Oct 25 2013

You Got Me Covered, Right?: Illinois Court Finds That General Contractor Did Not Waive Coverage Under Subcontractor's Commercial General Liability Insurance Policy

You Got Me Covered, Right?:  Illinois Court Finds That General Contractor Did Not Waive Coverage Under Subcontractor’s Commercial General Liability Insurance Policy

By Ken Cripe

Construction subcontracts typically require the subcontractor to provide a certificate of insurance to the general contractor to evidence contractually required insurance coverage.  Insurance coverage disputes often arise long after certificates of insurance have been issued, the project completed and the subcontractor paid.

The recent unpublished case of Las v. James McHugh Dev. Co., 2013 IL App (1st) 112888-U (Feb. 13, 2013) addresses just that situation. 

A general contractor, James McHugh Construction Company, subcontracted with a subcontractor, Mastership Construction Company, Inc., to perform work at the Battle Stations 21 Facility project at Great Lakes Naval Base and Naval Air Force Station in Great Lakes, Illinois.  The dispute began in 2009 when Jozef Las, an employee of Subcontractor, filed an action against General Contractor and others for alleged injuries sustained when he fell from scaffolding while working at the Project, but did not sue his employer, the Subcontractor.  The worker attributed the injuries to General Contractor’s negligence.  EMC Insurance Companies was Subcontractor’s workers’ compensation insurer and commercial general liability insurer. 

The Subcontract provided

“Subcontractor agrees to obtain and submit to [General Contractor], and to cause all of its subcontractors to obtain and submit to [General Contractor], within seven (7) days of the date hereof and in any event before commencing work hereunder policies or certificates of insurance issued by a company or companies acceptable to [General Contractor] showing the insurance coverage required by Schedule ‘B’ (Insurance Requirements Bulletin), attached hereto.

Each of the aforesaid policies shall name [General Contractor] and such other parties designated on Schedule ‘B’ as additional insured parties and shall provide that it is primary to any general liability insurance maintained by [General Contractor] or any other additional insured party and also that it may not be canceled or changed except upon thirty (30) days notice in writing to [General Contractor].”

Schedule B required minimum limits for commercial general liability of $2 million for each occurrence and $2 million for general aggregate.  Schedule B also required that Subcontractor’s “policies shall be primary for the benefit of the additional insureds and on ISO Form GC 20 10 1185 or equivalent coverage.”

In August 2009, General Contractor sought coverage as an additional insured on Subcontractor’s commercial general liability policy from Subcontractor’s Insurer “pursuant to ISO Form CG 20 10 1185 or equivalent endorsement.”  Insurer advised General Contractor that no coverage existed because the policy was endorsed with Additional Insured coverage form CG 7482 12 00, rather than the contractually required endorsement.  That was important because, although Insurer conceded General Contractor was an additional insured, under the CG 7482 form, there were limitations on coverage for an act or omission by the additional insureds, whether the sole or contributing cause of loss, under Form CG 7482.

In March 2010, General Contractor filed a third-party complaint against Subcontractor for contribution and breach of the Subcontract for failing to provide contractually required insurance coverage.

General Contractor’s third party complaint attached the Subcontract and the certificate of insurance which stated that the limit for the commercial general liability was $1 million for each occurrence and $2 million for general aggregate.  The certificate of insurance also stated that General Contractor was an “Addl Insds Primary Non-Contributory (CG7193) as respects General Liab Policy.”  As is standard, the disclaimer on the certificate of insurance stated the certificate was “a matter of information only and confers no rights upon the certificate holder.”

Subcontractor filed a motion to dismiss General Contractor’s third party complaint arguing that Subcontractor complied with the Subcontract insurance provisions or alternatively, General Contractor waived the Subcontract insurance provisions by not raising certificate of insurance defects when received, permitting Subcontractor to perform and complete work and paying Subcontractor in full.  General Contractor responded by arguing that Subcontractor led General Contractor to believe that Subcontractor complied with the Subcontract by providing a certificate of insurance identifying contractually required coverage and that any court ruling that Insurer did not owe General Contractor coverage would mean Subcontractor breached the Subcontract.

The trial court granted Subcontractor’s motion to dismiss.  The trial court found that, even though there was a question of fact regarding coverage under the circumstances, that would not help General Contractor because General Contractor already had waived any deficiency in insurance coverage.  The trial court denied General Contractor’s motion to reconsider.  The General Contractor appealed.

The appellate court reversed and remanded the trial court’s decision.  The appellate court held that the certificate of insurance did not provide General Contractor with notice that General Contractor was not covered under Subcontractor’s policy, as the appellate court said was required by the Subcontract.  Without notice that General Contractor was not covered under Subcontractor’s insurance policy, General Contractor could not knowingly waive its right to coverage. 

The appellate court further reasoned that the certificate form’s standard disclaimer did not trigger any obligation for General Contractor to obtain the relevant policies to prevent a finding of waiver.  The appellate court’s decision meant the litigation between the Subcontractor and General Contractor would continue and would determine whether Subcontractor had breached by not providing conforming insurance coverage for the General Contractor.

There was a vigorous dissent.  The dissenting justice viewed the disclaimer as controlling because the limits shown on the certificate were obviously not conforming with the Subcontract’s requirements.

The Las case is unpublished and does not carry precedential value.  Nevertheless, it shows how important it is to review not only certificates of insurance, but Additional Insured endorsements, to determine whether any insurance coverage deficiencies or limitations exist to avoid a later insurer argument of no coverage for a suit and then a waiver defense by the procuring subcontractor.