Academic journal article Defense Counsel Journal

Construction Industry AIEs: Problems of Contract Interpretation and Solutions

Academic journal article Defense Counsel Journal

Construction Industry AIEs: Problems of Contract Interpretation and Solutions

Article excerpt

There's been a dramatic explosion in additional insured litigation, suggesting that there should be a better risk allocation

THIS article discusses recurring problems arising in construction industry declaratory litigation seeking judicial interpretations of additional insured endorsements (AIEs).(1) Its thesis is that endorsement language is often inadequate to express the risk allocation and insuring relationships these litigants have attempted to create, or may have assumed were created, by merely requiring that one party be named an additional insured on another person's policy. This article sets forth strategies and proposals that, if adopted, should help to preclude, minimize or simplify declaratory litigation seeking construction of these endorsements.

Part I introduces general vocabulary, discusses the construction industry players and identifies some of the advantages and disadvantages of using AIEs to allocate risk.

Part II identifies three recurrent categories of construction industry additional insured declaratory litigation, focussing primarily on the recent flood of cases in New York's trial and appellate courts, and identifies underlying problems in standard endorsement language.

Part III discusses negotiating and contractual-based strategies available to construction industry participants and their counsel to help avoid or minimize the problems discussed and identified in the Part II cases.

I. ADVANTAGES AND DISADVANTAGES OF AIEs

A. Statement of Problem and Basic Definitions

Agreements to procure insurance (APIs) are contractual arrangements in which one party to a contract agrees to procure insurance for another party's benefit. Such agreements are enforceable in New York.(2) In the construction industry, the API is frequently satisfied through inclusion of an AIE in one party's insurance policy. Under the AIE, the party promising to procure the insurance (the "promisor") makes the party for whose benefit insurance is being obtained (the "promisee") an additionally insured person under the promisor's policy (an "additional insured").(3)

Where the promisee negotiates its inclusion as an additional insured on the promisor's policy, it attempts to shift its own risk of loss to the promisor and, derivatively, the promisor's insurance carrier. The additional insured often assumes it has purchased adequate insurance coverage for its involvement with the named insured on the policy (the "named insured"). Frequently, the carrier providing the additional insured coverage, which is normally the named insured's own carrier (the "additional insured carrier") and the additional insured have very different ideas about the nature and scope of AIE-created coverage.(4)

When a claim is made following what the additional insured may believe to be a covered occurrence, the additional insured carrier may refuse defense or indemnification, or both. It may choose to involve the additional insured's commercial general liability (CGL) carrier in the claim. That carrier probably will have issued a separate policy in which the additional insured is the CGL carrier's named insured.(5) This places the additional insured in exactly the opposite position it expected when it required, through its API, that it be named an additional insured on someone else's policy-its own carrier ends up involved in a claim, through declaratory litigation, resulting in an increase in the additional insured's CGL policy premiums.(6)

Such disputes, for reasons discussed below, tend to result in particularly protracted and expensive litigation fro all parties. Although AIEs now (and generally) are regarded as a cost effective and adequate means of providing insurance coverage (the "traditional view"),(7) AIEs have not, in many construction cases, been cost effective or adequate contractual mechanisms to shift risk.

B. Construction Industry Players

The parties to construction industry risk-shifting lawsuits usually include the owner of a property (the "owner"). …

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