Contractor Additional Insured Endorsements May Reduce Coverage Available to the Named Insured

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by Christopher J. Boggs, CPCU, ARM, ALCM

“Arising out of the named insured’s operations” does not legally equate to “arising out of the named insured’s negligence.” Further, for an injury to “arise out of” an operation, it is not necessary for the named insured’s acts to have caused the accident or injury. (Pulte Home Corporation, plaintiff, v. American Southern Insurance Company and Transamerica Investment, L.L.C., defendants; No. COA06-747; Filed: 7 August 2007)

With these statements, the North Carolina Court of Appeals expanded the intended (and previously understood) breadth of coverage provided by all CG 20 10 (and CG 20 33) editions prior to the adoption of the 07/04 edition (see Table 3). Coverage extended to additional insureds by these older forms was no longer limited solely to the additional insured’s vicarious liability for the actions of the named insured; there was now provisional coverage for the direct actions of or charges against the additional insured (“provisional” as there were certain requirements to be met before coverage would extend to cover the actions of the additional insured).

The Pulte Case

Pulte Home (Pulte) was acting as the general contractor (GC) in the development of a residential community in Wake County, North Carolina. As the GC, Pulte hired a group of subcontractors to complete the work; among this subcontractor pool, TransAmerica (TA) was contracted to do framing. As part of the subcontract agreement, TA was contractually required to name Pulte as an additional insured.

The CG 20 10 07 98 or the 10 01 edition (see Table 3) was used to comply with the risk transfer requirements (not likely it was the 10 01 edition since the injury occured in October of 2001). Pulte was listed “as an insured but only with respect to liability arising out of [TransAmerica's] operation or premises owned by or rented to [TransAmerica]” (wording on the certificate of insurance).

In the course of its normal operations, TransAmerica hired Rudolfo Sanchez (Sanchez) as a framing sub-subcontractor to complete some of the work Pulte had contracted TA to perform. Whether any contractual risk transfer existed between TA and Sanchez is not known, evidence seems to suggest there wasn’t; but if there had been, the outcome of this case may have been different.

Marcos Antonio Mejia (Mejia), an employee of Sanchez, was struck by a crane operated by an employee of an unaffiliated entity, Morlando Enterprises (Morlando), causing him to fall from the roof and suffer severe injuries including paraplegia. Mejia claimed in his August 2002, suit against Pulte, TransAmerica and Morlando that in October 2001, he was directed to work on the roof without the safety of fall protection. Mejia charged Pulte with failure to provide and/or enforce an overall safe working environment; TransAmerica he charged as the contractor directly responsible for assuring safety and Morlando was sued as the party negligent in causing the injury.

Seven months after receiving the suit papers, Pulte submitted the claim to American Southern Insurance Company (American Southern) claiming coverage as an additional insured under TransAmerica’s commercial general liability policy. American Southern denied any obligation to provide defense or coverage on behalf of Pulte, stating that additional insured status applied only to the additional insured’s vicarious liability.

Pulte settled the claim with Mejia for $700,000, incurring another $105,000 in legal fees, expenses and expert costs; and in September 2004 filed an action against TransAmerica and American Southern to recover these costs alleging breach of contract. A Superior Court Judge entered summary judgment in favor of American Southern in December 2005; Pulte and TransAmerica jointly appealed.

Pulte v. American Southern

At trial, American Southern again argued that it had no duty to defend Pulte because the additional insured wording made Pulte insured “only with respect to liability arising out of [TransAmerica's] operations….” American Southern interpreted this to mean “arising out of” TransAmerica’s negligence. Therefore, Pulte was only protected against its “vicarious liability” for the wrongful acts of TransAmerica. Since Mejia sued Pulte for its individual negligence, American Southern felt it was not obliged to defend or indemnify.

“Arising out of…”

The Court of Appeals’ analysis of the additional insured wording focused on the meaning of the phrase “arising out of.” The CGL does not define this phrase, leaving the determination to the court.

A long-standing insurance contract interpretation principle compels the court to interpret exclusions in their most restrictive terms and coverage in the broadest possible terms. Applying this principle, the Court of Appeals took the position that “arising out of” requires only a “causal nexus . . . and not causation rising to the level of proximate cause.” Therefore, “arising out of” and “caused by” are not legally equivalent. Additionally the wording of the endorsement uses “arising out of (the Named Insured’s) ongoing operations” as the trigger for coverage not “arising out of (the Named Insured’s) negligence,” which the court proved could have been done by reference to a similar St. Paul endorsement that did limit coverage to the named insured’s negligence.

