The ramifications of this decision could be either negligible, or enormous.
The actual holding could be negligible, inasmuch as insurers can easily change their policies to explicitly state, "[t]his insurance does not apply to: ‘[b]odily injury’ or ‘property damage’ arising out of any act or omission of the additional insured(s) or any of their employees, other than the general supervision of work performed for the additional insured(s) by you."
This language was included in the policy in Baltimore Gas & Electric Co. v. Commercial Union Ins. Co., 688 A.2d 496 (Md.Ct.Spec.App.1997), and was cited by the court of appeals as language that could lead to a different result.
However, the court’s discussion of whether such language would render the coverage illusory, and the court’s discussion of the general rule against indemnification for a party’s own negligence, suggests it may be impossible for insurance companies to draft an endorsement that would fulfill that purpose.
Given the language of the policies, the court’s decision in this case is certainly defensible: a reasonable layperson, armed with only a dictionary, and no prior knowledge of business, law, or insurance, could read the policies in this case, and think that the policies mean what the court held them to mean that the additional insured endorsement requires that Miller be covered even for its own negligence, rather than only the negligence of the named insured.
However, the purpose of the contract language between Miller and Selzer-Ornst, and the additional insured endorsement made pursuant to that contract, could not be any plainer Miller didn’t want to be saddled with potential liability for negligence by Selzer-Ornst or its subcontractors, just because it happens to have the deepest pockets, and the general contractor or subcontractor turns out to be underinsured.
Requiring Sezler-Ornst and all its subcontractors to provide proof of insurance, and proof that Miller is named as an additional insured, serves this purpose. If a subcontractor is negligent, and a third-party is injured, Miller is secure that either the general contractor’s insurer, or the subcontractor’s insurer, will provide the defense, and pay any judgment. Miller need not defend itself, and it need not cross-claim against the subcontractor if it is sued, nor need Miller worry about seeking contribution if a judgment should rendered against it, when it did nothing wrong.
That is not illusory coverage, but a genuine benefit to Miller. Given the court’s refusal to acknowledge this, it is questionable whether insurers can draft any additional insured endorsement that will only require them to pay for the named insured’s negligence, while avoiding liability for the negligence of the additional insured.
The court’s discussion of the general rule that "an indemnification agreement will not be construed to cover an indemnitee for his own negligent acts absent a specific and express statement in the agreement to that effect" is also troublesome.
The court concluded that this case fit into an exception to that general rule: "if it is clear that the purpose and unmistakable intent of the parties in entering into the contract was for no other reason than to cover losses occasioned by the indemnitee’s own negligence, indemnification may be afforded."
In reaching its holding, the court cited for support two cases that should have been distinguished, instead: Hastreiter v. Karau Buildings, Inc., 57 Wis.2d 746, 205 N.W.2d 162 (1973); and Herchelroth v. Mahar, 36 Wis.2d 140, 13 N.W.2d 6 (1967).
In Hastreiter, a lease between a property owner and a commercial tenant provided that the tenant must indemnify the landlord even for its own negligence, and the provision was upheld after a third party was injured, allegedly because of the absence of a handrail on a stairwell.
The court wrote, "The purpose of the public liability insurance clause can only be to protect the landlord from some liability which it sustains as the owner of the building. But, having contracted away the right to possession, it is liable only for structural defects or a failure to maintain or repair the building." Hastreiter, 57 Wis.2d at 749.
In Hercehelroth, a lease for a truck provided that the renter of the truck must indemnify the owner of the truck for damages, even if the truck owner is found negligent.
What is essential to note, as the court in Hastreiter did above, is that the owner of the property gave up possession and all control of the property (real estate or a truck). The renter was the party in the best position to avoid injury, and thus, a lease was drafted that required the tenant to indemnify the landlord, even for its own negligence. Because that was the clear intent of the contract, and because it is generally considered a positive thing to place responsibility for damage on the party in the best position to avoid damage, the contract was upheld.
The court of appeals decision indicates the injury was caused because Miller failed to properly maintain its own elevator. Neither the general contractor, nor the subcontractor, had any control whatsoever over Miller’s elevator; they were only there to repair windows. The decisions in Hastreiter and Herchelroth thus do not provide support for the court’s decision.
Thus, while insurers should be able to prevent any future decisions such as this, merely by changing the language of their policies, there is much in the court’s reasoning to suggest there is nothing that they can do to draft an endorsement that only provides coverage for the named insured’s negligence.
– David Ziemer
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David Ziemer can be reached by email.