A recent decision from the Southern District of New York highlights why a risk-transfer analysis should extend beyond additional-insured coverage. In Massachusetts Bay Insurance Co. v. Seneca Insurance Co., 768 F. Supp. 3d 592 (S.D.N.Y. 2025), the court held that a contractual indemnity provision required the indemnifying party’s primary and excess insurance to respond before the indemnitee’s own coverage.
The decision illustrates how contractual indemnification can preserve—or even expand—risk transfer when additional-insured status is disputed or unavailable.
Two Paths to Risk Transfer
Additional-insured coverage and contractual indemnification provide distinct forms of protection.
Additional-insured status gives a qualifying party direct rights under another party’s insurance policy. Its principal advantage is often an immediate defense. In New York, the duty to defend arises whenever the complaint’s allegations or facts known to the insurer suggest a reasonable possibility of coverage. Additional-insured status may also transfer defense costs, preserve the additional insured’s policy limits, and provide primary and noncontributory coverage.
By contrast, contractual indemnification arises from the parties’ agreement. The indemnitor’s policy may cover that obligation as liability assumed under an “insured contract.”
Where the intention of the parties, as expressed in clear contractual language, is that the indemnitee’s liability will pass completely to the indemnitor (i.e., a pure “pass through”), the indemnitor’s entire insurance stack (primary and excess policies) may be obligated to respond before the indemnitee’s coverage. This is a variation from the general rule governing priority of coverage of policies, known as horizontal exhaustion.[1] This ordering is commonly described as vertical exhaustion.
The Massachusetts Bay Decision
The underlying action arose from a construction accident at a Brooklyn property owned by 2939 LLC and leased to Borgo Guglielmo LLC and related Industria entities. The tenant retained the injured worker’s employer to perform renovations. The worker fell while performing that work and was rendered quadriplegic.
The lease required the tenant to indemnify the property owner for judgments arising from the negligence of the tenant’s contractors. It also extended its covenants to the owner’s successors and assigns. Although the original owners had transferred the property to 2939 shortly before the accident, the court held that 2939 succeeded to their contractual indemnity rights.
The court entered a $21 million judgment against 2939, the tenant entities, and the contractor. The record established that the contractor was negligent and that 2939’s liability was statutory rather than the result of its own negligence.
The tenant’s insurers—Massachusetts Bay Insurance Company and Hanover Insurance Group—paid their combined $16 million in primary and excess limits. The contractor’s insurer paid the remaining $5 million. Massachusetts Bay and Hanover then sought $6 million in contribution from 2939’s insurers, which had issued $1 million in primary coverage and $5 million in excess coverage.
The court rejected that claim. Because 2939 was entitled to contractual indemnification from the tenant, its liability passed through to the tenant and its insurers. The tenant’s $1 million primary policy and $15 million excess policy therefore applied before either of 2939’s policies. Whether 2939 also qualified as an additional insured under the tenant’s policies was ultimately “a fact of no relevance” to the contractual-indemnity analysis.
The Developing “Complete-Pass-Through” Doctrine
The principle applied in Massachusetts Bay developed through a series of New York decisions. In Indemnity Insurance Co. of North America v. St. Paul Mercury Insurance Co., 74 A.D.3d 21 (1st Dep’t 2010), the City’s liability was purely statutory, and a contractor had agreed to indemnify it for claims arising from the contractor’s work. The First Department held that ordinary insurance-priority analysis was irrelevant because the City’s liability passed completely to the contractor and its insurers.
The First Department applied that reasoning again in Arch Insurance Co. v. Nationwide Property & Casualty Insurance Co., 175 A.D.3d 437 (1st Dep’t 2019). There, the owner and general contractor were not negligent, the subcontractor owed them contractual indemnification, and the subcontractor’s umbrella policy was required to respond before the upstream parties’ primary coverage.
In Century Surety Co. v. Metropolitan Transportation Authority, 2021 WL 4538633 (2d Cir. Oct. 5, 2021), the Second Circuit predicted that the New York Court of Appeals would give effect to an established contractual indemnity obligation over conflicting “other insurance” language. The court reasoned that requiring the indemnitee’s insurer to pay first—only to seek recovery of the same amount through indemnification—would produce unnecessary circular litigation.
Most recently, in Scottsdale Insurance Co. v. Mt. Hawley Insurance Co., 213 A.D.3d 442 (1st Dep’t 2023), the First Department expressly held that horizontal exhaustion did not apply where an established right to contractual indemnification produced a complete pass-through of liability.
The Doctrine’s Limits
Vertical exhaustion does not follow from the mere existence of an indemnity clause. The indemnity obligation must be valid, preserved, applicable to the loss, and sufficiently broad to produce a complete pass-through. The indemnitee’s own negligence, an anti-indemnification statute, limiting contractual language, or an unresolved factual record may prevent that result.
The First Department emphasized this distinction in Zurich American Insurance Co. v. Alterra America Insurance Co., 237 A.D.3d 558 (1st Dep’t 2025). Because contractual-indemnity entitlement had not been established, the court applied ordinary horizontal-exhaustion principles to the additional-insured coverage dispute. A possible future indemnity determination did not alter the existing coverage priority.
The New York Court of Appeals has also not squarely resolved the relationship between contractual indemnification and competing policy-priority provisions. Massachusetts Bay is a federal trial-level decision applying a developing body of First Department and federal authority.
Practical Takeaways
The complete-pass-through doctrine is particularly useful when the additional-insured route leaves a gap in the intended risk transfer. For example, an upstream party may fail to qualify as an additional insured because a blanket endorsement requires direct contractual privity. That same party may still possess enforceable indemnity rights if the underlying agreement expressly protects owners, contractors, successors, assigns, or other identified parties. Contractual indemnity may also provide an alternative where the additional-insured endorsement contains a narrower causation requirement than the indemnity provision.
The doctrine can be even more significant in high-exposure matters involving multiple layers of insurance. Additional-insured coverage may be excess under the policy’s “other insurance” language or capped at the amount of insurance required by the underlying contract. An established indemnity obligation may require the indemnitor’s primary and excess policies to respond to the indemnitor’s contractual liability before the indemnitee’s own insurance is reached. This can preserve the indemnitee’s policy limits, reduce its loss history, and shift substantially more than defense costs.
The strongest candidates for vertical exhaustion are matters in which the indemnitee is free from negligence and faces only statutory or vicarious liability, including claims against owners and general contractors under New York’s Labor Law §240. In those circumstances, a sufficiently broad and enforceable indemnity clause may transfer the entire loss to the party whose conduct caused the accident. Active negligence by the indemnitee, an anti-indemnification statute, limiting contractual language, or an unresolved liability record may prevent a complete pass-through.
Timing also matters. As Zurich demonstrates, a potential indemnity right does not alter additional-insured priority before entitlement to indemnification has been established. Counsel should therefore assert each risk-transfer theory separately, tender directly to the indemnitor and its primary and excess insurers, preserve contractual-indemnity claims in the underlying action, and seek an early determination of those claims when the record permits. Counsel should also examine the policies’ insured-contract provisions, contractual-liability exclusions, limits, and notice and consent requirements.
Massachusetts Bay ultimately reminds us that an unsuccessful additional-insured tender may be the beginning—not the end—of the risk-transfer analysis. Contractual indemnification can offer an independent path to the indemnitor’s entire insurance tower and determine who ultimately bears a substantial loss.
[1] See, Bovis Lend Lease LMB Inc. v. Great Am. Ins. Co., 53 A.D. 3d 140 (1st Dept. 1973).
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