Indemnity Agreements Take Priority

The Second Circuit Court of Appeals recently held that, under New York law, the indemnity agreement in a contract between a contractor and subcontractor governs the priority of coverage for the contractor as an additional insured on the subcontractor’s commercial general liability policy, rather than the “Other Insurance” clause of the policy. The case is Century Sur. Co. v Metro. Tr. Auth., 20-1474-cv, 2021 U.S. App. LEXIS (2nd Cir. Oct. 5, 2021).

At issue in Century was a contract between defendant Long Island Railroad (LIRR) and Rukh Enterprises (Rukh) to remove lead paint. Rukh contractually agreed to indemnify LIRR against liabilities arising out of the project and named LIRR as an additional insured on its insurance policies. Rukh then hired a non-party subcontractor to perform the lead-related work. As the result of an accident that occurred while working on the project, an employee of the subcontractor brought an action against Rukh and LIRR in state court.

Century Surety Company (Century), the excess liability insurer for Rukh, filed a complaint in federal court, Southern District of New York, seeking a declaratory judgment that it had no duty to defend or indemnify any party in the state court action. Admiral Insurance Company (Admiral), the protective liability insurer for LIRR, filed a separate suit against Century seeking a declaratory judgment that Century was obligated to defend and indemnify LIRR and that Century’s policy must exhaust before Admiral’s policy would respond.

The cases were consolidated, and all parties moved for summary judgment. The district court found that the language in the “Other Insurance” provision of the Century policy was a “true excess policy,” so Century was not liable to contribute until all available insurance policies, including Admiral’s, had been exhausted. The district court found Century was not obligated to provide insurance coverage for the underlying case. This decision was appealed.

On appeal, the Second Circuit concluded that the indemnity agreement in the contract controlled, and that even if the contractor’s insurance was excess to the owner’s insurance, the owner was entitled to indemnification from the contractor because the owner’s liability would pass through to the contractor and its insurers.

In making this decision, the Second Circuit rejected the traditional procedural formalities that called for a separate action to enforce the indemnity agreement. The court reasoned that, even if the “Other Insurance” clause might not require an indemnitee’s insurer to pay in the first instance, the indemnity agreement ultimately could require the insurer to pay, such that both obligations should be determined in one action. 

Therefore, parties entering into contracting relationships should reevaluate indemnity portions of their contracts moving forward, as the Second Circuit has found New York case law supports finding an indemnity agreement to supersede “Other Insurance” clauses of an insurance policy, even when a “true excess policy” is involved. This can result in excess insurance policies taking on more liability than anticipated if the underlying contracts include agreements to indemnify parties against liabilities arising out of the work being performed anticipated by the contracts.