Additional insured endorsements are critical to contract risk transfer systems. Currently, 44 states have anti-indemnity statutes that limit a company’s ability to contractually transfer risk to another party within a construction contract.¹ Conversely, only 10 states have statutes that limit the additional insured endorsement’s ability to transfer risk from one party to another.² Because of this, additional insured endorsements are typically more effective risk transfer mechanisms than indemnification agreements.

However, as these forms are rapidly changing, one particular additional insured endorsement pitfall is the direct contract requirement, which was the focus of Westfield Insurance Company v. FCL Builders, Inc.³ While this decision is more than six years old, its ramifications are still not widely understood. This article will discuss the case, explore its impact, and offer best practices to all parties on how to avoid the associated risks.

Background

FCL Builders, Inc. (FCL) was the GC on a project that required the fabrication and erection of structural steel. FCL subcontracted the steel fabrication and erection to Suburban Ironworks, Inc. (Suburban). Since Suburban was a steel fabricator and not an erector, it subcontracted the steel erection to JAK Iron Works, Inc. (JAK).

FCL issued a contract to Suburban outlining the insurance requirements that Suburban was mandated to provide, including to add FCL as an additional insured under its general liability policy. This contract also required that all lower-tiered subcontractors hired by Suburban had to follow the same insurance requirements. Suburban hired JAK and JAK responded accordingly by issuing a certificate of insurance referencing the additional insured endorsement it was required to add in favor of FCL.