Privity and Its Impact on Blanket Additional Insured Endorsements for Contractors
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In the complex and often litigious world of construction and contracting, insurance coverage plays a critical role in allocating risk among various parties. A key legal doctrine that intersects with insurance law, particularly in the context of blanket additional insured endorsements, is the doctrine of privity of contract. While this concept is fundamental in contract law, it can have unintended and sometimes detrimental consequences for contractors who believe they are protected by downstream insurance policies.
Understanding privity, its implications, and how to address it are essential for contractors seeking to ensure adequate risk transfer and coverage.
What Is Privity of Contract?
Privity of contract is a common law principle stating that only parties who are directly involved in a contract can enforce or be bound by its terms. This means that a third party who is not a signatory to a contract typically has no right to sue under it or benefit from its provisions.
In practical terms, if a general contractor hires a subcontractor, a direct contractual relationship (privity) exists between those two parties. However, if that subcontractor then hires a sub-subcontractor, the general contractor and the sub-subcontractor do not have privity unless a direct contract also exists between them.
Privity and Blanket Additional Insured Endorsements
A blanket additional insured endorsement is a provision in a commercial general liability (CGL) insurance policy that automatically extends coverage to additional insureds — such as general contractors or owners — when required by a written contract. These endorsements are attractive because they eliminate the need for a separate endorsement for each additional insured.
However, blanket endorsements can create a false sense of security as contractors may assume they are protected simply because downstream contracts require them to be added as additional insureds. Privity can become a significant obstacle when attempting to enforce coverage under these blanket endorsements.
Why Lack of Contractual Privity is an Insurance Concern
Many blanket endorsements are triggered only if there is a written contract or agreement directly between the named insured and the party seeking additional insured status. If the contractor seeking coverage does not have a direct written contract with the subcontractor whose insurance policy contains the blanket endorsement, the doctrine of privity may prevent the endorsement from being triggered.
For example:
- A General Contractor hires Subcontractor A.
- Subcontractor A hires Subcontractor B.
- Subcontractor B’s CGL policy includes a blanket additional insured endorsement.
If the General Contractor seeks coverage under Subcontractor B’s policy due to an incident involving B’s work, they may be denied because there is no direct contractual privity between the General Contractor and Subcontractor B, and thus no contractual requirement to name the General Contractor as an additional insured.
Solutions to Overcome Privity Issues in Contractor Insurance
To address the privity issue and ensure intended coverage is achieved, several proactive measures can be taken:
1. Specific Insurance Language in Contracts
Include language in subcontracts explicitly requiring downstream parties to name upstream parties as additional insureds whether or not there is a direct contract. While this won’t create privity, it provides evidence of intent and may support broader interpretation in some jurisdictions.
2. Direct Written Contract Requirements
Ensure that all tiers of subcontractors have direct written agreements with upstream parties who are to be covered as additional insureds to create the necessary privity and satisfy the condition of most blanket endorsements.
3. Add or Amend Verbiage on Additional Insured Endorsements
Many insurance carriers are able to add or amend verbiage on their blanket additional insured endorsements to language that specifically addresses the issue of privity. Verbiage such as “entities you are explicitly required to add as an additional insured under any contract or agreement” may alleviate concerns about privity while still providing the benefits of using the blanket additional insured endorsements.
4. Use of Scheduled Additional Insured Endorsements
Instead of relying solely on blanket endorsements, request scheduled endorsements that specifically list upstream parties by name. This bypasses the privity issue by directly naming the intended additional insureds.
5. Project-Specific Policies
For large projects or high-risk scopes, consider requiring project-specific policies or wrap-up insurance (OCIPs/CCIPs) that cover all parties involved, regardless of contractual relationships.
Conclusion
Privity of contract is a foundational principle that, while useful in many contexts, can undermine risk transfer in construction projects when not properly addressed. Contractors relying on blanket additional insured endorsements must understand how privity can limit coverage and take deliberate steps to create enforceable insurance obligations. By emphasizing direct contracts, clear language, and tailored insurance strategies, contractors can mitigate the risks posed by privity and better protect themselves.
