Construction Risk

Incorporation by Reference Clause Did Not Flow Down Prime Contract Insurance Provisions to the Subcontractor

Where Owner argued that it was covered as an Additional Insured under a Subcontractor’s CGL policy, the court held that the subcontract required only that the Prime Contractor be named as an additional insured, and because no one is an additional insured unless a contract mandates that they be named as one, the Owners were not covered.  The project Owners argued that the contract wording between the Owner and the Prime Contractor required the Prime to name the Owner as an additional insured, and other wording in the contract required that the Prime contract must be incorporated by reference into all subcontracts.  The court reviewed the dispute under both Virginia law and New York law and concluded that the courts in both state that incorporation by reference clauses “bind a subcontractor only as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor.”  Clauses like indemnity clauses and insurance clauses do not get incorporated by reference.  Amerisure Insurance Company v. Selective Insurance Group, Inc., 2023 WL 3311879, (US, 2nd Cir. 2023).

In this case an employee of the subcontractor was injured on the job a forklift and filed suit against the prime contractor and the owner.  The subcontractor’s insurance carrier defended the prime contractor as an additional insured.  It refused, however, to defend the project owner because they were not named as additional insureds under the policy and the subcontract did not require that the owner be made an additional insured.

The court explained that in order for the Owners to qualify as additional insured under the policy, the subcontractor must have agreed in writing, in the subcontract or otherwise, to name the owners as additional insureds.  Although the subcontract failed to require the owner be named as and additional insured, the Owners argued that “the Subcontract incorporated all of [the Prime’s] obligations under the General Contract – including the clause that required the Prime to provide additional insured coverage to the Owners.”

“In support of its incorporation argument, Amerisure notes that, in Section 5.3 of the General Contract, EDC promised the Owners that it would require subcontractors “to assume toward [EDC] all the obligations and responsibilities … which [EDC], by the Documents, assumes toward the Owner[s],” id. at 1495, and that Section 1.9 of the Subcontract states that “[t]he Subcontractor shall be bound by the terms of the Specifications, General Conditions and Supplemental Conditions and Addenda in the Contract between the Contractor and the Owner, shall confirm to and comply with the Drawings and Specifications and Addenda, and shall assume toward the Contractor all the obligations and responsibilities that the Contractor assumes toward the Owner,” id. at 1792.”

In rejecting that argument, the court stated:

“Under Virginia law, Amerisure’s incorporation argument is unavailing. The incorporation clause in the Subcontract does not require the subcontractor to assume all obligations of the general contractor, but only those relating to the nature or scope of the work undertaken by the subcontractor.”

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The Supreme Court of Virginia held that, notwithstanding this broadly worded incorporation clause, a subcontractor was not bound by the general contract’s waiver of liens provision because that provision did not pertain to the nature of the work to be performed under the subcontract. See id. at 370 (explaining that “the subcontractor was put on notice of the general contract between the [o]wners and [general contractor], and of the plans and specifications for the projects, but he accepted them only as to the nature of the work and materials required of him,” and the incorporation of documents was thus “restricted to that purpose only”).”

Risk Management Comment:

New York and Virginia courts may be more restrictive in what they deem to flow down via the incorporation by reference clause than some other states are.  When our risk management consulting firm provides review and redlining of subcontracts we like to add the following wording immediately after the incorporation by reference language typically found in the subcontract:

“… provided however that the Standard of Care and the Indemnification provisions set forth in this Subcontract Agreement take precedence over the Contract between Prime and its Client and any other documents.”

We add this because we are concerned about the subcontractor being held to an uninsurable standard of care or an uninsurable indemnity clause that might potentially flow down.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 26, No. 1 (January 2024).

Copyright 2024, ConstructionRisk, LLC

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