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(A revised version of this article appears in The Construction Lawyer, Volume 24, No. 1, Winter 2004, published by the American Bar Association's Forum on the Construction Industry.)
By John W. Ralls
Howrey LLP
An Oregon subcontractor agreed to obtain liability insurance coverage naming the general contractor as an additional insured. The insurance clause in the subcontract read:
| Insurance. Subcontractor shall obtain, pay for, and maintain such insurance as is required under this paragraph. Prior to commencing performance of the Work, Subcontractor shall provide to [general contractor] a certificate of insurance evidencing such required insurance. Such certificate shall name Owner, [general contractor], and the officers, directors, partners, employees, and agents of each of them as additional insureds.. |
The subcontractor purchased a "blanket additional insured endorsement" to its general liability policy that added as insureds "any person or organization (called additional insured) whom you [the subcontractor] are required to add as an additional insured on this policy under a written contract or agreement."
During construction, one of the subcontractor's employees was injured. The employee sued the general contractor. The general contractor tendered defense of the employee's claim to the subcontractor's insurance carrier. The subcontractor's carrier refused to defend, claiming that the additional insured provision was void as a matter of law because it required the subcontractor to procure insurance that would indemnify the general contractor for its own negligence.
The general contractor settled with the injured employee and initiated a breach of contract claim against the subcontractor's insurance carrier based on its status as an additional insured. The trial court granted summary judgment in favor of the insurance company. The Oregon Court of Appeal affirmed. Walsh Construction Co. v. Mutual of Enumclaw, 189 Ore.App. 400, 76 P.3d 164 (2003).
The issue on appeal was whether the insurance provisions violated Oregon Revised Statutes (ORS) §30.140, which provides:
| (1) | Except to the extent provided under subsection (2) of this section, any provision in a construction agreement that requires a person or that person's surety or insurer to indemnify another against liability for damages arising out of death or bodily injury to persons or damage to property caused in whole or in part by the negligence of the indemnitee is void.
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| (2) | This section does not affect any provision in a construction agreement that requires a person or that person's surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property to the extent that the death or bodily injury to persons or damage to property arises out of the fault of the indemnitor, or the fault of the indemnitor's agents, representatives or subcontractors. |
The general contractor relied on the distinction between insurance and indemnity. The general contractor argued that while the statute rendered void agreements to indemnify another party for the consequences of its own negligence, the statute did not preclude agreements to procure insurance coverage for others.
After reviewing the language and legislative history of ORS §30.140, the court rejected this argument and concluded that the additional insured provision violated ORS §30.140. The court found that ORS §30.140 "was designed to prevent parties with greater leverage in construction agreements (generally, owners and contractors) from shifting exposure for their own negligence - or the costs of insuring against that exposure - to other parties (generally subcontractors) on a 'take-it-or-leave-it' basis."
"Whether the shifting allocation of risk is accomplished directly, e.g., by requiring the subcontractor itself to indemnify the contractor for damages caused by the contractor's own negligence, or indirectly, e.g., by requiring the subcontractor to purchase additional insurance covering the contractor for the contractor's own negligence, the ultimate - and statutorily forbidden - end is the same."
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2004 Howrey LLP
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