Advisories & Insights

The Oregon Court of Appeals' opinion on the enforceability of additional insured requirements in construction contracts in Walsh Construction Co. v. Mutual of Enumclaw, A117368 (September 11, 2003) can be expected to significantly impact contractors and subcontractors and their insurers.

In Walsh, the construction contract required the subcontractor to obtain commercial general liability insurance naming the general contractor as an additional insured. The construction contract placed no limitations on the coverage to be provided and required that the insurance be primary and non-contributory with the general contractor's insurance. Subcontractor's employee, injured at the job site, sued the general contractor. The general contractor tendered its defense to the subcontractor's insurer under the additional insured endorsement. The insurer denied the defense on the grounds that the additional insured provision was void under ORS 30.140(1).

The Court of Appeals considered the legislative history of ORS 30.140(1), which voids construction contract provisions that require a person or the person's insurer to indemnify another for damages for injury or damage caused in whole or in part by the other person, and concluded that the statute was intended to prevent parties from shifting exposure for their own negligence or the cost of insuring that exposure to other parties. Accordingly, while a subcontractor may still be required to provide indemnification or insurance for their own negligence, a provision requiring the subcontractor to indemnify or obtain insurance for loss arising in whole or in part from general contractor's fault is void.

The greatest impact will arise from workplace bodily injury claims brought by subcontractor employees against the general contractor. Generals will no longer be able to shift risk, defense costs, and indemnity to the subcontractor's carrier via the additional insured endorsement. The general, and its carrier, will bear the entire cost, both for defense and indemnity.

In the context of construction defects claims, the decision will have a lesser impact. Generals and their carriers have had some limited success in tendering defense to subcontractor carriers, thereby achieving a sharing of defense costs. This will immediately end.

The net effect of the decision is to make AI endorsements relatively worthless. The general will now gain no advantage or risk shifting by virtue of an AI endorsement from a subcontractor's carrier.

Look for generals to start self-performing traditionally subcontracted work that has the highest risk of workplace injury. Generals may seek the protection of workers compensation insurance, rather than face the defense and indemnity costs posed by bodily injury suits brought by injured subcontractor employees.

Project wrap-ups may also get a boost from this decision. Whether owner or contractor-controlled, the wrap-up program may offer a solution by doing away with the risk shifting between carriers and their insureds.