The dispute in Security National Insurance Company v. Sunset Presbyterian Church, __ Or. App.__ arose out of construction claims involving a church, its general contractor, a subcontractor, and the subcontractor’s liability insurer. In an underlying lawsuit, the church brought claims against the general contractor (Andersen), who brought third-party claims against its subcontractors, including its masonry subcontractor (B&B). In settlement of the claims, Andersen assigned its rights against subcontractors to the church (Sunset).
In subsequent litigation between Sunset and B&B's insurer (Security National), Security National sought a judgment declaring that it had had no duty to defend Andersen, thus defeating Sunset's assigned claims. The Oregon Court of Appeals reversed the trial court, and held that Security National did have an obligation to defend.
Andersen’s subcontract with B&B required B&B to add Andersen as an additional-insured on its liability policy for liability arising out of the operations performed for Andersen by B&B, acts of Andersen in connection with supervision of B&B, and claims for injuries to B&B's employees related to the construction. Security National provided B&B with liability coverage that included a blanket additional-insured endorsement that added, as an insured, any person that B&B was required by written contract to add as an insured to the policy. B&B's subcontract provided as follows:
[s]ubcontractor shall endorse its Commercial General Liability [policy] to add Andersen*** as additional-insured with respect to liability arising out of (a) operations performed for Andersen or the Owner by Subcontractor, (b) acts or omissions of Andersen or the Owner in connection with general supervision of Subcontractor’s operations, and (c) claims for bodily injury or death brought against Andersen or the Owner by Subcontractor’s employees *** however caused, related to the performance of operations under the Contract Documents.
Security National asserted that this subcontract provision was wholly void under ORS 30.140, Oregon's anti-indemnity statute, which limits the scope of indemnity, and additional insurance coverage, available to contractors and prohibits indemnity for the negligence of the indemnitee (Andersen) itself. Security National also asserted that its additional-insured endorsement afforded Andersen no coverage because the underlying complaint did not allege liability arising during B&B’s “ongoing operations,” within the meaning of its endorsement.
The Court overturned the trial court's dismissal of Sunset's defense cost claim against Security National, giving effect to the additional insurance requirements of B&B's subcontract to the extent it covered Andersen for B&B's acts. In addition, because Sunset's claims against Andersen raised the possibility that damage occurred during B&B's work, the Court found it unnecessary to decide Security National's claim that its endorsement limited coverage to B&B's "on-going" operations, because at the duty-to-defend stage the mere possibility of covered damage is sufficient.
The takeaways from this decision are the following:
(a) Although the additional insured provision of Andersen's subcontract required its subcontractor (B&B) to purchase insurance covering Andersen's own fault in violation of ORS 30.140, the Court chose to excuse this drafting error and gave effect to the provision to the extent it could under Oregon law. It's important to check state law, especially as it pertains to indemnity and insurance contract terms, to ensure the terms comply with local laws.
(b) Security National did not prevail on the terms of its endorsement limiting to coverage to "on-going" operations because Sunset's claims were for defense costs and its claims against the general contractor (Andersen) raised the possibility of damage during B&B's operations. If, however, additional-insured coverage is intended to extend to "completed operations", additional insurance contract terms should so specifically state and the contractor/additional insured should check the endorsement language itself (and not just rely on a certificate of insurance).
(c) The Court's ruling that ORS 30.140 limits additional-insured defense coverage to acts of the named insured means that insurers providing a defense to an additional insured will require defense counsel to limit their representation, or at least to segregate defense costs, which may interfere with the additional insured getting an effective or efficient defense. In some circumstances, the additional insured may need to have its own insurance carrier provide a separate defense counsel, undermining some of the point of broad additional insured contract requirements.