The Importance of Naming Indemnitees as Additional Insureds
A Georgia appellate court's recent decision creates uncertainty--at least in Georgia--over the scope of "insured contract" coverage provided by commercial general liability policies ("CGL'). Ordinarily insurance policies do not protect against breach of contract claims. But when provided by the policy "insured contract" coverage protects the insured when the insured contractually assumes tort liability for bodily injury or property damage to a third party.
The case, Scottsdale Insurance Co. v. Great American Assurance Co, involved a sub lease of office space. The lessor was Pearle Vision, the lessee Moresi, the sub lessee, Dr. Mullins. The lease and sub leases contained clauses requiring indemnification of Pearle Vision for personal injuries incurred on the leased premises. A patient sued Pearle Vision and Mullins for medical negligence. Moresi's insurer, Great American, refused to indemnify Pearle Vision. Pearle Vision's insurer, Scottsdale, settled the medical negligence claim and sued Moresi for indemnity winning a $3.0 million verdict. Scottsdale then sued Great American to collect the award on the grounds that the indemnity obligation in the lease fell within the insured contract coverage. The appellate court held Great American not liable, reasoning that since Scottsdale's claim for breach of the indemnity clause was not covered by the policy, there was no need to even address whether the insured contract coverage applied.
This case came to our attention through Powell Goldstein's United States: Government Contracts Client Alert. The author of that alert, John Daniel, observed about the case:
This case is a departure from previous cases dealing with insured contract coverage. Before Scottsdale, all claims involving insured contracts were based on the indemnity agreement. The understanding was that the underlying liability may be in tort for bodily injury or property damage. But the way the claim is paid is through a breach of contract action based on the indemnity clause. The court in Scottsdale failed to follow the line of previous cases.
In the construction context, it is now even more important to be named as "additional insured." If an indemnitee is listed as an "additional insured" on the indemnitor’s insurance policy, there is no need to look for coverage under the insured contract provision of the indemnitor’s CGL policy. Of course, it is best to have both insured contract coverage and be named as additional insured. But the Scottsdale decision magnifies how important it is to be named as additional insured. Failure to be named as additional insured could result in no coverage at all.
Query: I agree it's best to name indemnitees as additional insureds, but does this case sweep so broadly or does it simply reflect the court's reluctance to use "insured contract" coverage as a means to convert a CGL into an errors and omission policy.