On October 5, 2021, a three-judge panel of the United States Court of Appeals for the Second Circuit unanimously ruled that under New York law the indemnity agreement in a contract between a contractor and a subcontractor governs the priority of coverage for the contractor as an additional insured on the subcontractor’s commercial liability policy, rather than the “Other insurance” clause of the policy. This decision clarifies the order in which the additional insured coverage applies to owners, contractors, subcontractors and their respective insurers.
In Century Surety Co. v. Metropolitan Transit Authority, Long Island Railroad, Admiral Insurance Co.,1 the defendant Long Island Railroad (LIRR) contracted with Rukh Enterprises (Rukh) to remove lead paint from the Cyprus Bridge in Queens. In the contract, Rukh agreed to indemnify LIRR against liabilities arising from the Cypress Bridge project.2 Rukh also appointed LIRR as an additional insured on Rukh’s insurance policies. Rukh hired East Coast Painting and Maintenance (East Coast), an independent subcontractor, to do the lead related work.3 In September 2013, an employee of the subcontractor suffered an injury while working on the Cyprus Bridge and brought an action against Rukh and LIRR in state court.4
In January 2017, Century Surety Company (Century), Rukh’s excess liability insurer, filed a lawsuit in the Southern District of New York seeking a declaratory judgment that it had no obligation to defend or indemnify a party in the state legal action.5 In April 2017, Admiral Insurance Company (Admiral), LIRR’s protective civil liability insurer, filed a separate lawsuit against Century seeking a declaratory judgment that: (1) Century was obligated to defend and indemnify LIRR; and (2) Century’s policy must be exhausted before Admiral’s policy responds.6 These two cases were subsequently combined and all parties applied for summary judgment.7 On January 29, 2019, the District Court issued summary judgment in favor of Century because the wording of the “Other Insurance” provision of Century’s policy was “true excess policy” and Century, therefore, did not was not required to contribute until all available insurance policies, including that of the Admiral, had been exhausted.8 Century appealed.9
On appeal, Admiral did not dispute that Century’s “Other Insurance” provision made the Century policy a “true franchise policy”.ten Rather, the Admiral argued that the compensation agreement in the construction contract between Rukh and LIRR controlled and made Century pay before the Admiral.11 When faced with the question of whether the terms of the indemnity agreement in the contract between Rukh and LIRR or Century’s “Other Insurance” provision were applicable, the court concluded that the indemnification agreement was scrutinized.12 The Second Circuit found two New York Appeal Division cases that were “particularly informative” – Indemnity Insurance Co. of North America v. St. Paul Mercury Insurance Co.13 and Arch Insurance Co. v. Nationwide Property & Casualty Insurance Co.14 In both cases, it was a compensation agreement whereby the contractor undertook to compensate the owner who was “in contradiction with the terms of the contractor’s insurance policy” , which also contained provisions on “true deductibles”.15 Indemnity and Arch held that even if the contractor’s insurance exceeded the owner’s insurance, the owner was entitled to compensation from the contractor because the owner’s liability would pass on to the contractor and his employees. insurers.16
In addition, the second circuit distinguished Bovis Lend Lease LMB, Inc. v. Great American Insurance Company17, an earlier case of the Appeal Division, which held, unlike Indemnity and Camber that the provisions of an insurance policy relating to the priority of coverage prevail over an underlying indemnity agreement.18 Because Bovis was decided before Indemnity and Camber, the court found that the latter cases were more indicative of the approach the New York Court of Appeals would now take.19 In addition, the court rejected the traditional procedural formalities of Bovis, which calls for separate action to enforce the compensation agreement.20 Instead, the Second Circuit provided that New York’s highest court would determine the rights and obligations of the parties in one action, thereby reducing any further litigation.21 The court held that while the Other Insurance clause may not require the insured’s insurer to pay first, the indemnity agreement may ultimately require that insurer to pay, so both obligations should be determined in a single action. In strengthening its position, the court cited other federal courts across the country that have come to the same conclusion that an indemnity agreement is determinative, not other insurance clauses.22 In short, the decision of the Second Circuit in Century continues the trend in New York jurisprudence that an indemnity agreement in an underlying commercial contract, rather than an other insurance clause in a policy, governs the priority of coverage for an additional insured. This participation provides important information to owners, developers, builders and their insurers regarding the priority of coverage in relation to their obligations to be paid in a settlement.
1 Century On. Co. v. Metro. Transit Auth., 20-1474-cv, 2021 US App. LEXIS (2nd Cir. 5 Oct 2021).
2 Identifier. to * 1, * 6.
3 Identifier. at 2 hours.
5 Identifier. to 3.
7 Identifier. at 4 o’clock.
9 Identifier. at 5.
ten Identifier. to * 5–6.
12 Identifier. to 6.
13 Compensation Ins. Co. of Am. C. St. Paul Mercury Ins. Co. (Indemnity), 74 AD3d 21 (1st Dep’t 2010).
14 Arch Ins. Co. v. Nationwide Prop. & Case. Ins. Co. (Arch), 175 AD3d 437 (1st Dep’t 2019).
15 Century On. Co., 2021 US App. LEXIS at 8.
16 See Indemnity Ins. Co., 74 AD3d-26; see also Arch Ins. Co., 175 AD3d to 438.
17 Bovis Lend Lease LMB, Inc. v. Great Am. Ins. Co. (Bovis), 53 AD3d 140 (1st Dep’t 2008).
19 Century On. Co., 2021 US App. LEXIS at 9 o’clock.
20 Identifier. at * 11-12.
22 St. Paul Fire & Marine Ins Accord. Co. v. Am. Int’l Specialty Lines Ins. Co., 365 F.3d 263, 272, 277 (4th Cir. 2004); A m. Lloyds indemnity v. Travelers Prop. & Case. Ins. Co., 335 F.3d 429, 436 (5th Cir. 2003); Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583, 587 (8th Cir. 2002).