Insurance—Additional Insured—Contract by Conduct—Insurance Agent Liability to Third Person

KB Home Tucson, Inc. v. The Charter Oak Fire Ins. Co., 700 Ariz. Adv. Rep 19 (App. Div. I, November 25, 2014) (J. Cattani) (Trial Judge M. Brain)

GENERAL CONTRACTOR CREATED QUESTION OF FACT AS TO WHETHER IT WAS AN ADDITIONAL INSURED UNDER SUBCONTRACTOR'S GENERAL LIABILITY INSURANCE/REQUIREMENTS SET FORTH IN CORRESPONDENCE BY THE GENERAL TO THE SUB WHEN ACTED UPON BY SUB CREATES CONTRACT/NO DUTY BY INSURANCE AGENT TO THIRD PARTY GENERAL CONTRACTOR REGARDING FAILURE TO OBTAIN COVERAGE

Plaintiff general contractor hired subcontractor for residential subdivision work. Subsequently the general is sued by homeowners and the city for construction deficiencies. Plaintiff tendered defense to sub's insurer who denied coverage alleging there was no contractual obligation requiring subcontractor to provide insurance for plaintiff.  Plaintiff sued insurer seeking a declaration that coverage exists and for bad faith.  Plaintiff also sued the procuring agent for negligence in failing to assure plaintiff was an additional insured under the contract.  The trial court granted the defendants summary judgment and the Arizona Court of Appeals reversed in part and affirmed in part.   The applicable insurance contract in defining “insured” provided that “any person or organization you are required to include as an additional insured on this policy” was in fact an additional insured under the policy. Because there was no express language in the contract between the general and sub requiring the sub add the general as an additional insured the trial court granted summary judgment.  The court of appeals reversed on two basis. First there was correspondence from the general to the sub stating the sub was required to add the general as an additional insured and the sub in fact acted upon that requirement and instructed its agent to see to it certificates of insurance were issued naming the general as an additional insured. The court found that a jury could reasonably find that this conduct constituted “execution” of the requirement which created a contract.  It was significant to the court that the insurance contract in question did not require the insurer's consent to adding a particular contractor as an additional insured. Further, the sub never disputed that it was contractually obligated to obtain the coverage and testified it had done what it thought it needed to do to comply.   Second, the written contract did specifically note a duty to comply with other "rules and requirements," and there was no evidence the sub was surprised  by the “rule” or “requirement” set forth in correspondence or that this requirement was beyond the scope of the contract. A jury could reasonably find that the contract did require the insurance based upon the correspondence requiring it and the subs reaction to the correspondence.   Finally the court affirmed the granting of summary judgment for the insurance agent on the basis the general had no contractual relationship with the agent and was nothing more than a third party to the transaction between the sub and the agent. Consequently the court held the agent owed no duty to the general. Further the certificate of insurance that was delivered to the general specifically said it did not alter or amend the actual terms of the insurance contract, and  in fact the agent truthfully indicated that the general was an additional insured if it had a written contract as required by the relevant insurance policy.