It is commonplace in construction projects for a contractor to require its subcontractors to purchase liability insurance that protects against certain claims and that includes the contractor as an additional insured. The problem is that many times the policy that the subcontractor purchases does not on its face meet the requirements set forth in the written agreement between the contractor and subcontractor. For example, the construction agreement may require liability insurance with higher limits of liability than that actually provided by the subcontractor’s policy, or it may require coverage for completed operations but the actual policy fails to do so.
In these situations, can a contractor argue that the subcontractor’s liability policy should be read to provide the coverage required by the agreement between the contractor and subcontractor? In its recent opinion in Vivify Construction, LLC v. Nautilus Insurance Co., 2017 IL App (1st) 170192, the Illinois Appellate Court, First District, fairly clearly said, “No,” at least when the insurance policy language is unambiguous.
Vivify questioned whether the subcontractor’s liability carrier had to provide the contractor with coverage against a bodily injury suit brought by the subcontractor’s employee. The subcontractor had agreed in the construction agreement to purchase commercial general liability coverage that made the contractor an “additional insured…for claims caused in whole or in part by [subcontractor’s] negligent acts or omissions during [subcontractor’s] operations.” The subcontractor’s liability policy provided blanket additional insured coverage that made “any person or organization” an additional insured when the named insured subcontractor “agreed in writing in a contract…that such person or organization be added as an additional insured.” The policy stated that such person or organization is an additional insured “only with respect to liability for ‘bodily injury’…caused, in whole or part, by your acts or omissions, or the acts or omissions of those acting on your behalf.”
However, the policy by endorsement excluded coverage for bodily injury to “any insured’s contractors’, subcontractors’, or independent contractors’ ‘employees’.” Because the underlying bodily injury suit was brought by an employee of the additional insured contractor’s subcontractor, the exclusion clearly applied to bar coverage for the suit against the contractor.
The contractor tried to argue that the court should consider evidence outside of the policy in determining whether the insurer had a duty to defend, particularly the construction agreement between the contractor and subcontractor. The First District rejected that argument. While some Illinois decisions have considered extrinsic evidence in some instances for the purposes of the duty to defend, the appellate court here held that “interpreting the scope of policy coverage presents a separate issue from whether the circumstances of an underlying action fall within the scope of that policy.” Accordingly, the court declined the contractor’s invitation to “consider parol evidence in interpreting an otherwise unambiguous insurance policy.”
In so doing, the First District rejected earlier Illinois decisions suggesting that any interpretation of a policy’s additional insured coverage should consider the scope of insurance contemplated by the underlying agreement between the contractor and subcontractor. See e.g. Equilon Enterprises LLC, 2012 IL App (1st) 111529 (“a circuit court ought not ignore the agreements that serve to drive the named insured to purchase the liability policy naming the other party as an additional insured, in assessing the risk undertaken and the subject matter and purpose of the insurance contract”).
Contractors and subcontractors who agree to make one another additional insureds on their liability policies would be wise to ensure that those policies actually meet the insurance requirements of the parties’ written agreements. If the policy falls short, the First District’s opinion in Vivify makes vividly clear that Illinois courts may very well reject any request to “re-interpret” the policy to make up the difference, so long as the policy language is unambiguous.