Don’t Spare Me the Details – the Importance of Reviewing and Understanding the Terms of Your Policy When Requesting Additional Insured Status
Authors: Jonathan S. Forester and Leroy Carter, III
Recently, the Louisiana First Circuit examined a claim made by a general contractor against its subcontractor and multiple insurance carriers for breach of contract and declaratory judgment as well as the argument that the subject carriers failed to obtain and place coverage in accordance with the terms and conditions of the project contract entered into between the general contractor and subcontractor. Pointedly, the Louisiana First Circuit examined and answered the question of: Does a subcontractor/insured have a duty to review the policy and make sure that the terms and conditions of the policy meets its needs when contracting with a third-party to procure coverage? They answered, “yes”, to this complicated inquiry.
In Chet Morrison Contractors, L.L.C. v. Spartan Directional, L.L.C., Chet Morrison, L.L.C., Plaintiff, contracted with Shell Pipeline Company, LP (“Shell”) to provide pipeline construction services for a project (“Contract”). Further, Chet Morrison contracted with subcontractor/defendant, Spartan Directional, L.L.C. (“Spartan”) to perform construction services (“Subcontract”). As a result, Chet Morrison and Spartan executed a Subcontract, in which Spartan agreed to procure insurance coverage on behalf of Chet Morrison based on specified terms of the Subcontract. The contract required Spartan to procure:
Builder’s Risk Insurance in the amount of $3,200,000, which policy shall provide full coverage for all loss or damage to all or any portion of the construction while it is in the care, custody or control of Spartan, and such policy shall be maintained throughout the performance of Spartan’s work on the Project, including through acceptance of Spartan’s work by Company. In addition, Section 8(h) of the contract, the policy provided, in pertinent part, that all policies of Spartan shall name Chet Morrison as an additional insured.
Thereafter, Spartan hired Gallagher Risk Management Services (“Gallagher”) to obtain insurance in accordance with its Subcontract. Please note that the project was split into two phases (Phase I and II). For Phase I, Gallagher obtained a builder’s risk policy with Chet Morrison named as an additional insured. However, for Phase II of the project, Gallagher obtained an “installation floater policy” issued by Berkshire Hathaway Specialty Insurance Company (Berkshire) for Spartan, but there were no additional insureds included on that policy, even though Spartan’s insurance agent with Gallagher stated he “believed” that he requested additional insured states and “intended” to do so. Importantly, on the insurance application, Gallagher listed Chet Morrison under “Additional Interest”. However, Gallagher did not check the box to indicate the type of interest, i.e., “Additional Insured,” even though that was an option. Additionally, Gallagher never checked (or even received) the actual policy before Gallagher issued a Certificate of Insurance (“COI”) to Spartan listing Chet Morrison as and Additional Insured on the Policy. Further, nowhere in the policy was Chet Morrison listed as an Additional Insured.
After the Policy was issued, an accident occurred while Spartan was performing work on the site in which the drill pipe Spartan was using to drill broke off in the borehole and Shell’s servitude was damaged as well as the area around the project. As a result, Spartan filed a claim with Berkshire, which ultimately resulted in a paid settlement. Additionally, Chet Morrison sued Spartan for breach of contract and failure ot perform in a workmanlike manner, which allegedly caused Chet Morrison to incur damages in the form al additional costs, delay, loss of revenue and other damages.
Further, Chet Morrison also made a claim to Berkshire as an “Additional Named Insured” under the policy In response, Berkshire sent denial correspondence stating that Chet Morrison was not an additional named insured on the policy. During that time, Gallagher discovered that the Berkshire policy did not include an additional named insured. In response, Gallagher then requested that Berkshire modify the policy (which was now expired) to include Chet Morrison as an additional insured, which was ultimately denied by Berkshire.
Chet Morrison then filed multiple supplemental and amending petitions, including adding Gallagher and Berkshire as defendants, for failure to include Chet Morrison as an Additional Insured on the policy.
On motion for summary judgment, Berkshire argued that Chet Morrison was, in actuality, not an additional insured under the policy. As a result, the trial court granted Berkshire’s motion, which was then appealed.
Ultimately, the appellate court affirmed the trial court’s ruling affirming Berkshire’s motion. First, the court found no evidence before the court that would create a genuine issue of material fact as to whether Berkshire Hathaway either offered or agreed to include Chet Morrison in the policy as an additional insured. The Louisiana First Circuit noted that Berkshire’s insurance quote detailed the coverage offered to Spartan and contained a warning to “review carefully” because “[s]ome coverages/endorsements provided in the proposal may differ from those requested in the submission.” In the court’s discussion, it cited Boudreaux v. Coco, stating that an insurer is free to limit coverage in any manner it desires, and the insured has the obligation to review the policy to ensure that it meets his needs. In the instant case, Spartan admitted that it did not review the insurance application submitted on Spartan’s behalf.
Notably, the Louisiana First Circuit further ruled that the failure to obtain proper coverage and name Chet Morrison as an additional insured cannot be imputed to Berkshire. The court cited TCC Contractors, Inc. v. Hospital Service District No. 3 of the Parish of Lafourche, stating that although an insured subcontractor was contractually obligated to list a contractor as a loss payee in its insurance contract, the contractor was not entitled to coverage as a third party beneficiary to the insurance contract simply because the insured “intended” to cover the third party, where there was no clear expression of intent to benefit the third party in the insurance contract).
This case provides and important lesson to contractors that you must always check your actual insurance policies to ensure the coverage and additional insured status required in your contract is actually being provided in the applicable insurance policy. You cannot simply rely upon your insurance agent and assume all is well. If you do, insureds could be faced with breach of contract allegations and those who think they are additional insureds may be left with no additional insured coverage.
