Federal Court Rules No “Insured” Status for General Contractor and Subcontractor under Builders Risk Insurance Policy


By: Ben Dunlap

A recent ruling by the United States District Court for the District of Massachusetts underscores the importance of confirming the effectiveness of coverage for contractors and subcontractors on construction projects. In Factory Mut. Ins. Co. v. Skanska United States Bldg., No. 18-cv-11700-DLC, 2020, the Court ruled that a general contractor and subcontractor were not entitled to insured status under the project owner’s Builders Risk insurance policy (“the Policy”). The case arose from the construction of a biomedical facility in Cambridge, Massachusetts. During construction, a threaded cleanout plug at the project allegedly failed and released water into the construction site, causing substantial damage. The project owner submitted a claim for the property damage to the Builders Risk insurer, which paid the claim. The insurer then filed a subrogation action against the general contractor and subcontractor, alleging their negligence caused the damage.

The general contractor and subcontractor sought to dismiss the suit against them by filing motions for summary judgment, arguing they were insureds under the Policy and therefore could not be liable in subrogation, based on the “anti-subrogation” doctrine. The anti-subrogation doctrine provides that an insurer has no right of subrogation against its own insured, and thus may not seek indemnification against a third party if the third party also happens to qualify as an insured under the policy.

The general contractor and subcontractor argued they qualified as insureds because the Policy’s “Property Damage” provision “also insures the interest of contractors and subcontractors in insured property during construction at an insured location. . . to the extent of the Insured’s legal liability for insured physical loss or damage to such property,” “limited to the property for which they have been hired to perform work.”

The Court denied the motions for summary judgment, concluding that the  general contractor and the subcontractor were not entitled to insured status under the Policy.  The Court reasoned that an “insured” under the Policy would be one whose liability would be purely vicarious “to the extent of the insured’s legal liability for insured physical loss or damage.” The suit alleged the contractor and subcontractor were directly liable, not vicariously liable, and the named insured project owner was not alleged to have any legal liability for the loss, so the contractor and subcontractor were not “insured” with respect to the alleged damage.  Further, the language of the Policy itself indicated that it applied to only one insured, meaning only the project owner. As a result, the Court concluded that the anti-subrogation doctrine did not apply, and the subrogation lawsuit could proceed.

The ruling offers lessons for contractors and subcontractors evaluating litigation risk on construction projects.  When considering coverage under another party’s insurance policy, interested parties must proceed with care, including having that insurance policy reviewed by a professional and obtaining an opinion as to whether such insurance coverage is afforded.

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