between liability insurers as the anti-contribution rule:

Florida courts have consistently held that, once the duty to defend is activated, every subject insurer assumes it on a personal and indivisible basis. That means that when an insured tenders a claim to multiple insurance providers, the entity that actually engages in the defense and incurs the fees and costs associated with it cannot subsequently seek contribution or equitable subrogation from the fellow insurer who “lagg[ed] behind.”

Zurich American Ins., Co., supra, at *5 (internal citations omitted).

Since the general contractor’s CGL insurer bore the costs of the general contractor’s defense in the construction defect lawsuit, it cannot now divvy up the defense fees and costs to other insurers that may have had a similar obligation unless an exception to this rule applies (see below).

The third reason this is an important point is because there is an exception to this anti-contribution rule:

A “responsive” insurer who complied with its insured’s tender for defense can extract reimbursement from the “nonresponsive” insurer when the insured had separately contracted with another entity, itself an insured of the nonresponsive carrier, to indemnify the first insured. The logic of the exception is that the insured parties’ express decision to “shift[ ] exposure” from one to the other is imputed to the insurer relationship and overcomes the general anti-contribution principle.

Zurich American Ins., Co., supra, at *8 (internal citations omitted).

ADDITIONAL INSURED OBLIGATIONS AND THE UNDERLYING LAWSUIT

Posted on October 2, 2016October 2, 2016 by Edward Garber

As a general contractor, you understand the importance of being named an additional insured under your subcontractors’ commercial general liability (CGL) policies. Not only do you want your subcontract to express that a subcontractor’s CGL policy is primary and noncontributory to your policy, but you want it to express that the subcontractor must identify you as an additional insured for ongoing and completed operations. Even with this language, you want the subcontractor to provide you with their additional insured endorsement and, preferably, a primary and noncontributory endorsement. These additional insured obligations are important to any general contractor that has been sued in a construction defect / property damage lawsuit.

In the recent decision in Core Construction Services Southeast, Inc. v. Crum & Forster Ins. Co., 2016 WL 5403578 (11^th Cir. 2016), a general contractor built a residential development. The general contractor required its roofing subcontractor to identify it as an additional insured under the roofer’s CGL policy. The general contractor was sued with the lawsuit asserting that the roofs were installed incorrectly. The general contractor tendered the defense of the claim to the roofer’s CGL insurer and the insurer refused to provide the defense because there was no “property damage” within the definition of the CGL policy (“physical injury to tangible property…”). The general contractor then filed a lawsuit against the subcontractor’s insurer arguing that the insurer was obligated to defend and indemnify it since the general contractor was an additional insured under the subcontractor’s CGL policy. The trial court, and as affirmed by the Eleventh Circuit Court of Appeal, held that the insurer owed no duty to defend or indemnity the general contractor because there was NO asserted property damage within the meaning of the policy. If there was no property damage then there was no obligation for the roofing subcontractor’s insurer to defend the general contractor as an additional insured under the subcontractor’s CGL policy.

The underlying lawsuit only claimed that the roofs had been damaged but did NOT claim that the defective roofs had caused damage to other property (other components of the building). The omission of this assertion was important because the complaint was not pled to trigger insurance duties, such as additional insured obligations, since the cost to repair or replace the damaged roof would not be covered by the subcontractor’s CGL insurer. Rather, costs to replace or repair damage caused by the subcontractor’s defective roofing installation would be covered; however, such damage was not pled in the underlying complaint. Remember, the insurer’s duty to defend is only triggered based on allegations in the underlying complaint so without such allegations, there is no duty.

THE “PRIMARY AND NONCONTRIBUTORY” INSURANCE REQUIREMENT

Posted on September 19, 2014September 19, 2014 by Edward Garber

If you were ever involved in a construction defect claim or lawsuit, you may have heard the phrase “primary and noncontributory” when referring to YOUR insurance coverage. Or, you may have come across this phrase when discussing with your insurance broker the additional insured insurance coverage requirements you need to provide pursuant to your contract.

But, what does this mean when referring to YOUR insurance coverage? This phrase refers to the priority of YOUR insurance coverage.

For instance, a general contractor will require that that its subcontractors obtain CGL insurance coverage that not only names the general contractor as an additional insured (for both ongoing and completed operations), but also includes an endorsement reflecting that the subcontractor’s policy is “primary and noncontributory.” (See above picture for example of endorsement) The subcontract may provide, by way of example, that, “Insurance coverage provided by you [subcontractor] to the additional insured [general contractor] shall be primary and noncontributory with respect to any insurance coverage otherwise available to the additional insured.” This means that if the general contractor is sued associated with the negligence of its subcontractor, it will tender the claim to the subcontractor’s insurer to defend and indemnify it since it will (hopefully) be an additional insured under the policy. The subcontractor’s policy is the “primary” policy without contribution from the general contractor’s policy (as the general contractor’s policy will really come into play as excess insurance).

The general contractor, to be safe and circumspect, may want the subcontractor to obtain a “primary and noncontributory” endorsement that says that the subcontractor’s insurance will be primary and noncontributory when required by written contract. The reason this is safe is because most CGL policies already contain a section called “Other Insurance.” In this section (as depicted in part in the adjacent picture), the policy will state that it is primary except when other insurance (specified in the policy) is available in which case it will serve as excess insurance. One of the other insurance conditions that will deem your policy as excess is when you are identified as an additional insured under another’s policy (e.g., the subcontractor’s policy that identifies the general contractor as an additional insured is the primary policy and the general contractor’s policy will serve as excess insurance). The primary and noncontributory endorsement modifies this “Other Insurance” language.

Understanding the application of insurance and the interrelationship of potential policies is never easy. But, this understanding is of the utmost importance for construction risk assessment purposes where risk is inherent in the very nature of construction.