Insurance Exclusion Negates Additional Insured Coverage

So you think your additional insured status as a GC provides protection against claims by your sub’s injured workers? Think again.

General contractors commonly require subs to include the GC as an additional insured party on the sub’s general liability insurance policy. This requirement, coupled with an express indemnity of the sort found in all major industry contract templates, will provide protection for the GC in the event of a claim against the GC by a sub employee that arises out of the sub’s work.

But one GC has discovered that some insurance policies include a so-called “cross liability exclusion,” which bars coverage for bodily injury to an “employee of any insured.”

Project and the Lawsuit

A worker for a scaffolding company was injured when he fell from scaffolding that he was helping to dismantle. The section of scaffolding where he was standing did not have a guard rail, and the worker had not been provided with fall protection. The facts recited all point to control by the sub, and not the GC, over the detail of the operations.

The injured worker sued the GC, and the GC tendered the defense to the sub’s carrier, based on the GC’s additional insured status and on the subcontract indemnity. Since both scaffolding sub and GC were insured parties, the GC was seeking coverage for a claim ostensibly barred by the cross liability exclusion, and the carrier declined to defend the GC.

Court Decision

The Massachusetts Appeals Court has upheld the carrier, denying coverage to the GC.

The GC argued that the cross liability exclusion should be read in conjunction with the separation of insureds clause (referred to generically as a “severability of interests clause”), which states:

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:

1. As if each Named Insured were the only Named Insured; and

2. Separately to each insured against whom claim is made or 'suit' is brought.

The GC noted that the two clauses were inconsistent, and argued that the term “any insured” in the cross liability exclusion is thus ambiguous and should be construed in favor of the GC. But the Appeals Court did not agree. The court noted use of both “the insured” and “any insured” at different places in the policy, and held that the distinct language should be assumed to be intentional.

The court concluded: “There would thus be ‘no logical reason why [a severability of interests clause] would operate to limit application of an exclusion whose very purpose is to prevent one insured (or its employee) from suing another insured (or its employee).’” (citations omitted)

Impact of Decision

Query whether anyone informed the court that a major source of claims to be covered by the additional insured endorsement is the type of claim here – a sub employee injured while carrying out the sub’s work, who then sues the GC. The court’s comment, noted above, shows a lack of understanding of the very logical reason why GCs would consider the cross liability exclusion to run counter to a major reason for demanding additional insured status.

In any event, this decision is a wake-up call to general contractors. Pay attention to whether the subs’ insurance policies include a cross liability exclusion, which could prevent the GC from requiring subs to defend and indemnify the GC against injured worker claims. And this will be the same issue for owners, relative to GC worker claims.

The case is Phoenix Baystate Construction v. First Financial Insurance Company, 2020 Mass. App. Unpub. LEXIS 411 (May 18, 2020).