In our last post, we discussed "risk shifting" provisions and "additional insured" clauses. Now we'll move on to "other insurance" clauses and risk of owner "holdback".
“Other Insurance” Clause
When a project involves multiple parties, each of whom is providing their own liability insurance, each policies’ “Other Insurance” clause is also often implicated. These clauses must be carefully designed to ensure that the policies “exhaust” (i.e., provide and use up coverage) as the parties intended.
For example, if one insurance policy contains an “Other Insurance” clause which states “This policy is primary…,” and another policy provides that “This policy is excess…,’” there is generally no problem. However, if both policies contain the same “Other Insurance” clause, New York courts have concluded that the terms are mutually exclusive and, therefore, ineffective. For example, if two excess or umbrella liability policies contain identical “Other Insurance” clauses, each of which says “This policy is excess…,” then neither policy is excess. Under New York law the clauses are ignored and each policy will suffer first exposure and will pay in the first instance on a pro-rata basis.
Risk of Owner "Holdback"
In the event of a coverage denial, you may also face the added problem of the owner or general contractor implementing a “holdback” and stopping all future payments under the contract until they receive appropriate assurances that in lieu of the insurance coverage you have failed to provide, other satisfactory arrangements were being made for their (costly) legal defense, as well as possible indemnification for the damages ultimately awarded and paid to the injured plaintiff.
Complying with contract insurance requirements will require more than simply providing an “ACORD” form indicating the specified type and amounts of insurance are in place. If you fail to properly include “additional insureds” on your policies, or fail to assure that “other insurance” will be required to respond properly, you may face a situation where you have failed to provide the insurance coverage required under your contract.
When a claim by an injured party is received under such circumstances, you could be faced with the problem of having to “go out of pocket” at your own expense if your carrier disclaims coverage. This will require you to personally pay for the defense of both the upstream parties who are not receiving the anticipated “additional insured status,” as well as yourself. The legal fees in defending the underlying construction accident case can be very significant.
GOLDBERG & CONNOLLY COMMENTARY
The effort you and your insurance professional spend properly implementing a contract-compliant, project-specific insurance program is time certainly well spent. It is not enough to simply buy the cheapest CGL, excess and workers’ compensation policies, or to simply keep renewing what you already have in place. You need to understand the insurance specifications of your contracts and assure that the content of your various insurance policies are consistent with your contractual obligations (beyond mere type and amount of insurance). Paying more careful attention to this seemingly routine, but extremely important issue can go a long way toward avoiding a disaster (and isn’t that the very purpose of insurance), as well as “protecting your insurance protection.”