The Dam Project and Its Dam Additional Insured Coverage for the Dam Failure

CGL – ADDITIONAL INSURED – "ONGOING OPERATIONS" – REQUIRED BY WRITTEN CONTRACT – DUTY TO DEFEND
Town of Fort Ann v. Liberty Mut. Ins. Co.
(3rd Dept., decided 1/28/2010)

Juvenile title, I know.  Sorry, just couldn't resist. 

Plaintiff Town of Fort Ann retained engineering firm Heynan Teale Engineers and construction company Kubricky Construction Corporation to reconstruct its Hadlock Pond dam in 2004 and 2005.  On July 2, 2005, the reconstructed dam catastrophically failed, releasing a billion-gallon torrent of water that destroyed homes, cars and roadways for hundreds of yards downstream from the spillway. Upstream and downstream property owners brought multiple property damage lawsuits against the Town, which sought liability coverage an an additional insured from Heynan's CGL insurer, Steadfast Insurance Company, and Kubricky's CGL insurer, Liberty Mutual Insurance Company.  Steadfast and Liberty both denied any obligation to the Town asserting, among other things, that the Town did not qualify as an "additional insured" under the terms of their respective policies.

The Town and its CGL insurer commenced this declaratory judgment action for defense and indemnification coverage from Steadfast and Liberty, and breach of contract damages against Kubricky, and, following the completion of discovery, moved for summary judgment.  All defendants cross-moved for summary judgment.  Albany County Supreme Court granted plaintiffs' motion to the extent of finding that Steadfast was obligated to defend the Town in the underlying property damage actions and denied all other motions and cross motions.  All parties appealed.

In MODIFYING the order appealed from to declare that Liberty also had a duty to defend the Town in the underlying property damage actions, the Third Department found that additional insured coverage was triggered under both Kubricky's (Liberty's) and Heynan's (Steadfast's) policies.

Kubricky's policy with Liberty extended additional insured status to an entity when Kubricky's written contract to provide work for the entity required such coverage.  The written contract between Kubricky and the Town required Kubricky to maintain such insurance until the Town accepted the completed project. Liberty argued that the Town's additional insured coverage had ceased since the policy provided that such coverage remained in effect only so long as Kubricky had ongoing operations at the project.

In rejecting Liberty's argument that Kubricky's operations had ended before the dam breached, the Third Department noted that there had yet to be a final inspection of Kubricky's work and held:

The term "ongoing operations" is interpreted broadly in New York (see generally Wausau Underwriters Ins. Co. v Cincinnati Ins. Co., 198 Fed Appx 148, 150 [2d Cir 2006]; Liberty Mut. Fire Ins. Co. v E.E. Cruz & Co., 475 F Supp 2d 400, 411 [SD NY 2007]). Work may be considered as ongoing during a short lapse of time necessary to conduct tests designed to assure proper performance where such testing is an essential element of the work by the insured (see Perez v New York City Hous. Auth., 302 AD2d 222, 222 [2003]; cf. 9A Couch on Insurance 3d § 129:24). While major construction by Kubricky had ended one to two months before the dam's failure, inspection of the project by the engineer, which was required before Kubricky's work was considered completed under the contract, had not yet occurred. In light of the nature of the project, such inspection was not merely a minor after-the-fact detail. We find that the Town adequately established that it was an additional insured for purposes of the broad duty to defend. The exclusions in the policy urged as applicable by Liberty Mutual, which must be construed narrowly, do not vitiate Liberty Mutual's expansive obligation to provide a defense (see generally Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131, 137 [2006]). 

Steadfast's policy with Heynan provided that a client of Heynan would be an additional insured when "required by written contract executed and effective before the performance of 'your work' or 'covered operations.'"  The written contract between Heynan and the Town, which was executed before Heynan's work on the project commenced, stated that "[c]ertificates of insurance will be furnished upon request naming the Town of Fort Ann . . . as additional insured."  The Town did not request the certificate of insurance until well after the dam had failed.  Because the Town had not requested certificates of insurance from Heynan before its work or the dam breach, Steadfast argued that Heynan's written contract with the Town did not require that the Town be named as an additional insured on Heynan's policy.

In rejecting that argument, the Third Department reasoned that an agreement prospectively to provide certificates of additional insured insurance reflected or constituted an agreement to provide AI insurance:

So long as a clear written intent to include an entity as an additional insured is manifested prior to the loss, the fact that certificates of insurance are not issued until after the loss does not compel the conclusion that such entity is not an additional insured (see United States Fid. & Guar. Co. v Shorenstein Realty Servs., LP, 591 F Supp 2d 966, 968-969 [ND Ill 2008]; Atofina Petrochemicals, Inc. v Continental Cas. Co., 49 Tex Sup Ct J 225 185 SW3d 440, 443-444 [2005]; 3 Couch on Insurance 3d § 40:29). Applying rules for construing contracts (see National Abatement Corp. v National Union Fire Ins. Co. of Pittsburgh, Pa., 33 AD3d at 571), we observe that the underlying contract, which had been drafted by Heynan, addresses the full extent of insurance coverage in just one paragraph, three sentences in length. The fact that Heynan agreed in the contract that it was prepared to supply certificates of insurance upon request reflects a clear intent to include the Town as an additional insured in Heynan's work on the dam project. The status of the Town as an additional insured is not made contingent upon the request for a certificate of insurance. We agree with Supreme Court that, under these circumstances, Steadfast Insurance has a duty to defend the Town. 

Credit to the Bay Ridge Volunteer Fire Department for use of its Hadlock Pond dam and damage photos.