Contractor’s Conundrum? Coverage for Additional Insured’s Own Negligence in Nebraska

January 4, 2012 by William F. Austin

The Nebraska Supreme Court recently decided the case of Federated Service Insurance Company v. Alliance Construction et al., 282 Neb. 638, 805 N.W.2d 468 (October 28, 2011).  This was a declaratory judgment action.  An employee of Sadler Line Construction was injured and sued the general contractor, Alliance Construction.  Alliance sought coverage as an additional insured from Sadler’s liability carrier, Federated Service Insurance Company. 

Federated argued that (1) the subcontract that its insured, Sadler, entered into with Alliance did not require Sadler to insure Alliance for Alliance’s direct acts of negligence, and that (2) the Federated policy itself did not insure Alliance for its direct acts of negligence.  In overruling and reversing the District Court’s ruling in favor of Federated, the Supreme Court noted that the District Court properly interpreted Nebraska law as requiring Sadler to obtain insurance coverage for losses caused by Alliance’s own negligence in two circumstances: (1) the subcontract contained express language to that effect, or (2) the subcontract contained clear and unequivocal language that the parties intended Sadler to obtain such insurance.

            However, the Court concluded, contrary to the District Court, that the insured’s agreement to make Alliance an additional insured on its Comprehensive General Liability policy unequivocally showed that the parties intended for Sadler to procure tort liability coverage for Alliance’s own negligence, and not just coverage for vicarious liability.  The Court then analyzed the pre-2004 additional insured endorsement to Sadler’s CGL policy that stated that coverage was extended to "any person or organization . . . for which you have agreed by written contract to procure bodily injury or property damage liability insurance, arising out of operations performed by you or on your behalf."  Like many courts before it, the Nebraska Supreme Court said that this created a "but for" causal connection which did not require the named insured’s acts to have caused the injury or damage; instead, it was sufficient that, as in this case, the named insured’s employee was injured while present at the scene in connection with performing the named insured’s business even if the cause of the injury was the negligence of the additional insured.

            Thus, the Court found that the subcontract, by agreeing to make Alliance an additional insured, was sufficient to show that Sadler was required to procure tort liability coverage for Alliance’s negligence and that the "arising out of" language in the additional insured endorsement was enough to extend such coverage to Alliance.  The Court reversed for further proceedings because an additional issue relating to "sole negligence" was factually unresolved.

            Here is the conundrum.  The Nebraska Supreme Court concluded that the additional insured endorsement in that case extended the coverage as required by the contract.  However, the Court noted that the insurance industry in 2004 reworked the additional insured endorsement to limit the coverage extended to an additional insured to "your acts or omissions or the acts or omissions of those acting on your behalf [named insured]." 

What happens now when the contract, as in Federated Service Insurance Company v. Alliance Construction, agrees to make the owner or contractor an additional insured on its CGL policy, which under Nebraska law as explicated in the Federated case shows that the parties intended to procure tort liability coverage for the property owners or contractor’s own negligence, but the newly reworked additional insured endorsement does not provide the requisite coverage?  As the Court also noted in that case, "if a contract clearly requires a subordinate party to insure against a promisee’s negligence and the subordinate party fails to do so, the subordinate party will be liable for the promisee’s damages for its own negligence."  Will property owners or contactors, frustrated in their attempt to obtain coverage under the additional insured endorsement, seek recourse against the subcontractor or contractor itself under this ruling?

A perspicacious subcontractor or contractor will carefully review the insurance procurement clause of any contract to be sure that its procurement duties are consistent with and no greater than the coverage that will be afforded by the additional insured endorsement of its CGL policy.  Have your legal counsel carefully review these provisions both in your contract and your insurance policy.