Kyle A. Bechet and Richard W. Brown | Saxe Doernberger & Vita
Commercial general liability (“CGL”) policies providing limits on a “per-project” basis have become standard in the construction industry. General contractors and other upstream parties on large construction projects, as a rule, require downstream subcontractors to maintain CGL coverage with limits provided on a “per project” basis. The goal is to ensure access to dedicated limits that are not exhausted or otherwise impaired due to losses on other projects. Contractors that require or are obligated to provide insurance with dedicated “per project” limits should, however, be aware that many excess policies ––which, despite “following-form” ––fail to provide the same “per project” aggregate limits as their underlying insurance. This issue is further illustrated in our discussion below of J.D. Eckman Inc. v. Starr Indemnity & Liability Company, wherein the United States District Court for the Eastern District of Pennsylvania ruled that an excess policy did not incorporate the underlying insurance’s “per project” aggregate limit.
The Background
In J.D. Eckman Inc., a highway construction company (“Eckman”) found itself simultaneously defending against ten Pennsylvania lawsuits. Eight of the lawsuits arose from a single project in Dauphin County, Pennsylvania, which caused several serious injuries and three fatalities. The other two lawsuits arose from a single project in Berks County, Pennsylvania, which caused two additional fatalities. The severity of the claims ensured that the company’s legal liability would exceed the limits of its primary insurance policy.
Eckman purchased a CGL policy with a $1 million per occurrence limit and a $2 million per project aggregate limit. As such, the policy provided $2 million in aggregate limits for both the Dauphin County and Berks County projects. Eckman also purchased excess coverage, including a $1 million first-layer excess policy issued by Great American Insurance Company (“Great American”) and a $4 million second-layer excess policy issued by Starr Indemnity & Liability Company (“Starr”).
Eckman believed it had a total of $7 million in aggregate limits available for each project based on the per project aggregate limits of the primary policy and the standard follow-form language contained within the two excess policies, which provided that the excess policies “follow[ed] the terms, definitions, conditions and exclusions” of the underlying insurance, “except to the extent” that the policies conflicted.
In 2023, Eckman brought suit against Starr, seeking a declaration that the Starr policy followed the underlying insurance with $4M in “per project” aggregate limits. As such, Eckman argued that the Starr policy should provide a total of $8 million worth of coverage—$4 million for the Dauphin County project claims and another $4 million for the Berks County project claims. The Starr policy’s declaration page indicated that the policy had a $4 million “Other Aggregate(s) Where Applicable” limit and Eckman argued that the follow-form provision in the Starr policy meant that the “Other Aggregate(s) Where Applicable” limit applied on a “per project” basis.
However, the Starr policy also included a separate provision indicating that the “Other Aggregate Limit” was the most Starr would pay for all losses. Starr argued that the language clearly demonstrated that the $4 million aggregate limit would be the most Starr would ever pay under the policy, regardless of the number of projects or claims.
The Verdict
The Eastern District of Pennsylvania ultimately agreed with Starr, concluding that the insured’s proffered interpretation of the Starr policy would lead to an “absurd result.” The court referenced two decisions from neighboring states which reached the same conclusion—JRD Unico Inc. v. Starr Indemnity & Liability Company (New York) and Colony Insurance Company v. Aspen Specialty Insurance Company (New Jersey). Interestingly, in JRD Unico Inc., the Supreme Court of New York noted that the same Starr policy used “cumbersome verbiage” which “could be clearer.”
Nonetheless, the J.D. Eckman Inc. court concluded that it would violate black-letter principles of contract interpretation to disregard the policy language, which stated that Starr would never pay more than the aggregate limit during the policy period. The court emphasized the fact that “follow-form” policies have the same terms and conditions of the primary policy, except to the extent that they conflict. The court determined that the “most we will pay” language conflicted with the primary policy’s “per project” aggregate limits and the insured’s reasonable expectations did not matter because the policy language was not ambiguous under Pennsylvania law.
The Takeaway
The Eckman decision provides a useful illustration of the relevant coverage issues and the importance of having clearly stated risk transfer terms within construction contracts, particularly those operating in Pennsylvania, New York, and New Jersey. The decision highlights the limitations of “follow-form” excess coverage with respect to aggregate limits. The decision should caution commercial policyholders to carefully understand their excess aggregate limits in order to avoid any coverage issues in the event of multiple, catastrophic claims.
Notably, the J.D. Eckman Inc. decision provides the often-overlooked solution to this excess limits issue––the decision does not focus on the first-layer Great American excess policy because the highway construction company did not sue that insurance company. Unlike Starr, Great American managed to avoid coverage litigation because it included a provision in its policy that clarified that the aggregate limit would be applied “separately and in the same manner” as the aggregate limit in the underlying insurance. Accordingly, any commercial policyholder intending to procure excess coverage with “per project” aggregate limits should consider endorsing their policies with similar clarifying language.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.