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Insurance - Third Party Over Actions required by written contract

image Charles E. Comiskey Sr., Vice President, Brady Chapman Holland & Associates, Inc., Houston, TX

HOUSTON - What is one of the most common types of construction claim arising from on-going operations? It’s called a “third party over action”. As an example, subcontractor’s employee is injured on the job, makes a workers’ compensation claim, but is dissatisfied with the benefits provided. Subcontractor’s employee is prohibited from suing his/her employer due to the exclusive remedy rule of workers’ compensation, so that employee sues the upstream contractor. As the lawsuit is against the upstream contractor only, this is by definition an allegation of sole negligence. That does not mean that the upstream was solely at fault, but is the only party being sued.

    Contractor’s agreement with subcontractor states that subcontractor will defend, indemnify and hold contractor harmless for injuries to subcontractor’s employees, so contractor forwards the lawsuit to subcontractor to answer and defend.  Where is the coverage for this petition potentially provided?  Under the subcontractor’s general liability coverage.

    In a standard GL policy, subcontractor’s general liability insurance says:  “This insurance does not apply to (e) Employer’s Liability, ‘bodily injury’ to an employee of the insured arising out of an in the course of employment by the insured”.  So coverage is excluded, right?  But the coverage form goes on to state:  “This exclusion does not apply to liability assumed by the insured under an ‘insured contract’” (a series of definitions in a GL policy).  This exception to the exclusion does not provide coverage for the injury to the employee, but instead provides coverage for the contractual assumption of this risk.
    What if the form instead said:  “This insurance does not apply to (e) Employer’s Liability, ‘bodily injury’ to an employee of any insured arising out of and in the course of employment by the insured”?  Did you catch the change?  It’s subtle, just substituting just one word – “any” instead of “the” – but hardly insignificant.  The effect is that coverage for a third party over action is no longer provided to any insured.
    Not as subtle but equally devastating, many insurance companies simply delete the exception to the exclusion, again resulting in a loss of coverage for a third party over action for any insured.  In either case, now both the upstream contractor and the downstream subcontractor have real problems and are headed toward litigation. 
    There are also two standard exclusions that may affect coverage for the assumption of risk in any indemnity agreement.  The first is called an “Amendment of Insured Contract Definition”, which limits coverage by referring  to “that part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for the ‘bodily injury’ or ‘property damage’ to a third party provided the ‘bodily injury’ or ‘property damage’ is caused, in whole or in part, by the [the Named Insured] or those acting on [the Named Insured’s] behalf.” 
    The effect? Contractual liability coverage is now provided only to the extent that the subcontractor was wholly or partially was negligent.  Coverage is no longer extended to the upstream contractor for its independent sole actions, again eliminating coverage for a third party over action lawsuit.  This is ISO CG 24 26 04 13 and should be avoided if the transfer of sole negligence is required.
    The second standard endorsement affecting the contractual assumption of liability is called a “Contractual Liability Limitation Endorsement”, and “limitation” is an understatement.  This completely deletes that portion of the definition of “Insured Contract” that provides coverage for the assumption of negligence in a construction agreement.  This is ISO 21 39 10 93 and is one of worst endorsements in the insurance industry.
    Endorsements like these limit the coverage provided for the contractual assumption of liability in spite of what the construction agreement may require.  This may lead to the downstream party being found to be in breach of contract, for which no insurance is provided.

Charles E. Comiskey, CPCU, CIC, CPIA, CRM, PWCA, CRIS, CCM, CMIPSr. Vice PresidentBrady Chapman Holland & Assoc.,
10055 West Gulf Bank  • Houston, TX  77040

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