Verbal Agreement May Lead to Insurance Coverage

March 20, 2016

If your business is operating in Illinois with a commercial general liability policy, you may want to grab your policy and examine the language regarding the ability to name additional insureds. Many general liability policies include the right to extend coverage to other entities. This is done in order to provide liability to entities that may be providing temporary services for the insured, such as during construction or renovation. Adding these temporary coverages can protect businesses and individuals, but insureds must be diligent in seeking out this coverage.
The actual procedures to expand coverage to additional or temporary insureds are detailed within the insurance policy. Traditionally, insurance coverage starts only after the issuance of a certificate of insurance by the insurer. However, a recent opinion authored by Judge Posner of the Seventh Circuit Court of Appeals has held that a verbal agreement to expand coverage can, in fact, bind the insurance company even if the certificate of insurance was not issued until after an accident.

In the case of Cincinnati Insurance Co. v. Vita Food Products, 808 F.3d 702 (7th Cir. 2015), Painters USA had a commercial general liability policy with Cincinnati Insurance that provided Painters with the right to name an additional insured under the policy by oral agreement. The policy further required that the oral agreement precede any occurrence or loss and that “a certificate of insurance showing that a person or organization as an additional insured has been issued.”

In 2011, Painters contracted with Vita Food Products to paint their facility. While providing its services to Vita, Painters verbally agreed to add Vita to its policy, at which time, an employee of Painters was injured while painting Vita’s facilities. The employee sued Vita, alleging negligent maintenance of the premise. Painters subsequently requested that a Cincinnati agent issue a certificate of insurance showing Vita as an additional insured. Vita then tendered a claim with Cincinnati, which was denied. Cincinnati then brought forth a declaratory judgment action in the Northern District of Illinois stating it did not owe coverage to Vita. The district court granted summary judgment in Cincinnati’s favor, which Vita then appealed.

Cincinnati argued that the timing of the oral agreement was irrelevant because the issuance of the certificate was determinative of coverage, and there was no question that the issuance of the certificate occurred after the injury. Posner agreed with Cincinnati in part, but opined that the policy was ambiguous and that when a contract is ambiguous, it should be construed more favorably against the drafter, in this case Cincinnati. Judge Posner held that the language of the policy could not be construed to as requiring the issuance of the certificate as a precondition of receiving the insurance coverage. Recognizing that the policy required that only the verbal agreement to extend insurance coverage occur before any incident, Posner remanded the case back to the district court to determine whether or not the verbal agreement occurred before or after the injury of Painters’ employee.

While commercial general liability insurance is a necessity when operating a business in Illinois, the policies for this type of liability insurance may be extremely complex, and requiring even courts to read between the lines to understand their true meaning. Rock Fusco & Connelly’s attorneys are always there help you analyze and obtain a better understanding of your possible risks and liabilities concerning your business and insurance coverage.