Risk Management
Execution of contract triggers coverage for additional insureds
General contractors and subs should specify when their contractual relationship begins
By Donald S. Malecki, CPCU
If a general contractor fires a subcontractor and hires another subcontractor to take over the existing work, the question is whether the new subcontractor’s agreement to name the general contractor as an additional insured will be recognized by the subcontractor’s insurer if, at the time of an accident, the contract between the general contractor and subcontractor was not yet signed.
This actually is a fairly common situation. Sometimes it is not practical for a contract to be signed before work commences. Manufacturers that regularly require work by a plumber, electrician, carpenter, and other service providers commonly require the signing of purchase order agreements before work can begin. But in an emergency, the signing of a contract sometimes has to be postponed.
In many other instances, the parties involved have contracted with one another in the past, have trust in one another, and each knows (or should know) what his or her respective obligations are likely to be.
Even if the parties to a contract have not contracted with one another in the past, there is often some oral agreement or implied understanding as to the contract terms. With time of the essence, project owners, general contractors and a variety of businesses often permit the commencement of work, even though the contract has not been signed.
As a matter of principle, a subcontractor’s insurer is likely to refuse to defend and indemnify the additional insured in the foregoing scenarios, whether the contract has been signed or not, particularly when there are no allegations of fault attributable to the subcontractor.
Apart from that common pattern and practice of denying coverage to the additional insured, whether a contract has to be signed before additional insured coverage is activated is a legitimate concern. In fact, a considerable amount of dialogue currently is being generated in insurance circles about the requirement of some insurers issuing blanket additional insured endorsements.
The condition precedent to qualifying as an additional insured, under some blanket additional insured endorsements, has been that such status applies only “where required by contract, provided the contract is entered into prior to a loss.” Some insurers are now substituting that condition for one stating that the contract calling for additional insured status “is executed prior to the loss.”
This requirement may be new to blanket additional insured endorsements, but it certainly is not new to contractual liability coverage. It was included with the Broad Form CGL endorsement, introduced by ISO in 1976, which required execution of a contract for purposes of contractual liability.
Specifically, the CGL policy, at that time, excluded bodily injury and property damage for which the insured was obligated to pay damages by reason of the assumption of liability in a contract or agreement, except with respect to an “insured contract.”
If the injury or damage arose out of liability assumed in an “insured contract,” as defined, coverage was contingent on injury or damage occurring subsequent to the execution of the contract or agreement.
When standard ISO CGL policy provisions were revised in 1986, those provisions were eliminated. The essence of that requirement, however, was retained and incorporated within the sixth definition of “insured contract” dealing with tort liability assumed. This provision was again changed in 1988.
As contractual liability coverage currently stands, the requirement concerning execution applies within the exception to contractual liability exclusion b. Thus, if bodily injury or property damage for which the insured is obligated to pay damage by reason of the assumption of liability in a contract or agreement is to be covered, the injury or damage must occur subsequent to the execution of the contract or agreement.
Meaning of executed contract
An executed contract can be said to be one that is fully performed, or one that has been signed. All others are executory contracts. The terms “executed,” or “made,” as used in commercial liability policy provisions, however, are not defined nor do they make a distinction between a fully executed contract and an executory contract, where some act, such as its signing, remains to be done.
Black’s Law Dictionary, 6th Edition, 1990 defines the term “executed” as:
“Completed; carried into full effect; already done or performed; signed; taking effect immediately; now in existence or possession; conveying an immediate right of possession; act or course of conduct carried to completion. Term imports idea that nothing remains to be done.”
Judicial track record
Interestingly, the consensus of the courts, thus far, having to do with whether a contract has been executed, for purposes of contractual liability coverage, has been quite liberal. In one such case, Travelers Insurance Co. v. Chicago Bridge & Iron Co., 442 S.W. 2d 888, TX (1969), the court did not require a signing to constitute execution of a written contract.
The court held here that execution of a contract included performance of all acts necessary to render the contract complete as an instrument, and that the term imparts the idea that nothing remains to be done to make a completed and effective contract. Under this reasoning, therefore, the contract is arguably executed, as long as the contract is written and performance is underway or complete.
Of significance in the Travelers case was the court’s reproduction of the following wording taken from Corbin on Contracts:
If a written draft of an agree-ment is prepared, submitted to both parties, and each of them expresses his unconditional assent thereto, there is a written contract. So far as common law is concerned, the making of a valid contract requires no writing whatsoever; and even if there is a writing there must be no signa-tures unless the parties have made them necessary at the time they express their assent and as a condition modifying that assent.
An unsigned agreement, all the terms of which are embodied in a writing, unconditionally assented to by both parties is a written contract.
In some jurisdictions, at least, the parties’ assent to the contract arguably is sufficient to execute an agreement that is being performed or where performance is complete. In absence of a statute or contractual provision requiring a signature or stating that the contract shall not be binding until signed, the parties may become bound by the terms even though they do not sign it, where their assent is otherwise indicated.
In a recent New York case involving an additional insured endorsement, however, the insurer that was looked to for coverage was found not to be obligated to do so. The case is Rodless Properties, L.P., et al., v. Westchester Fire Insurance Company, 2007 NY SlipOP 03835 App. Div. First Dept.
An employee of a contractor, who was injured while working at the site of a project owner, sued the project owner. The project owner, in turn, looked to the general contractor for protection as an additional insured. The endorsement attached to the contractor’s CGL policy provided that, with respect to Additional Insured—Owners, Lessees, or Contractors, Who Is An Insured is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of “your work” for that insured by or for you.
The endorsement’s schedule, as respects the name of a person or organization, read: “As required by contract, provided the contract is executed prior to loss.” The contract, admittedly, was never reduced to a writing, and the accident, which occurred five days before conclusion of the job, prevented full performance by the contractor and the project owner.
In reversing the trial court’s decision that the undefined term “executed” was ambiguous, the appellate court stated that even if the term “executed” were ambiguous, “the canon of construction that ambiguities in an insurance policy are to be construed against the insurer in favor of the insured, an argument raised by the project owner, does not apply here where the real party in interest is the project owner’s insurer and not the insured (project owner).”
Conclusion
Use of the term “executed” by ISO in its CGL policy provisions, dealing with contractual liability coverage, does not, on its face, require the actual signing of a contract where the parties’ assent is demonstrated by performance or other means. This, however, is a judicial determination that can vary by jurisdiction, and it should not be left to chance, as the foregoing Rodless Properties, L.P. case demonstrates.
As with the use of any undefined term, reference to an “executed” contract will lead to complications unless addressed either by policy modification or endorsement, which may be difficult to do, except with respect to nonstandard policies.
Depending on the parties’ respective interests, it may be preferable for the contract, whether written or oral, to be considered executed at the time performance begins. With oral contracts, this condition should be clearly understood between the parties and a clause to that effect inserted in written contracts.
Obviously, this contractual amendment must be in conformity with the applicable law, if any, of the state involved. If this step is taken, however, it may deflate the expectations of denying coverage by the efforts of insurance company claims people who generally are the first persons to read contracts following an occurrence resulting in bodily injury or property damage. *
The author
Donald S. Malecki, CPCU, has spent 47 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter and broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.