After a two-year battle over the effectiveness of "additional-insured endorsements" in Oregon's construction insurance industry, a clear ruling in January 2005 from the Oregon Supreme Court ensured that this traditional risk-allocation method for Oregon construction projects remains standing. These endorsements, which create a web of insurance coverage to spread risk among parties in the construction process—according to each party's share of liability—are fully enforceable, except when one party attempts to escape its own liability by pushing it off on the insurance of another party. An additional-insured endorsement states that in addition to the insured contractor, another party is an "additional insured party" under the insurance contract, thus giving the "additional" party the right to make a claim directly on the policy. This simple mechanism ensures the availability of insurance among various participants in construction projects, including owners, general contractors, subcontractors, and sub-subcontractors. And that lowers the overall cost for risk-allocation on the project.
The battle over whether these endorsements in Oregon are effective was fought in the case of Walsh Construction Co. v. Mutual of Enumclaw, in which the trial court's and Oregon Court of Appeals' opinions had many believing that additional-insured endorsements were relatively worthless. Those courts found that the endorsements ran afoul of Oregon's "anti-indemnification" statute, ORS 30.140, which prohibits passing off one's liability on another through contractual indemnification provisions. The courts held that this statute applied to insurance provisions in construction contracts as well, and that the endorsements in that case was void.
But the Oregon Supreme Court clarified that even though ORS 30.140 does apply to additional-insured endorsements, it voids those endorsements only when the additionally insured party fails to allege any fault of the insured party, and instead merely attempts to use the insured party's insurance to pay for the additionally insured party's liability. The statute specifically allows indemnification and insurance to the extent of the insured party's own liability. In other words, the policy of "to each his own" prevails: The web of insurance created by use of these endorsements is effective only to the extent of each party's own liability, and cannot be used to insure someone else for their own fault.
In the Walsh case, the supreme court found that the party seeking to use the endorsement (a general contractor) had not alleged any fault on the part of the party providing the insurance (a subcontractor); thus, the endorsement was not available to insure the general contractor for its own liability in the underlying claim.
The earlier Walsh decisions, therefore, were essentially limited to the facts of that case, and the supreme court neutralized the broad implications of the court of appeals’ decision that had threatened to upset the balance among owners, general contractors, and subcontractors with respect to the validity of additional-insured endorsements. Because of the way that the court of appeals had written its decision, some feared that its ruling effectively voided all indemnity clauses and additional insured requirements in Oregon. Consequently, the supreme court's ruling serves to curb the potential abuse of additional-insured endorsements when used to pass one's own liability to others, but it is no bar to the use of the endorsements to efficiently involve the carriers of potentially liable parties.
In construction contracts over the past decade, owners have often required general contractors to buy liability insurance that names the owners as additional insureds. Subcontracts, in turn, often require subcontractors to do the same for general contractors and upper-tier subcontractors. Additional-insured endorsements are now a virtually universal risk-allocation feature on most complex residential and commercial construction projects, creating a web of insurance coverage among parties who are potentially liable for a claim, to the extent of the liability of each. Costs of risk are spread, and thus reduced, by making a potentially liable party's coverage available to upstream parties that may be sued or blamed for the insured's actions. For example, an owner finding a construction defect may sue his general contractor, even though the ultimate fault for the defect may lie with one or more of the subcontractors on the project. The endorsement allows the general contractor (or, in some cases, the owner) to make a claim directly on the liable subcontractors' insurance. The web works at any tier, however, including between subcontractors and their sub-subcontractors.
Under Oregon's anti-indemnification statute, each party to a construction contract must bear its own share of liability, and can be required to indemnify others to that extent, but no more. An owner or general contractor cannot require that the subcontractor protect the owner or contractor from its own negligence (i.e., the downstream contractor cannot be forced to protect the owner or contractor from its own mistakes). A construction contract provision that requires a downstream contractor to indemnify the owner or contractor for injuries or damage caused by the owner or contractor is void. The supreme court ruling in Walsh clarifies that an additional-insured endorsement is valid only if there is a claim that the downstream contractor was negligent.
The Walsh decision affirmed that these endorsements are subject to the statute, and the decision will have an impact on the way that additional insured endorsements are dealt with from now on. When seeking to enforce an additional-insured endorsement, the claimant must allege that the principal insured is liable in whole or in part for the damage. Conversely, before a party acquiesces to the use of its insurance to participate in defense of a claim, that party should know whether there is some basis for its potential liability. It is also important, to avoid any collateral challenge to contractual insurance and indemnification requirements, that a party make sure that the contracts it signs clarify that the indemnification and insurance to be provided will appropriately indemnify for the insured's own negligence or fault, but will not provide protection for the indemnitee's (upstream party's) liability or fault.
The court made it clear that the Walsh decision does not apply in any way to cases in which the liability of the downstream contractor is alleged or established. Had the supreme court not clarified this important point, the 2003 court of appeals decision could have been used by some insurers and others to try to undo the critical web of insurance coverage on which the risk management of construction projects has been based for years.
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