The Case: Suffolk Const. Co., Inc. v. Illinois Union Ins. Co., 80 Mass.App.Ct. 90 (2011).
Why we featured this case:
This Appeals Court case ruled for the first time in Massachusetts that to be an additional insured under a subcontractor’s policy there must be a written contract executed by the parties before the loss. Oral agreements (and probably implied agreements) will not satisfy the terms of the usual additional insured endorsement, nor will a certificate of insurance stating that a party is an additional insured.
What You Should Know About This Case:
Suffolk Construction (Suffolk) was the general contractor hired S&F Concrete (S&F) as a subcontractor for a major Boston construction project. After being hired, S&F then subcontracted its rigging work to another company, The Hallamore Corporation (Hallamore). An oiler on one of the Hallamore’s cranes fell off an excavation ladder and sustained serious injuries. The oiler sued Suffolk and S&F for negligent maintenance of an unsafe work area. His claim was eventually settled for $210,000.
At issue in this case is the fact that the subcontract between Suffolk and S&F had a flow-down provision that required S&F to incorporate the terms of the general contract between the owner and the general contractor into its agreements with any lower-tier subcontractors. This flow-down provision, if applied, required any lower tier subcontractor to maintain general liability insurance and to name Suffolk and S&F as additional insureds on all liability policies. The written purchase order between S&F and Hallamore made no reference to the addition of insureds. Hallamore later admitted, however, that it believed that it had a contractual duty to include Suffolk and S&F as additional insureds under its policy with Illinois Union Insurance Company (Illinois Union).
Automatic or blanket additional insured endorsement on policy but, no written contract executed before the loss.
The Hallamore policy had an automatic or blanket additional insured endorsement that made additional insureds any persons “…As required by contract, provided the contract is executed prior to loss.” Suffolk nor S&F were neither specifically nor otherwise identified as additional insureds.
When Hallamore’s employee brought suit, Suffolk and S&F called upon Illinois Union to defend and indemnify them under the terms of the policy between Hallamore and Illinois Union. Illinois Union responded by demanding the executed contract requiring Hallamore to name Suffolk and S&F as additional insureds.
In response, Suffolk and S&F provided copies of the following:
- The purchase order between S&F and Hallamore;
- Correspondence including S&F’s request that Hallamore add Suffolk and S&F as additional insureds; and
- A certificate of insurance created by ABC Insurance Group (ABC), Hallamore’s agent.
The certificate of insurance from ABC Insurance identified Suffolk and S&F as additional insureds under Hallamore’s insurance policy with Illinois Union. The certificate was issued by ABC Insurance but not signed by any authorized person. Included in this certificate was the standard disclaimer: “This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the [policy].”
Notwithstanding the certificate and the evidence of, at least, an oral agreement, Illinois Union refused to defend or indemnify Suffolk and S&F. The insurance carrier stated the requirement of the policy endorsement was a written signed contract executed before the loss and that evidence of an implied or oral contact did not satisfy the terms of the policy.
What the Court said:
The court acknowledged that this was a case of first impression in Massachusetts. In its decision, the Appeals Court ruled that the terms of the additional insured endorsement trumped the claim of the existence of an oral contract, even with a certificate of insurance. The Court reasoned that such evidence could not create a contractual obligation sufficient to satisfy the terms of the policy.
In its explanation, the court highlighted that the critical word in the endorsement was the word “executed.” Since there was no Massachusetts case law on point, the court went to the established dictionaries to furnish the approved natural meaning of disputed terms. Using a legal and a popular dictionary, the court found that in the endorsement the word “executed” would only mean a contract that was “signed.”
The court rejected the proposed interpretation by Suffolk and S&F that would make simple formation of a contract, oral or otherwise, sufficient for the addition of insureds. The court ruled that an informal contract could not suffice under the terms of the endorsement. It also stated that all the words of the endorsement had to be used in interpreting the policy and if the court allowed mere formation of the contract without formal execution, the language of the endorsement could end with the words “as required by contract.” The further clause, “provided the contract is executed prior to loss,” when read with the first clause “as required by contract” added a requirement beyond simple formation.
The Appeals court also argued that its interpretation that prohibited oral contracts as the basis of additional insured status served an important public purpose. “A written and dated instrument furnishes certainty. Its definiteness should act as safeguard against mistaken and fraudulent claims, and against the loss of time, effort, and expense consumed by litigation to resolve them.”
Agent Takeaways:
- The phrase “as required by contract, provided the contract is executed prior to loss” in the automatic additional insured endorsement means that the contracting parties must have a written contract agreeing to create additional insureds. This contract must be agreed to and signed before any loss.
- Agents should advise their insureds who have risk management programs that use additional insured status to control insurance costs, that relying solely upon certificates of insurance is not a good practice based upon this decision.
- For risk management purposes, agents should advise any of their insureds that when using flow-down insurance clauses with subcontractors they should understand that they need to monitor whether all the lower-tier subcontractors have executed a written contract evidencing the agreement. Your insureds should not rely on certificates of insurance in and of themselves.
- Agents should be careful to verify if the certificate issued follows the policy. The agency issuing the erroneous certificate in this case was not made a defendant in this case. But, Massachusetts recognizes negligent misrepresentation as a cause of action. Another party receiving a certificate verifying insurance that relies upon it to their detriment might well sue not only the carrier but the agent issuing the certificate.
By Owen Gallagher
In the meantime here are…
Other legal analyses from Agency Checklists that you might be interested in….
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Agency Risk Primer: Underinsured Loss Ends A 50-Year Insurance Relationship
Subrogation Issues for Your Insureds To Avoid (with your good advice)
DOI Bulletins Do Not Have The Force of Law
