To Be or Not to Be an Additional Insured?

Contract Must Require Additional Insured Status

Businesses require indemnity from their vendors in almost every contract. Most also require a certificate of insurance to prove that the vendor is insured and can, therefore, give confidence that claims for indemnification can be paid. Many prudent businesses also require that the vendor make the buyer an additional insured on the vendor’s policy.

In Federal Signal Corporation v. Tammcor Industries, Inc., United States District Court, N.D. Illinois, Eastern Division 2016 WL 1426289 (April 7, 2016) Federal Signal Corporation (“Federal Signal”) sued Defendants Tammcor Industries (“Tammcor”) and Peerless Indemnity Insurance (“Peerless”), seeking indemnification for certain costs it incurred defending against, and later settling, a separate lawsuit. After limited discovery, Peerless filed a Motion for Summary Judgment, claiming that under the relevant contracts, it has no duty to indemnify Federal Signal.

BACKGROUND

Federal Signal designs and manufactures security and communication systems, among other products, for a variety of customers. Among their products was a speaker system installed on the Navy supply ship, USNS Matthew Perry. Tammcor Industries manufactures various machine components and supplied Federal Signal with the metal housing for the speaker system on the ship. The origins of the present lawsuit trace back to an accident involving that speaker system. A speaker allegedly malfunctioned sometime in April 2011 and sent debris into the eyes of a nearby person. The injured party filed a lawsuit in California state court against Federal Signal, and the parties settled for an undisclosed sum.

Federal Signal now seeks indemnification for the losses it sustained in defending and eventually settling the California suit. It brings claims against Tammcor, whom it alleges manufactured the component responsible for the injury. But it also names Tammcor’s insurer, Peerless, as a defendant. The Complaint maintains that Federal Signal enjoys “additional insured” status under Peerless’ insurance policy with Tammcor, making Peerless directly responsible for Federal Signal’s legal liabilities in the California case.

The dispute implicates two contracts. The first is the general liability insurance policy between Peerless and Tammcor. An amendment to the policy provided that: “ADDITIONAL INSURED—VENDORS … A. SECTION II—WHO IS AN INSURED is amended to include as an additional insured any person or organization (referred to below as vendor) when [Tammcor] and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on [Tammcor’s] policy. Such person or organization is an additional insured only with respect to “bodily injury” or “property damage” arising out of “your products” which are distributed or sold in the regular course of the vendor’s business….” (emphasis added)

The policy period for the coverage was from February 2, 2011 to February 2, 2012.
The second relevant contract is one between Tammcor and Federal Signal. The contract was a purchase order for the parts used in the speaker system on the USNS Matthew Perry. The purchase order contained certain terms and conditions, including the following provision: “INDEMNIFICATION: [Tammcor] shall defend, indemnify, and hold harmless [Federal Signal] against all damages, claims or liabilities and expenses (including attorney’s fees) arising out of or resulting in any way from any defect in the goods or services purchases hereunder, or from any act or omissions of [Tammcor], its agents, employees or subcontractors. This indemnification shall be in addition to the warranty obligations of [Tammcor] and [Tammcor] agrees to provide Certificates of Insurance for such Indemnity upon request.”

According to the Complaint, Tammcor supplied all components for the speaker system to Federal Signal between 2003 and 2008. Whether Peerless agreed to indemnify Federal Signal as an “additional insured” is the only issue raised in the present Motion for Summary Judgment.

ANALYSIS

Federal Signal believes that the amendment to the Peerless insurance policy regarding additional insureds “automatically provides Federal Signal coverage pursuant to [the purchase orders] with Tammcor.”

This issue is more straightforward than Federal Signal suggests—the relevant contractual provisions are unambiguous. First, the insurance policy: Peerless agreed to adopt a party as an additional insured only when Tammcor and that party “agreed in writing in a contract or agreement that such [party] be added as an additional insured.”  The required agreement in writing, according to Federal Signal, is satisfied by the purchase orders signed between 2003 and 2008 for the speaker components. But the purchase orders’ terms state that Tammcor, not Peerless, will indemnify Federal Signal for all relevant damages. Tammcor alone responsible for Federal Signal’s legal liability. An insurer (for example, Peerless) may be eventually responsible for Tammcor’s losses, but that insurer would only be considered liable to Federal Signal in a derivative fashion.

In another relevant term of the purchase orders, Tammcor agrees “to provide Certificates of Insurance for such Indemnity upon request.”  The Peerless insurance policy required Tammcor to contract explicitly in order to add an additional insured. The express identification of an additional insured is precisely what is lacking here.

But even if there were ambiguity, Federal Signal had no reasonable expectation that it would be covered by Peerless. It signed the last purchase order in 2008. At that time, it was reasonable to expect that Tammcor would indemnify it for certain of the components—the terms of the purchase order said as much. There is no evidence, however, that Federal Signal believed at that time, or in 2011 when the accident occurred, that it was covered directly under an insurance policy held by Tammcor. There is similarly no evidence that Federal Signal ever inquired about its status as an additional insured prior to the accident; that it ever questioned Tammcor’s ability to pay for potential liabilities; or even that it requested Tammcor’s proof of insurance.

Even if Federal Signal did entertain an expectation of insurance, it would be unreasonable, because a third-party insurer is nowhere mentioned in the purchase orders. Federal Signal is a large, established public company, not an unsophisticated individual. If it wanted additional insured status, it should have contracted for it.

Peerless is not directly liable to Federal Signal, and that is the only question that was before the Court.

ZALMA OPINION

The court used the clear and unambiguous language of the two contracts to put away the creative, albeit useless, argument that a request for a certificate establishing that a vendor is insured make the purchaser an additional insured. As the court made clear, if a party wants additional insured status it should have contracted for it. Failure to do so was fatal to the creative and imaginative arguments of the plaintiff.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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