Insurance: Are You Really Covered?
February 2011
By: David N. Ravin, Michelle A. Schaap, and Celine L. Barakat
Wolff & Samson Construction Law Alert
Assumptions about the coverage provided by your current insurance contract may prove to be incorrect and a great expense in light of a recent Appellate Division decision. Contractors now have another reason to carefully review their contracts and question their brokers to determine whether their insurance contracts provide the minimum necessary protection. If not, contractors may learn too late that their insurance contract does not cover liabilities assumed in a third-party contract and that New Jersey courts do not hesitate to enforce these exemptions, even when the contractor clearly purchased the insurance to satisfy a mandatory indemnification agreement.
One contractor learned these lessons the hard way when the Appellate Division confirmed that provisions in a commercial surplus line insurance contract that clearly exclude liability assumed by the insured in a third-party contract are enforceable, even if the contractor had no opportunity to bargain for the exclusions and such exclusions render the benefits of the insurance contract useless to the contractor.
In Transcontinental Contracting Inc. v. The Burlington Ins. Co., Transcontinental, a general contractor, was awarded a contract with the New York City Economic Development Corporation (“EDC”). The contract required Transcontinental to indemnify, among others, the EDC, New York City and the construction manager from any and all claims, damages and judgments arising from various events including, the acts, omissions or negligence of Transcontinental and its subcontractors. In light of the broad indemnification provision, during the term of the job Transcontinental purchased three successive one-year surplus line insurance contracts from Burlington Insurance Company (“Burlington”) through the Dale Group, a retail insurance broker as well as through CRC Insurance Services, a wholesale broker. Each yearly contract included a Cross Liability Exclusion that excluded bodily injury and personal injury claims of “any insured” from coverage.
In the insurance contract for the third and final year, however, Burlington added a new provision: a Contractual Liability Limitation that excluded bodily injury or property damage assumed under a contractual obligation with a third party, and in this case, thereby excluding Transcontinental’s indemnification liability assumed under the contract with the EDC.
Unfortunately, during this final year of contract, two Transcontinental employees were gravely injured while working on the EDC project. The employees subsequently filed suit against EDC and the general contractor. Citing the Cross Liability Exclusion and Contractual Liability Limitation provisions, Burlington denied coverage of the employees’ injury claims. In response, Transcontinental filed for declaratory judgment to require Burlington to provide coverage. During cross-motions for summary judgment, the trial court ruled in favor of Transcontinental, finding that Burlington’s unilateral addition of the Contractual Liability Limitation provision was unfair and, additionally, resulted in ambiguity in the meaning of the contract. As such, the court interpreted the contract in favor of finding coverage, as was consistent, in the trial court’s opinion, with Transcontinental’s reasonable expectation under the insurance contract. The court obviously reasoned, why would Transcontinental enter into an insurance contract that did not cover the very damages for which Transcontinental was expressly procuring the coverage?
On appeal, however, the Appellate Division disagreed. The Appellate Division focused on the underlying personal injury action commenced by Transcontinental employees. As Transcontinental employees, their damages were originally excluded from coverage under the Cross Liability Exclusion present in all three insurance contracts. The court even went so far as to say that in and of itself, the Cross Liability Exclusion, without the Contractual Liability Limitation, excluded all insureds, including those for whom Transcontinental was performing operations, presumably, the EDC.
The Appellate Division also found that the two provisions did not render the insurance contract ambiguous and therefore the stated terms of the insurance contract must be enforced, despite the fact that Transcontinental did not have the opportunity to bargain for the exclusions. The Appellate Division stressed that surplus line insurance contracts are inherently risky, as a measure of “last resort”, and that such insureds are cognizant of the risk. Therefore, even though the exclusions rendered the insurance coverage useless to Transcontinental, who needed that very insurance to comply with its contract with the EDC, the exclusions were nonetheless enforceable in a commercial surplus line insurance contract. Transcontinental was therefore liable for the damages and legal fees resulting from its employees’ personal injury actions, without the insurance protection it thought it had procured from Burlington.
The deadline to appeal has passed and neither party has filed for review with the New Jersey Supreme Court. Thus, this insurance-friendly precedent remains the current law in New Jersey. Therefore, it is incumbent upon contractors to carefully review their insurance contracts (especially surplus line insurance contracts) for provisions that exclude from coverage those liabilities assumed under an indemnification agreement (and any other exclusions). Such provisions may include language that simply excludes damages suffered by “any insured”. As we have learned in Transcontinental, such language has been interpreted by the New Jersey courts to exclude indemnification liabilities.
Therefore, each contractor should confer with the appropriate professionals, including its brokers, to ensure that all parties are aware of all contractual liabilities and potential liabilities, either current or prospective, and determine whether the contractor’s current insurance contract(s) provides the necessary (and intended) protection. A written representation by the broker and insurance company confirming that the desired coverage is included in the subject policy can resolve (or reveal) any potential gaps in coverage. Contractors should also consider discussing with legal counsel whether negotiating for applicable law other than New Jersey would better serve its company’s needs so long as the Transcontinental opinion remains unchallenged. These precautionary measures may prevent unanticipated extraordinary costs down the line.
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David N. Ravin ■ Member of the Firm ■ (973) 530-2034 ■ dravin@wolffsamson.com
Michelle A. Schaap ■ Member of the Firm ■ (973) 530-2026 ■ mschaap@wolffsamson.com
Celine L. Barakat ■ Associate ■ (973) 530-2151 ■ cbarakat@wolffsamson.com
