A recent decision from the Georgia Court of Appeals illuminates a potentially dangerous blind spot of risk for contractors. In The Estate of Pitts v. City of Atlanta, 312 Ga. App. 599, 719 S.E.2d 7 (Ga. Ct. App. 2011), the Georgia Court of Appeals ordered judgment in favor of the estate of a deceased worker who sued various contracting companies for their failure to enforce a contractually required automobile liability insurance obligation of a sub-subcontractor. The estate successfully argued that the decedent, Mr. Pitts, was a third party beneficiary of the contracts that required the insurance and was harmed when the coverage was not available.
This case arises out of a construction project at the Atlanta Hartsfield Jackson International Airport (the “Project”). The City of Atlanta (“City”) is the owner. Multiple companies formed a joint venture to serve as the general contractor on the project (“General Contractor”). Mr. Pitts worked for a group of companies that formed a joint venture to serve as subcontractor (“Subcontractor”). He was struck and killed by a negligent driver for a trucking company working for the Subcontractor.
The City had an Owner’s Controlled Insurance Program (“OCIP”) which was incorporated into both the General Contractor’s and Subcontractor’s agreements. The OCIP included typical language stating that it was intended “to provide one master insurance program that provides broad coverage with high limits that will benefit all participants involved in the project.” The General Contractor and Subcontractor were contractually obligated to maintain $10,000,000 in automobile liability insurance and to require all of their subcontractors and sub-subcontractors to do the same.
The deceased worker’s estate obtained a judgment against the trucking company that negligently struck and killed him. However, the trucking company had insufficient insurance to satisfy the judgment despite the contractual requirement to maintain a minimum of $10,000,000 in coverage. Because the sub-subcontractor could not satisfy the judgment, the decedent’s estate sued the General Contractor and Subcontractor for failing to enforce the minimum insurance requirement. The trial court granted summary judgment in favor of the defendant companies and denied Mr. Pitts’ estate’s motion for summary judgment. Mr. Pitts’ estate appealed. The Court of Appeals reversed the trial court and determined that the estate had standing to sue the General Contractor and Subcontractor, as a third-party beneficiary, for breach of their contractual obligations to enforce the minimum insurance requirement on the sub-subcontractor trucking company. In addition, the Court of Appeals ruled that the exclusive remedy clause of Georgia’s Workers Compensation Act1 did not bar the estate’s action because the estate sought damages for breach of contract and not for personal injury.
Notably, Mr. Pitts was not specifically named as a beneficiary of any of the contracts. However, the OCIP that was incorporated into the contracts stated that it was intended for “the benefit of all participants involved in the project.” Accordingly, the Court of Appeals ruled that the phrase “all participants” included Mr. Pitts as an intended beneficiary. Hence, his estate had standing to sue for the failure to enforce the minimum insurance requirement. Moreover, the Court made its determination notwithstanding a clause in the contract claiming to prohibit third party beneficiaries. The Court found that by its plain terms, the clause only disclaimed third-party beneficiary status to lower tier subcontractors and vendors, and not individuals such as Mr. Pitts.
This case should serve as a wake up call to contractors who may sometimes include insurance requirements in their contracts but fail to verify that the required coverages are actually in place. The best practice is to secure copies of all policies – not just the certificates – as proof that their subcontractors and sub-subcontractors have complied with all insurance obligations. In addition, contractors seeking to restrict potential third-party beneficiary claims should re-visit their contracts to make sure that the intended language is sufficiently broad.
–by Stephan Reams
Stephen Reams has significant experience with both litigation and construction contracts for large commercial projects and developments throughout the United States. He has written and negotiated a variety of complex construction design, design-build and construction management contracts involving hundreds of millions of dollars for malls, shopping centers, industrial facilities, condominiums, multi-family housing developments and professional sports stadiums. He has handled commercial and construction litigation matters in multiple states and he is a frequent speaker and writer on construction risk management for construction projects.