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Construction e-Alert: "Fifth Circuit Holds that Contractor is Entitled to Additional Insured Coverage even though Indemnity Agreement is Unenforceable"

The Fifth Circuit Court of Appeals recently issued a decision holding that even if an indemnity agreement between a contractor and a subcontractor were unenforceable for failing to meet the fair notice requirements of express negligence and conspicuousness, the indemnity agreement nevertheless qualified as an “insured contract” under the policy and therefore entitled the general contractor to coverage as an additional insured. Specifically, in Gilbane Building Co. v. Admiral Ins. Co., 2011 WL 6153370 (5th Cir. Dec. 12, 2011), the general contractor was sued after a subcontractor’s employee was injured when he fell while climbing down a ladder. The injured worker alleged that recent rainstorms had caused the construction site to accumulate mud and that the general contractor had been negligent in failing to keep the job site clean. The contract between the general contractor and subcontractor required the subcontractor to add the general contractor as an additional insured on the subcontractor’s general liability policy. The general contractor demanded that the subcontractor’s general liability insurer defend and indemnify it as an additional insured.

The subcontractor’s policy contained an endorsement which provided that any contractor on whose behalf the subcontractor was performing operations was an additional insured, but only if coverage as an additional insured is required by written contract or written agreement that is an “insured contract.” Like most standard CGL policies, the subcontractor’s policy defined “insured contract” as a contract pertaining to the subcontractor’s business under which the subcontractor assumed the tort liability of another party to pay for bodily injury or property damage. The subcontractor’s insurer denied coverage on the basis that the contract’s indemnity provision was unenforceable under Texas law for failure to meet the fair notice requirements. The Fifth Circuit found that enforceability of the indemnity provision was irrelevant to the question of whether the general contractor qualified as an additional insured and that the general contractor was indeed an additional insured under the plain language of the policy. Ultimately, while the court found that the injured worker’s lawsuit did not trigger a duty to defend the additional insured, the general contractor was entitled to indemnity from the subcontractor’s insurer for the judgment entered against it because the actual facts showed negligence on behalf of both the general contractor and the injured worker.

This case stresses the importance of having proper additional insured coverage in place. In addition, while usually not the case, here the insurance company had liability to pay the judgment even though it did not have a duty to defend. Construction contracts entered on or after January 1, 2012, are subject to new provisions in the Texas Insurance Code which make certain indemnity agreements and additional insured requirements invalid. Although the new statute prohibits many indemnity agreements where one party assumes responsibility for the other party’s own negligence, it does allow a party to require that its contractors provide indemnity for any bodily injury to employees of the contractors, their agents, or their subcontractors of any tier regardless of who is at fault. Such an indemnity clause here could have shifted the entire responsibility for the subcontractor’s employee’s injuries to the subcontractor, thereby eliminating the general contractor’s need to seek direct coverage as an additional insured.

If you have questions regarding this alert or require assistance related to the issues described, please contact Cindy Holub (713.226.6607; cholub@porterhedges.com) or any of our construction practice attorneys.


Porter Hedges Construction Practice
Porter Hedges represents contractors, subcontractors and suppliers, sureties, design professionals, construction managers and owners in resolving complex construction disputes. Our lawyers have extensive federal, state and administrative litigation and arbitration experience. We have the resources to meet the needs of large national and multi-national corporations as well as those of small to mid-sized companies and individuals, from pre-litigation negotiation through appeal.

 

 

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