Being an additional insured

With construction work, it may not always be clear which party is responsible for paying damages following bodily injury or property damage. To help you in such cases, you should become familiar with the steps you can take to obtain recovery directly from insurance carriers for other parties whose negligence has caused bodily injury or property damage to you. There are several mechanisms that can be used for this purpose.

In the construction industry, the most common way to gain direct access to and coverage from another party's insurance policy is to become an additional insured. Becoming an additional insured is accomplished by a contractual provision in another party's liability insurance policy and an additional insured endorsement issued by the other party's insurance carrier.

Additional insured status

Currently, you invariably are required to name the owner, general contractor, architect, construction manager, property manager and others as additional insureds on your commercial general liability and other liability insurance policies. Similarly, you should require to be named an additional insured on the liability policies of your subcontractors, suppliers and vendors.

In addition, seek to be named an additional insured on up-stream contracts with general contractors, construction managers, building owners and property managers. The contract language and additional insured endorsement should be written so you are afforded coverage to the extent that the primary insured's negligence resulted in a claim against or loss sustained by you.

Upon becoming an additional insured on an insurance policy of a subcontractor or another party with whom you contracted, you should be able to recover payment from the other party's insurance carrier (in accordance with the terms stated in the additional insured endorsement). However, there have been cases where an additional insured was not able to sue the insurance carrier directly if there was no direct contractual relationship between the named insured and additional insured. This year, a new additional insured endorsement is being issued by the insurance industry through Insurance Services Office Inc., Jersey City, N.J., to provide coverage to nonprivity additional insureds.

But what if you are not named as an additional insured? Can you make a claim against the insurance carrier for the party whose negligence resulted in you sustaining bodily injury or property damage?

For example, let's assume you are a commercial roofing contractor who is installing a large roof system and a portion of the roofing work calls for tile installation. Rather than doing this work yourself, you retain a subcontractor to perform the tile installation. Several years following construction, there are leaks in the tile roof system resulting in interior property damage. The building owner files suit against you. Unfortunately, your subcontractor does not have the financial capability to pay an adverse verdict or settlement.

If your subcontractor's work is found to have been negligently performed, you will be liable for the resulting damages and you might not be able to obtain any recovery from the subcontractor because of its weak financial position. However, if you make a claim against and recover payment from your subcontractor's liability insurance carrier, you would not need to bear the financial risk and liability resulting from your subcontractor's work.

Direct-action statutes

Historically, you could not have sued another party's insurance carrier. You would have had to have filed a claim against the party with whom a contract was made, and that party may or may not have had insurance. Unless you had been made an additional insured under the other party's insurance policy, you would have had no claim against the other party's liability insurance carrier because of the absence of a contractual relationship between the injured person and insurance carrier.

But now, most states have enacted statutes that allow you, at least in certain circumstances, to file suit and recover from another party's insurance carrier if and when you obtain a final judgment against the insured party and the insured party does not pay the judgment.

For example, Louisiana, Puerto Rico and Wisconsin have enacted "direct-action" statutes that allow a claimant to initiate a lawsuit naming the insured and insurer based on the alleged negligence of the insured.

Although a defendant's insurance carrier cannot be named as a party in the original lawsuit against a defendant except in Louisiana and Wisconsin, a majority of states have enacted limited direct-action statutes that allow a successful plaintiff to sue and recover from the defendant's liability insurer.

In most states, once a final judgment is rendered against the insured defendant and if the judgment is not paid within 30 days, the successful plaintiff can file a separate suit to recover the amount of the judgment from the insured's insurance carrier in accordance with the insurance policy's terms and limits. Obtaining a judgment against the insured is a condition precedent to bringing a claim directly against the defendant's insurance carrier.

Upon becoming what is known as a "judgment creditor," the plaintiff is entitled to the same rights as the named insured under the defendant's insurance policy and can recover from the defendant's insurance carrier. Alabama, California, Connecticut, Delaware, Florida, Illinois, Iowa, Maine, Maryland, Massachusetts, Missouri, New York, Ohio, Rhode Island, Tennessee and Vermont have adopted this approach. Many of these states have enacted statutes requiring liability insurance policies to contain a provision affording a judgment creditor the opportunity to sue an insurance carrier directly and stating a policy will be construed to include such a provision even if the provision is not included in the insurance policy.

The Connecticut direct-action statute is typical. It provides that an injured claimant who obtains a judgment may satisfy the judgment against the defendant's property by subrogating his or her claim against the defendant's insurer if the judgment has not been satisfied within 30 days after the judgment was rendered. The injured claimant has the same rights against the defendant's insurer as the insured defendant.

Conversely, if the insurer has a valid defense to the claim that would negate coverage, the insurer can defend the subrogation claim. As a subrogee of the insured defendant, the judgment creditor is placed in the same legal position as the insured defendant toward the defendant's insurer.

