Legal issues regarding contractual privity have been occurring around the country, many with conflicting results. This issue primarily affects the construction industry, where insurance policies from the parent company or contractor is filtered down through other third party contractors and subcontractors.

Solving this insurance problem would make it financially safer not only for construction companies, but for the people who work as part of the construction industry. Every part is important to one another, and subcontractors are an integral part of the construction industry. Resolving the issue of contractual privity would make it easier to know what is covered by an insurance policy and what is not.


Explaining blanket additional insurance

When a general contractor or a project owner has insurance for a particular project, they are often able to transfer that insurance to include the people and companies they hire to work on that project. The transfer of insurance comes with the obligation to purchase additional insurance and a contractual risk transfer.

This insurance is known as blanket additional insured endorsements. This kind of insurance is triggered by a written contract that outlines the required additional insurance, as well as a loss that is connected to the person or company who holds the original insurance policy. This becomes very important when a company or subcontractors are trying to decide if the original insurance policy is enough, or if all parties need to be insured by the original policy or blanket insurance additions.

In construction, it can be helpful to have direct contractual contact between two companies to ensure insurance coverage for all involved. In this kind of agreement, general contractors or subcontractors under a parent company may be required to name that owner or parent company on their general liability policies. Without a direct contract between the two parties, it may be difficult to decide if the insurance policy will cover the owner or parent company in case there is an issue.


Legal Ramifications

Cases regarding contractual privity have been ongoing in Connecticut, Maine, and Texas. These cases found that contractual privity (that is, the agreement between two entities) is not required for additional insured endorsements.

The first case in Connecticut, known as First Mercury Insurance versus Shawmut Woodworking, was decided in favor of Shawmut Woodworking. An accident occurred with a subcontractor working under a company working under Shawmut Woodworking. Shawmut Woodworking had taken out additional insurance endorsements with First Mercury Insurance, under the contractual policy that “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.…"

This statement was taken as evidence that a direct contract between Shawmut Woodworking and the two subcontracting companies was not needed.

The case in Maine involved Pro Con, Incorporated, and Interstate Fire and Casualty. Pro Con was doing a project at Bowdoin College and there was a contract required between Pro Con, Bowdoin, and a subcontractor of Pro Con called Canatal. Canatal then hired another subcontractor that was also required to name Pro Con, Bowdoin, and Canatal as additional insureds on their general liability policy.

In the court case, Pro Con was sued by a subcontracted employee. The details of the blanket endorsement didn’t specify that there needed to be a written contract between all the subcontracting companies, but rather that there just needed to be a general written contract.

Opposing legal action

Other legal cases around the country have found that contractual privity is required, putting into question the impacts of differing legal systems between the states. The laws regarding contractual privity are constantly evolving, but remain incredibly important for companies that work in the construction industry.


 

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