Failing to Sign Subcontract Before Accident: Prime Contractor Might Not Be 'Additional Insured'
by John S. Mrowiec

The contractor also might neglect to collect an insurance certificate from the subcontractor naming the contractor as an additional insured under the subcontractor's insurance policy before allowing the subcontractor to begin work.

Suppose a subcontractor's employee is injured before a subcontract is signed or an insurance certificate listing the contractor as additional insured is tendered. Under such a situation, will the contractor be an additional insured under the subcontractor's comprehensive general liability policy if the subcontract is signed later?

Indiana Case Touches Issue

The question was addressed in a recent Indiana case, Liberty Insurance Corp. v. Ferguson Steel Company, Inc., 2004 Ind. App. LEXIS 1461 (2d Dist., July 27, 2004).

Some time prior to Jan. 6, 2000, Steel Frame Erectors Inc., who was to be a subcontractor to the general contractor, began work. On Jan. 6, 2000, one of the subcontractor's employees was injured.

At the time of the injury, the subcontractor had a comprehensive general liability insurance policy, and the insurer was Liberty Mutual.

The policy contained an "Additional Insured Endorsement Clause." The clause defined an additional insured as the following:

"any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy [but] . . . only with respect to liability arising out of your ongoing operations performed for that insured . . . [until] your operations for that insured are completed."

A week after the injury, the general contractor, Ferguson Steel Co., forwarded a subcontract to the subcontractor. The subcontractor, and then the general contractor, signed the written subcontract.

The subcontractor and general contractor had worked together frequently. The subcontractor often began work with this particular general contractor before signing a subcontract. The subcontractor and general contractor had the understanding that the subcontract would be in effect from the day work commenced, even though signed thereafter.

The contractor did not have such an understanding with other subcontractors. Instead, the general contractor required a signed subcontract before permitting those subcontractors to begin work.

The injured worker filed suit against the general contractor and others. The general contractor tendered defense of the worker's suit to the subcontractor's insurer. The subcontractor's insurer refused to defend or indemnify the general contractor. The general contractor sued seeking a declaration that the insurer owed coverage.

Motions Filed

The general contractor and the subcontractor's insurer each filed cross-motions for summary judgment. The trial court held that the subcontractor's insurer owed coverage to the general contractor. The insurer appealed.

The insurer contended that the unambiguous language of the policy required that the subcontractor's agreement to perform work had to be in writing to make the general contractor an additional insured under the policy. Until there was such a written agreement, the insurer argued, the general contractor was not an additional insured. The injury occurred prior to the signing of the written agreement.

The general contractor argued that it and the subcontractor had an oral agreement before inception of the work, and thus, before the injury, that would be, and in fact was, later reduced to writing. Therefore, according to the general contractor, the "in writing" requirement of the insurance policy was satisfied and coverage should have applied from the time the subcontractor began work which is what contractor and subcontractor intended.

The Ferguson Steel appellate court began its analysis with the legal principle that "when one enters into an agreement with the understanding that neither party is bound until a subsequent formal written document is executed, no enforceable contract exists until the subsequent document is executed," Ferguson Steel, 2004 Ind. App. LEXIS 1461, *6 citing Wolvos v. Meyer, 668 N.E.2d 671, 675 (Ind. 1996). The subcontract contained an integration clause: The subcontract provided it was "the entire and integrated agreement between the parties hereto and superseded all prior negotiations, representations, and agreement, either written or oral."

The appellate court concluded that there was no effective written agreement until the subcontract was signed, too late for coverage for this injury.

The appellate court ruled that the insurer was required to insure the general contractor only based upon the written agreement and not on the intentions of the general contractor and subcontractor to be bound to a subsequently signed writing. There was no evidence that the insurer had knowledge of the contractor-subcontractor understanding.

After all, the court reasoned, the insurer could not be expected to insure a party without knowledge of the name of the party, the period of coverage or of the insurer's obligation to do so. (But the court did not explain whether the policy even required the subcontractor to provide the writing to the insurer as a condition to insuring a general contractor.)

The general contractor argued that it had a "course of dealing" with the subcontractor that signing a writing merely formalized a pre-existing agreement. The Ferguson Steel court noted that a course of dealing is an established pattern of conduct between the parties to a particular transaction. But the insurer was not a party to the subcontractor-general contractor agreement; the insurer was a party to a separate agreement with the subcontractor that required a written agreement before the insurer would be obligated to insure a general contractor.

Nor would it matter to the Ferguson Steel appellate court whether there was a customary practice in the construction industry to delay written agreements until after work commenced. This general contractor generally did not allow work commencement without signing a written subcontract except with this subcontractor.

Appellate Court Reverses Decision

The Ferguson Steel appellate court reversed the trial court and held the insurer owed no coverage to the general contractor. Therefore, no matter how much trust two parties have for each other, commencing work without a written subcontract might leave the general contractor to rely on its own insurance to defend suits from injured subcontractor employees for incidents occurring before the subcontract is signed or no certificate is collected.

Sometimes a contract will provide an "effective as of" date, such as the date of work commencement, even though it was signed later. Neither the facts nor analysis of Ferguson Steel address whether the subcontract used an earlier "effective date." Thus, we do not know whether that common practice would have changed the Ferguson Steel result under the language of the particular insurance policy.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.