SDV Insights

There is a split among states as to how to interpret the “contractual privity” language in endorsements. Connecticut has not yet addressed the issue.

On August 22, the United States Court of Appeals for the Second Circuit heard the insurers’ appeal of the decision in First Mercury Ins. Co. v. Shawmut Woodworking & Supply, Inc., No. 3:12-cv-01096 (D. Conn. Sept. 23, 2014) (See our original Case Alert from 9/2014). The district court held that First Mercury had to defend the construction manager from negligence actions against them resulting from a deadly construction accident at Yale University.

Fast Trek was a subcontractor to Shepard Steel Company, which was hired by the construction manager Shawmut Woodworking. First Mercury argued that the endorsement, if it applied at all, provided coverage only to Shepard, because it applied only to parties that were in contractual privity with Fast Trek.

The form endorsement in the Fast Trek general liability policy added as an additional insured:

any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy

First Mercury argued that this language requires the additional insured to be in direct contractual privity with the named insured. The district court, analyzing the language of the endorsement as well as the history of the ISO Form, held that the endorsement provided coverage not only to the first tier-subcontractor that engaged Fast Trek, but also Shawmut Woodworking, the construction manager. The district court held the condition was satisfied by both the Shepard-Fast Trek contract (requiring Fast Trek to name the construction manager as an additional insured) and the Shawmut-Shepard contract (requiring Shepard to name Shawmut as an additional insured and bind its second-tier subcontractors, like Fast Trek, to the same terms). The court refused to “read into” the endorsement terms such as “direct” or “between” that were not explicitly included.

At oral argument, the Second Circuit asked whether the court should ask the Connecticut Supreme Court to decide. Counsel for Shawmut argued that Connecticut’s principle of interpreting ambiguous policy language in favor of the insured was reason enough for the Second Circuit to affirm without having to seek guidance from the State Court.

We will continue to monitor this case for updates.