Subcontractor Endorsement Found Valid and Enforceable on Appeal - Contribution Claim by Other Insurer Fails

April 1, 2002

Bryan M. Weiss of Murchison & Cumming's Los Angeles office, received a favorable decision handed down from the Court of Appeal for the Fourth Appellate District in California for Essex Insurance Company. Essex had issued a CGL policy to its insured, a construction company, which included an endorsement providing that, as a condition to coverage under the policy, if the insured employs subcontractors, it must obtain certificates of insurance and hold harmless agreements from those subcontractors and be named as an additional insured under its insurance policies. Scottsdale Insurance Company also issued a policy to the same insured for a subsequent time period to the Essex policy. The Scottsdale policy contained a similar "subcontractors" endorsement, but unlike the Essex endorsement, compliance was not a "condition of coverage" but rather would result in an adjustment of the premium if not complied with.

The claim was made against insured for damages arising out of alleged construction defects in a home he constructed for the claimant. It was undisputed that the insured did not comply with the conditions of the Essex policy. Scottsdale stepped in and settled the claim before it went to litigation for the amount of $225,000. Essex refused to contribute, contending that there was no coverage under its policy because of the insured's failure to comply with the "subcontractor" endorsement. Scottsdale then filed the present contribution action against Essex.

The trial court ruled that the "subcontractor" endorsement in the Essex policy was unenforceable for a variety of reasons and returned a judgment against Essex in the amount of $148,026.32. Among other things, the trial court ruled that the endorsement was illusory and constituted an invalid "escape" clause.

Essex appealed this judgment. On April 8, 2002, the Court of Appeal reversed the judgment, holding that the "subcontractor" endorsement in the Essex policy was valid and enforceable.