By Melanie FItzgibbons, Risk Transfer Consultant at The Horton Group
This month’s case focuses on a lawsuit filed by State Auto Property & Casualty Insurance Co. (“State Auto”) against KIN, Inc. d/b/a Kohl’s (“Kohl’s”) and the language of a subcontractor’s additional insured endorsement.
In February 2019, Kohl’s shopper Karla Mascari (“Mascari”) slipped on snow or ice in a Kohl’s parking lot in Machesney Park, Illinois, fell to the ground, and was injured. Mascari later filed suit against Kohl’s in the United States District Court for the Northern District of Illinois for claims related to her injuries.
Prior to the date of Mascari’s injury, the Machesney Park Kohl’s store entered into a contract with Divisions Maintenance Group, Inc. (“Divisions”) to manage the store premises. Divisions then subcontracted the duty to remove snow and ice from the store premises to LCU Properties, Inc. (“LCU”). That work was governed by Divisions’ and LCU’s Master Provider Agreement. This agreement required LCU to include Divisons’ client, which in this instance was Kohl’s, as an additional insured on LCU’s general liability policy.
LCU purchased the general liability insurance policy at issue from State Auto. The policy contained an additional insured endorsement that stated, in relevant part:
The following is added to Section II-Who Is An Insured:
2. Any person or organization for whom you are performing operations when you and such person or organization have agreed in a written contract or written agreement that such person or organization be added as an additional insured on your policy.
Importantly, this endorsement provides additional insured status for organizations with whom LCU Properties has a direct contract and that the contract requires the named insured to include the organization as an additional insured. This concept is known as privity of contract and is common to many additional insured endorsements. To satisfy this requirement, LCU is required to have a direct contract with Kohl’s.
After receiving Kohl’s tender of defense of the Mascari lawsuit, State Auto filed a separate suit against Kohl’s seeking a declaration from the Court that it does not owe Kohl’s a duty to defend it in the underlying Mascari lawsuit. This was due to the fact that Kohl’s does not qualify as an additional insured party on the insurance policy because LCU had the direct contract with Divisions and not with Kohl’s. As a means to resolve the case, State Auto filed a motion for summary judgment asking the Court to declare that State Auto does not owe a defense to Kohl’s.
State Auto relied on two important provisions of the endorsement in its motion. First, the person or organization must be one for whom the named insured is performing operations. In this situation, LCU was not performing operations for Kohl’s; rather, LCU was performing operations for Divisions.
Secondly, the language “when you and such person or organization,” in the endorsement expressly required direct privity of contract. In its analysis of the motion for summary judgment, the Court found that Kohl’s undisputedly was not in direct privity of contract with LCU.
The Court went on to state that when State Auto agreed to provide liability coverage to LCU, State Auto agreed with LCU on a process by which third parties can become additional insureds through the additional insured endorsement. That process was bargained for when LCU paid the premium for the policy. A broader endorsement may require a higher premium. Changing the terms would result in State Auto being held to terms it never negotiated or bargained for.
Based on that reasoning, the Court granted State Auto’s motion for summary judgment and declared that State Auto does not owe Kohl’s a duty to defend it in the Mascari lawsuit. This left Kohl’s without the defense it thought it had arranged through its contract with Divisions. This declaration could result in Divisions filing suit against LCU for breach of contract for LCU’s failure to provide Kohl’s a defense.
This case can serve as an important example to Horton clients who subcontract work. When multiple tiers of subcontractors are involved, contracting parties should confirm that their subcontractors and sub-subcontractors possess additional insured endorsements that do not require privity of contract. An additional insured endorsement that does not require the privity of a contract will often include very specific language. A carrier’s refusal to provide a defense can be a huge liability for Horton clients that no one wants the client to face. Carefully reviewing a Horton client’s additional insured endorsements against the requirements of a contract can help us avoid such a situation. Please feel free to reach out to Melanie Fitzgibbons for more information.
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