Sunday, November 23, 2008

Question of Fact on Additional Insured Coverage Found from "Unusual Chronology" of Certificate of Insurance and Purchase Order

Burlington Ins. Co. v Utica First Ins. Co.

(Sup. Ct., Nassau Co., decided 11/10/2008)

The date when an underlying contract was "executed" can be important for purposes of triggering additional insured (AI) coverage under certain blanket AI endorsements.  This is such a case. 

New York Interiors had a CGL policy with Utica First that contained a blanket additional insured endorsement, which provided:
WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization, including any person or organization shown in the schedule above, (called additional insured) whom you are required to add as an additional insured on this policy under a written contract or agreement; but the written contract or agreement must be:
  1. Currently in effect or becoming effective during the term of this policy; and
  2.  Executed prior to the "bodily injury", "property damage" or "personal and advertising injury".
Burlington Insurance Company insured Manlyn Development Corp, which subcontracted drywall and ceiling work on a commercial construction project to New York Interiors.  The subcontract was memorialized in a purchase order, dated June 26, 2003, which required New York Interiors to carry CGL insurance of at least $1 million and name Manlyn as an additional insured on a certificate of insurance (COI).

TheCOI was dated June 3, 2003 (23 days before the purchase order date).  Although the purchase order was dated June 26, 2003, Manlyn did not sign and authorize it until July 9, 2003; New York Interiors signed the purchase order on July 23, 2003.

On June 27, 2003 (one date after the purchase order was dated but on the same date New York Interiors began its work), a pedestrian fell through an open sidewalk cellar door and was injured.   The pedestrian sued Manlyn and New York Interiors, and Burlington tendered Manlyn's defense and indemnification in that action to Utica First, which rejected the tender based on the fact that the purchase order was not signed until after the accident.  Burlington eventually settled the personal injury action for $62,500 and brought this action to recover that amount plus $56, 122.85 it spent in defending Manlyn.

Both insurers moved for summary judgment.  Burlington argued that although the purchase order was not signed prior to the accident date, all of the essential terms had been agreed upon, and New York Interiors had begun work on the day of the accident.  Burlington argued that partial performance renders a contract executed within the meaning of the policy.

In denying Utica First's motion, Nassau County Supreme Court Justice Thomas Phelan held, in effect, that a contract need not be signed to be considered "executed":
Utica argues that the New York Interiors' contract with Manyn was not executed prior to the accident because it had not been signed.  However, the term executed may have a variety of different meanings depending upon the context in which it is used. The term "executed contract" may refer to one that has been fully performed by the parties (Black' s Law Dictionary, 6th  Ed. 1990). However, to "execute" a contract may also mean "to perform all the necessary formalities, as to make and sign the contract" (Id). Unless the contract is within the statute of frauds, a writing is not one of the formalities necessary to the formation of the contractt.  Thus,  where the parties discuss a writing, they may intend not to be bound until the writing is executed, or the writing may serve as a convenient memorial of an agreement already reached (Wise Co. v. Wecoline Products, Inc., 286 NY 365 (1941)).

A reasonable businessperson would expect that, under the blanket additional insured endorsement, other contractors would be additional insureds if New York Interiors was contractually obligated to obtain insurance for their benefit. The purpose of the prior written contract provision is simply to prevent a fraudulent scheme where the contractors agree to name one of the parties as an additional insured after the accident.  The New York Interiors contract with Manlyn did not expand the liabilty assumed by Utica because of the blanket additional insured endorsement. Indeed, an insurer may assume even liabilties which arose before the policy date, provided there is no fraud or concealment by the insured (Appelman Insurance Law and Practice § 4266). A fortiorari, provided there is no fraud by the named insured and the other contractor, a writing memorializing a prior agreement to name an additional insured may be signed within a reasonable time after the loss.
This part of Justice Phelan's ruling seems to be at odds with the First Department's decision in Rodless Props., L.P. v Westchester Fire Ins. Co., 40 AD3d 253 (1st Dept. 2007), in which the First Department held that the undefined term "executed" as used in a blanket AI endorsement is not ambiguous and means either a contract that has been signed or a contract that has been fully performed by both parties.  In attempting to distinguish Rodless Properties, Justice Phelan thought it important that in that case there was no proof of an oral contract to name the owner as an additional insured because the certificate of insurance was issued as a matter of information only and was tendered after the loss.  If Utica First appeals, my money will be on a reversal/modification of this part of the decision.

Based on testimony of New York Interior's owner that New York Interiors employees opened the sidewalk cellar door to deliver materials to the site on the day of the accident, the court found that the accident arose out of New York Interiors' work for Manlyn to trigger AI coverage under the Utica First policy.  However, in denying summary judgment to Burlington, Justice Phelan found that there was a triable issue as to whether Manlyn and New York Interiors fraudulently agreed to name Manlyn as an additional insured on New York Interiors' policy:
While the certificate of insurance is dated over thee weeks before the purchase order, there is no evidence as to when the certificate was tendered to Manlyn. Moreover, the purchase order is dated only one day before the accident.  Because of the unusual chronology of the documents, the court cannot conclude as a matter of law that no fraud took place. Accordingly, plaintiffs ' cross-motion for summary judgment is denied.

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