The Burlington Ins. Co., Ranger Specialized Glass, Inc. et al., No. 4:12-CV-1759 (S.D. Tex. Feb. 10, 2014)
Here is another vexed "additional-insured" coverage decision that drives yet another nail into the coffin of insurance companies' argument that additional-insureds, whose insured status depends on the existence of an "insured contract," may not obtain defense and indemnity unless the "insured contract" (i.e., an indemnification agreement) is actually enforceable under Texas law. Although the insurance companies have a reasonable point, it appears that that train has left the station, and there is no going back (until the Texas Supreme Court says otherwise).
The isurance dispute arose out of a bothched constuction project. The general contractor ("GC," the additional-insured) was hired to construct a 10-storey office building in College Station. Many subs were hired, and all were required to sign contracts agreeing to add the GC as a additional insured to the subs' liability policies. The contract at issue here contained some handwritten changes (by the sub) that struck out portions of the indemnification clause (the clause by which the sub agreed to indemnify and hold the GC harmless). The construction proceeded. A few years later the owner fired the GC and all its subs for defective work and brought suit the GC, who sought defense and indemnity as additional-insured from one of the sub's insurers. Insurer denied coverage, and the insurance suit began.
The insurer raised many defenses against coverage. I mention only one here. The insurer asserted that GC was not an insured because the contract between GC and sub was not an "insured contract," as required by the policy. Ordinarily, it is enough if the parties to a contract agree that one will add the other as an additional insured to its insurance policy. If that policy contains an endorsement in effect covering that agreement, then the other has insured status under the policy. But the specific terms of the endorsement control, and if, as in this case, the endorsement adds other conditions, then most of the time, courts will impose those conditions.
So what is an "insured contract"? Simply put, GC's contract with its sub is an "insured contract" if the sub agrees in the contract to indemnify and hold GC harmless for damage or injury to third parties in the course of contract works. Simply put. In this case, the contract indeed contained an indemnification clause of that sort, but, by virtue of the sub's handwritten changes, some language was stricken that our state's high court deems essential for enforcement, namely, the "express-neglience" provision. (for some explanation of the exress-negligence, see here). In other words, if GC sued sub seeking contractual indemnity from sub, a court would probably rule that GC was out of luck. So, said sub's insurer, their agreement cannot be a bona fide "insured contract," and GC cannot, therefore, obtain coverage.
The Magistrate Judge in this case recommended that insurer should defend GC in the underlying litigation. The simple reason is that the higher ups have already ruled out the insurer's argument. In Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589 (5th Cir. 2011), the Fifth Circuit held that the key issue with an "insured contract" is not whether the agreement is enforceable under Texas law, but whether the sub agreed to assume the tort liability of another. In this case, the part of the indemnity clause that was not stricken was enough to establish that the sub assumed the tort liability of the GC. The Magistrate Judge here was just following orders. Until we are told otherwise by the Texas Supreme Court, insurance companies are just going to have to defend additional-insureds, even when the policy requires an indemnity clause in the underlying contract, and even if the indemnity clause wouldn't otherwise stand up in court on its own.
But I have wondered since Gilbane if this ruling is really consistent with other Texas Supreme Court decisions on the enforceability of indemnity clauses. The high court adopted the express-negligence rule in Ethy Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 708 (Tex.1987) because without expressly stating the one party is assuming the negligence of the other, the intent to assume that liability is not clear. And to say that, under Texas law, an agreement that a sub will assume the tort liability of a GC is not enforceable unless it expressly says it is to assume the tort liability (negligence) of the GC, is to say that if the agreement does not meet the express-negligence test, it, in effect, is not saying what Gilbane says it must: i.e., that the sub agrees to assume GC's tort liability. In other words enforceability of the indemnity is key to establish the insured-contract intent.
But, as I said, that train seems to have the station.
David S. White