The Impact of the "Privity" Requirement in Commercial General Liability and Umbrella Liability Policies on New York Contractors

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The construction industry in New York is heavily regulated, with numerous insurance requirements that protect all parties involved, from contractors to property owners. One of the latest developments in the insurance landscape is the introduction of the "privity requirement" in the contract wording of Commercial General Liability (CGL) policies and Umbrella Liability policies. This requirement has significant implications for contractors, especially when it comes to ensuring coverage for additional insureds.

What is the Privity Requirement?

Privity, in legal terms, refers to the relationship between two parties that is recognized by law. Traditionally, privity is required for one party to enforce rights under a contract against another party. In the context of CGL and Umbrella Liability policies, the privity requirement means that for a general contractor or owner to be covered as an additional insured under a subcontractor’s policy, there must be a direct contractual relationship between the subcontractor and the party seeking coverage.

This shift in policy wording is a response by insurers to limit the extension of coverage to parties who do not have a direct contractual relationship with the named insured (typically the subcontractor). Essentially, it means that only those parties who are directly in contract with the insured subcontractor can claim coverage as additional insureds.

Consider a scenario where a general contractor hires a subcontractor to perform electrical work on a commercial building. The general contractor requires that the property owner be named as an additional insured under the subcontractor’s CGL policy. If the privity requirement is in place, the owner would only be covered if there is a direct contract between the owner and the subcontractor. If no such contract exists, the property owner would not be entitled to coverage under the subcontractor’s policy, even though the general contractor may be covered due to their direct contract with the subcontractor.

Example 2: Multi-Tier Subcontracting

In a more complex example, imagine a project where a general contractor hires a primary subcontractor, who then hires a second-tier subcontractor to perform specialized work. The general contractor and the property owner typically expect to be covered as additional insureds under all subcontractors’ policies. However, with the privity requirement, the second-tier subcontractor’s CGL policy would only cover the primary subcontractor as an additional insured, not the general contractor or the property owner, unless there is a direct contract between them.

Workarounds for Subcontractors

The privity requirement can pose significant challenges for subcontractors, who are often required by general contractors to provide coverage for all upstream parties. However, there are a few potential workarounds:

1. Additional Contractual Agreements: Subcontractors can enter into direct contractual agreements with general contractors and property owners, specifically for the purpose of meeting the privity requirement. These agreements can be limited in scope to insurance coverage and do not necessarily have to involve additional obligations beyond what is necessary for the insurance coverage.

2. Endorsements or Amendments: Subcontractors can negotiate with their insurers to include endorsements or amendments to the CGL and Umbrella Liability policies that broaden the definition of privity. For example, some policies may allow for additional insured coverage where there is an indirect contractual relationship, such as through multiple tiers of subcontracting.

3. Wrap-Up Insurance Programs: In larger construction projects, a Controlled Insurance Program (CIP), often referred to as a "wrap-up" program, can be implemented. These programs cover all contractors and subcontractors under a single policy, removing the need for individual privity between parties for additional insured coverage. However, wrap-up programs are typically only feasible for larger projects.

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If you want to speak with us, call Gary Wallach at 914-806-5853, click here to email, or visit our website.

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Informational Disclaimer

The information provided in this article is for general informational purposes only and does not constitute legal advice. Insurance policies and their terms can vary widely, and the privity requirement may be interpreted differently depending on the jurisdiction and specific policy language. Contractors and subcontractors should consult with their insurance brokers or legal advisors to understand how the privity requirement may affect their coverage and to explore possible solutions tailored to their specific circumstances.

Understanding the privity requirement and its implications is crucial for New York contractors navigating the complex landscape of construction insurance. By taking proactive steps, contractors can help ensure that they and their partners are adequately protected against potential liabilities.