Taking a much more limited approach, Georgia, Kansas and Nebraska allow a suit to be prosecuted against and recovery to be obtained from the defendant's insurance carrier only with regard to motor vehicle claims. New Jersey and Pennsylvania permit recovery directly from defendants' insurance carriers only for claims involving motor vehicles or when damages are caused by animals. The Nebraska and New Jersey statutes are further limited to situations when the insured defendant is insolvent or has filed for bankruptcy protection.

Many states have made it clear bankruptcy of the named insured does not relieve or release the insurance carrier of its obligations and liabilities as provided in an insurance policy. If a defendant is insolvent or bankrupt, state law may allow a direct action against the insolvent or bankrupt defendant's insurance carrier. Rhode Island also allows a direct action against insurers when insureds cannot be sued in Rhode Island.

No-action clause

Many liability insurance policies contain a so-called "no-action" clause that specifically prohibits a claim against an insurance carrier until the insured's obligation has been determined either by a judgment against the insured or a settlement agreement has been reached by the claimant, insured and insurance carrier.

If an insurance policy contains a no-action clause, the injured claimant cannot simply negotiate a settlement with the insured defendant and then recover from the defendant's insurance carrier without the consent of the defendant's insurance carrier.

Assignment of claim

You may be able to pursue payment from an owner's property insurance policy through an assignment from the owner. In the 2012 case Kyle W. Larson Enterprises Inc. v. Allstate Insurance Company, the Colorado Court of Appeals ruled a roofing contractor could pursue a claim against the homeowner's property insurer for unreasonable delay and improper denial of benefits.

In this case, Kyle W. Larson Enterprises, doing business as The Roofing Experts, Littleton, Colo., contracted with the owners of four homes insured by Allstate Insurance to repair their roof systems. The contracts between the contractor and homeowners included a provision stating the roofing contractor would be paid from the homeowners' insurance policies and granted the roofing contractor full authority to communicate with Allstate Insurance regarding all aspects of the insurance claims.

The Roofing Experts met with Allstate Insurance adjusters to determine the amount of each claim and began making repairs after obtaining approval from Allstate Insurance. However, it was later determined additional repairs were required to comply with applicable building codes and to maintain manufacturers' warranties. The Roofing Experts made the additional repairs and invoiced Allstate Insurance, which paid the originally agreed-upon amounts but refused to pay for the additional repairs.

The Roofing Experts sued Allstate Insurance under Colorado's insurance statute that requires insurance carriers "not unreasonably delay or deny payment of claim for benefits owed to or on behalf of any first-party claimant." Allstate Insurance argued The Roofing Experts was not a "first-party claimant." The Colorado statute defined a first-party claimant as "an individual, corporation, association, partnership or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy."

Reversing the decision of the trial court, the Colorado Court of Appeals ruled a contractor who is authorized to assert and does assert claims on behalf of an insured is entitled to assert a claim against the homeowner's insurance carrier for unreasonable delay and denial of benefits. In this case, the homeowners had given The Roofing Experts authority to communicate directly with Allstate Insurance, and The Roofing Experts' claim for the additional repair work was made "on behalf of" the insured homeowners, who were relieved from the obligation to assert the claims themselves based on their contracts with The Roofing Experts.

Therefore, without addressing the issue of whether the roofing contractor's claim was meritorious, the Colorado Court of Appeals recognized The Roofing Experts could file suit against the homeowners' insurance carrier based on the Colorado statute providing for claims against insurers who unreasonably delay or deny making payment.

Summing up

You should take advantage of all opportunities available to you to recover from insurance carriers if you are not properly compensated for damages caused by another party. As always, taking steps at the outset of a project is a prudent approach and will put you in a much better position than if you failed to consider the insurance of other parties before any work began.

Although injured parties are not generally permitted to bring a claim initially against another party's insurance carrier, there are various mechanisms you can use to pursue such a claim. Becoming an additional insured on another party's liability insurance policy is standard practice in the construction industry and provides the additional insured with rights under the other party's insurance policy.

You should seek to become an additional insured on the liability policies of all parties with whom you contract—upstream and downstream—and obtain a certificate of insurance from each party so you have the names and policy numbers of the insurance policies maintained by the parties with whom you contract.

In situations where you are not an additional insured, you still may be able to obtain recovery from the negligent party's liability insurance carrier if you have obtained a final judgment or the insurance carrier has agreed to a settlement through state-enacted direct-action statutes. In situations where you have obtained an assignment from an owner to obtain payment from the owner's insurance carrier, you also will be able to pursue a claim and potentially recover from the insurance carrier.

Stephen M. Phillips is a partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.