When a tower crane collapsed in New York City, killing seven people, injuring dozens more, and damaging several buildings, the contractor that was operating the crane was denied coverage by it’s excess liability carrier for several distinct reasons. The first reason given was that a residential exclusion in the policy barred coverage – and the building on which the crane was being used was a mixed-use condominium, office and retail tower. The carrier could prevail on that issue at trial but the court held this to be a fact question for a jury to determine whether a “mixed-use” building constitutes “residential construction activities” as defined and excluded by the policy. Admiral Insurance Co. v. Joy Contractors, Inc., et al, 19 NY 3d 448, 972 N.E. 2d 103 (2012). On the question of whether false statements in the application would, as a matter of law, justify rescission of the policy such that it would provide no coverage to the owners, developers, and others that were “additional insureds” under the policy, the court held in favor of the carrier, finding no coverage and permitting the policy to be rescinded for the reasons asserted by the carrier, which the court described as follows:
“These causes of [declaratory judgment action by the carrier] requested rescission of the excess policy or, in the alternative, its reformation to conform retroactively with such terms as might have been offered if [contractor] had responded accurately to the questions and inquiries posed to it by [excess carrier] during the underwriting process; a declaration that the excess policy was void, consistent with the policy condition providing for this in the event of fraud and/or misrepresentation by [contractor] relating to the policy; and a declaration that the claims arising from the crane accident were not within the scope of coverage by the CGL and excess policies.”
The additional insureds in this case essentially argued that they were entitled to rely upon there being coverage for them as additional insureds under the CGL and excess regardless of the insurance application representations or whether the work performed by the contractor differed from what was represented to the carrier.
In its application, the contractor represented that it specialized in drywall installation, did not carry out exterior work, and performed no work at a level above two stories in height from grade other than drywall interior work. The carrier’s suit, however, maintains that the contractor was actually the structural concrete contractor, performing work on the building’s entire exterior with the tower crane. Based on that, the court says,
“[Carrier] evaluated the risk of, and collected a premium for, providing excess insurance for interior drywall installation, not the obviously much greater risk presented by exterior construction work with a tower crane at a height many stories above grade. And as [Carrier] puts it, the only additional insureds it could have contemplated would [have been] entities associated with projects on which [Contractor] was performing interior drywall work and . . . the risk associated with them would [have been] limited to liability caused by acts or omissions of [Contractor] in performing drywall work.”
Taking issue with the trial court for granting the carrier’s motion to rescind coverage only as it concerns the Insured Contractor but not as to the additional insureds, the appellate court commented:
“As [Carrier] points out, the lower courts’ decisions dismissing its sixth cause of action seeking rescission as against all defendants except [Contractor] illogically ‘leaves in place [the excess policy] to be enforced by parties event if [this policy] ultimately is rescinded. In effect, these other parties [would be] permitted to rely on the terms of a policy that . . . may be deemed never to have existed to create coverage’ in the first place. In short, ‘additional’ insureds, by definition, must exist in addition to something; namely, the name insureds in a valid existing policy.”
The other bases argued by the carrier as justification for denying coverage, i.e., reformation or declarations based on the express policy condition regarding fraud and misrepresentation, or the scope of coverage properly afforded under the policy, were also reviewed favorably by the court, holding that the claims related to the contractor’s alleged misrepresentations in its application for insurance “are properly interposed against” the contractor and the owner/developer additional insureds.
Comment: Additional insureds generally obtain only a standard “certificate of insurance” that lists the amount of insurance maintained by the contractor, the names of the carriers whom it is maintained, and that shows specific entities as “additional insureds.” Generally speaking, the additional insureds do no ask for and do not obtain copies of the actual insurance policies – although it seems that more of them have been asking for copies of the policy recently. Perhaps the fear of loss of additional insured coverage, as occurred in this case, is the reason some entities are asking for copies of the policies. But even if the additional insureds in this case had obtained copies of the policies, they would have had no way of knowing that the “named” insured contractor had made material misrepresentations in its application (as alleged here) which would become the basis of rescinding the coverage both as the named insured and the additional insureds. Obtaining the policy, however, would have at least shown that there was a residential exclusion that might ultimately deprive the additional insureds of coverage under the policy for this particular building.
In light of the holding in this case, one might reasonably wonder (1) what, if anything, an insurance agent or broker might need to do when reviewing insurance applications that are being submitted by their clients to insurance carriers; and (2) what is the extent of due diligence someone needs to do when asking to be an addition insured to determine that the coverage will actually be there when needed.
My own view is that the situation and outcome described in this case are so unusual that significant change in the way additional insured status is requested and demonstrated is not necessary. Specifically, I will continue to maintain that obtaining the certificate of insurance is sufficient and that it is not necessary to request the actual insurance policies from the named insureds.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No. 11 (Dec 2012).
Copyright 2012, ConstructionRisk, LLC