Foran Glennon Palandech Ponzi & Rudloff

April 2014

Additional Insureds: Considerations From a Subrogation Perspective

Brian G. Cunningham


Many subrogation specialists may have encountered this frustrating scenario:  a loss is reported and the initial investigation shows strong liability against a third party for causing or contributing to the loss.  Further investigation, including examination of the relevant insurance policy, reveals that the targeted party is named specifically or categorically as an additional insured under the policy, which the insurer is seeking to subrogate under.  Depending on the facts and jurisdiction, this may completely preclude subrogation and require the closing of what otherwise would have been a strong subrogation case and a substantial recovery.

Discussion.  An example where this may occur is in the context of a construction project wherein the insured is a general contractor performing work for the owner and is required by the general contract to obtain builder’s risk insurance naming the owner and other parties as additional insureds.  Additional insured endorsements can be specific as to whom they name, or they may be broad in nature, providing “blanket” coverage by referring simply to categories of parties on the project such as “contractors,” “sub-contractors,” “sub-sub-contractors,” “suppliers” or “contractors and sub-contractors of all tiers.”

The above situation has resulted in what is known as the anti-subrogation rule.  Under the anti-subrogation rule, an insurer cannot seek recovery against its insured, co-insured or additional insured on a claim arising from the risk for which the insured is covered.  See Continental Divide Ins. Co. v. Western Skies Management, Inc., 107 P.3d 1145 (Colo. App. Ct. 2004); see also Sherwood Medical Co. v. BPS Guard Services, Inc., 882 S.W. 2d 160 (Mo. App. Ct. 1994); Tri State Ins. Co. of Minnesota v. Commercial Group West LLC, 698 N.W. 2d 483 (N.D. 2005); St. Paul Fire & Marine Ins. Co. LLC v. FD Sprinkler, Inc., 1008 N.Y.S. 2d 637 (NY Sup. Ct. 2010).  The rule serves two purposes.  First, it prevents an insurer from passing the risk of loss back to its insured, which would avoid coverage in the first instance for insurance the insured had purchased.  Second, it prevents a potential conflict of interest that might affect the insurer’s incentive to provide a vigorous defense or coverage for its insured.  See Continental Divide, 107 P.3d 1145.  Thus, in the construction project example above, a plumbing sub-contractor that negligently starts a fire which destroys the entire project may be immune from suit under the anti-subrogation rule if it is an additional insured under the project’s builder’s risk policy.

Nevertheless, there are exceptions where the anti-subrogation rule may not preclude subrogation against an additional insured or coinsured.  One such exception is known as the no-coverage exception.  See Chubb Ins. Co. v. DeChambre, 349 Ill. App. 3d 56, 59 (Ill. App. 1st Dist. 2004).  Under this exception, if an insurer pays a loss on behalf of the named insured for damage caused by an additional insured under a policy that does not cover the additional insured for the loss, the insurer may recover from the additional insured by means of subrogation.  The exception has been applied to allow an insurer: (1) to recover payments for damages caused by arson where a policy excluded intentional acts such as arson (insurer of wife allowed to sue additional insured husband for fire damage to their home caused by husband’s arson); (2) to recover payments made for bodily injury when a general liability policy excluded coverage for bodily injury; and (3) to recover payment for property damage caused by a sub-contractor’s negligence where the builder’s risk policy covered sub-contractors for property damage but not liability. See Continental Divide, 107 P.3d 1145.

The question typically raised in the third example is whether the builder’s risk policy’s insurable interest language insures a property interest and/or a legal liability interest of the additional insured.  The minority position is that a builder’s risk policy is property insurance and not liability insurance.  Under this line of authority, a sub-contractor that is negligent in causing a fire at a construction site is not immune from subrogation by the builder’s risk insurer even though the sub-contractor is an additional insured.  See Sherwood Medical Co. v. BPS Guard Services, Inc., 882 S.W.2d 160 (Mo. App. Ct. 1994); see also St. Paul Fire & Marine Ins. Co. v. LES Subsurface Plumbing Co., Inc., 699 N.Y.S. 2d 31 (1999); General Electric Co. v. Zurich American Ins. Co., 952 F. Supp. 18 (D.C. ME 1996); McBroome Bennett Plumbing, Inc. v. Villa France, Inc., 515 S.W. 2d 32 (Tex. App. Ct. 1974).

The majority position takes a more expansive view and holds that builder’s risk policies insure the property interests and legal liability interests of their additional insureds.  These courts interpret policy language which insure additional insureds “as their interest may appear” to include not only property interests, such as tools and equipment, but also the additional insured’s legal liability for any damages to the project including to their own work and the work of others.

In such jurisdictions, an additional insured sub-contractor that negligently causes damage to a construction project will likely be immune from subrogation by the builder’s risk insurer.  See Dyson & Co. v. Flood Engineers, Architects, Planners, Inc., 523 So.2d 756 (Fla. App. Ct. 1988); see also Baugh-Belarde Construction Co. v. College Utilities Corp., 561 P.2d 1211 (Alaska 1977); accord Harvey’s Wagon Wheel, Inc. v. MacSween, 606 P.2d 1095 (Nev. 1980); South Tippecanoe School Building Corp. v. Shambaugh & Son, Inc., 395 N.E.2d 320 (IN 1979).

Finally, some courts also determined that even though a sub-contractor is an additional insured under a builder’s risk policy, the anti-subrogation rule may not apply if the sub-contractor’s contract with the general contractor contains indemnity provisions requiring the sub-contractor to defend, indemnify and hold harmless the general contractor and owner from property damage and/or requiring the sub-contractor to obtain property insurance naming the general contractor and owner as additional insureds. See, e.g., Lumberman’s Underwriting Alliance v. RCR Plumbing, Inc., 969 P. 2d 301 (Nev. 1998).

Conclusion.  While the anti-subrogation rule may at times preclude an action against an otherwise culpable sub-contractor, sub-sub-contractor or other party to a construction project, depending on the jurisdiction, the contracts, and the policy language at issue, there may be one or more arguments to circumvent the anti-subrogation rule and pursue subrogation against that guilty party.