GALVESTON FEDERAL COURT RULES CONTRACTUAL “ADDITIONAL INSURED” PROVISION REQUIRES PRIMARY COVERAGE

Recently in Pac-Van, Inc. v. CHS, Inc., 3:12–CV–341, 2014 WL 1322761 (S.D. Tex. Mar. 31, 2014), Federal District Court Judge Gregg Costa from Galveston granted summary judgment for the carrier finding a contractual requirement to provide “Commercial General Liability Insurance” requires a primary policy.

Plaintiff Pac–Van, a company that leases and sells portable buildings for nonresidential use, leased a work trailer to Defendant CHS. The leased Pac–Van trailer was being used as a temporary office building at CHS’s Galveston location when one of CHS’s employees fell through a soft spot on the floor of the trailer and injured himself. The employee sued Pac–Van for his injuries.  Pac–Van and its insurance carrier gave CHS notice of the lawsuit and demanded that CHS defend Pac–Van pursuant to the parties’ Master Services Agreement. CHS and its insurance carrier refused.

The relevant provision of the Agreement provided:

INSURANCE: [CHS], at its own expense, shall insure for risks of loss or damage. [CHS] must carry commercial general liability insurance insuring both [Pac–Van] and [CHS] against loss. The general liability insurance amounts must not be less than $1,000,000 bodily injury per person, $1,000,000 bodily injury per occurrence, $1,000,000 property damage per occurrence, and [Pac–Van] must be named as an additional insured.

The insurance policy that CHS purchased named Pac–Van as an additional insured and had a per-occurrence limit of $1 million. But, it was an “excess” policy requiring Pac–Van to exhaust the first $2 million relating to any occurrence. The additional insured provision stated that “insurance provided to the Additional Insured is excess over the ‘self-insured amount.’”  The Court clearly and concisely framed the question as follows: when a company agrees to purchase “commercial general liability insurance” that lists another entity as an additional insured, must the insurance provide primary coverage?  CHS maintained that because the contractual provision did not specify “primary” insurance the excess policy was sufficient to satisfy the additional insured requirement.

CHS attempted to rely on three Texas cases from the First Court of Appeals in Houston. The Court distinguished each of those cases and based its decision, instead, on basic contract interpretation principles.  The Court found that the ordinary meaning of “general commercial liability policy” refers to a policy that provides primary coverage and that any other reading would render the obligation illusory.

In conclusion, the Court found that CHS was obligated to purchase a primary commercial general liability policy that provided insurance up the first million dollars of liability.  By failing to do so, CHS breached its contractual obligations to Pac–Van.  Thus finding when a company agrees to purchase “commercial general liability insurance” that lists another entity as an additional insured, the insurance must provide primary coverage.