In essence, the Court of Appeals found that the operations of TransAmerica put Mejia in harms way leading them to establish a “causal nexus.” The court decided that the injured employee would not have been on the premise and, therefore, subject to injury “but for” the operations of TransAmerica.

The last provisional requirement addressed by the court in determining whether an injury “arises out of” a particular operation is the issue of the activity itself; is the activity leading to the injury reasonably related to the insured’s expected and/or anticipated operations? To “arise out of,” the operation or activity giving rise to the injury must be a part of the insured’s operations for the additional insured. In the subject case, the installation of trusses was an anticipated operation of the named insured.

For these and other legal reasons not related to the question of contract wording, the Court of Appeals concluded that the injury did “arise out of” TransAmerica’s operations and that Pulte was an insured deserving of defense and indemnity. The Court of Appeals reversed the Superior Court summary judgment and awarded Pulte $805,957.74 plus pre-judgment interest.

Unlike the Table 1 and Table 2 endorsements, the pre-07/04 contractor’s additional insured endorsements (found on Table 3) may extend coverage to the scheduled additional insured when sued for their own actions or inactions. Such extension of coverage may act to lower the limits available to the insured for the same occurrence.

The 07/04 Fix

“Arising out of…” was replaced by “caused in whole or in part by…” in all three highlighted forms in each one’s 07/04 edition. This seemingly minor change may have returned the contractor’s additional insured endorsements to their intended breadth of protection covering only the additional insured’s vicarious liability for the actions of the named insured.

Applying the 07/04 wording, the injury or damage must be “caused by” the named insured, not simply “arise out of” its operations. “Caused by” is an active term where “arising out of” was passive.

Secondly, the term “ongoing operations” was augmented by the requirement that the injury be caused by the named insured’s “acts or omissions” or “the acts or omissions of those acting on [the named insured's] behalf.” This wording may have mitigated the “but for operations” provision applied in Pulte by requiring either complete or partial contribution to the injury by the actions or inactions of the named insured.

Is Coverage Reduced?

Revisiting the original question, does naming an additional insured reduce the amount of coverage available to the named insured? In a construction contractor/subcontractor relationship it depends on the form used.

Additional insured endorsements used in non-construction operations, as detailed in the first two articles and listed in Table 1 and Table 2, do not appear to lower the limits available to the named insured for a particular occurrence.

The answer for contractor classifications revolves around the edition date of the additional insured endorsement. If a pre 07/04 edition is being used, there is the possibility that coverage limits could be compromised by the independent actions or inactions of the additional insured. If, however, the most current 07/04 edition is being used, the limits do not appear to be compromised as the use of the “caused by” wording tends to limit coverage to the additional insured’s vicarious liability.

Conclusion

This ends the four part series on commercial general liability additional insured endorsements. Keep in mind that these articles dealt only with ISO’s additional insured endorsements and did not contemplate any proprietary forms.

Proprietary endorsements must be analyzed on their own merits. Company-specific forms can be compared against ISO wording for similarities and differences, but interpretation and application are based on that form’s specific wording.


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Comments

  • March 28, 2009 at 2:59 pm
    JOEL SIMON says:

    Now having read the full four parts of this well thought out series, I just have a few comments. Again I note that this comes from a New York perspective and is less an esoteric commentary than what actually occurs in litigation.

    Even in non construction scenarios (New York’s labor law), the same reduction of the named insured’s aggregate occurs. Landlords for example who are named on a tenant’s policy have coverage pertaining to any occurrence arising from the demised premises. While there may be restrictive language pertaining to structural defects, situations still arise where the actual negligence is not that of tenants (an example off the top of my head is debris removal or possible some maintenance that the landlord did not perform properly). Under such situations, the aggregate is reduced for the landlord’s covered exposure even thought the tenant had no negligence, as it arose out of the use etc.. of the demised premises.

    The endorsement mentioned which provides additional insured coverage if arising in whole or part of the named insured’s negligence does offer some protection pertaining to the indemnity obligation. However, it does not eliminate the insurer’s duty to defend (which as we all know is broader than the duty to indemnify), as in New York at least, it has been ruled that as the possibility of the named insured’s negligence exists, the obligation to defend also exists. While indemnification under the policy as an additional insured may hinge upon the final determination of the named insured’s negligence, this is often little benefit to the insurer who ends up paying indemnity dollars in a settlement due to the potential risk, once again reducing the aggregate. Further, even if the additional insured status purports to restrict the indemnity obligation, the contract between the parties will often circumvent this by requiring indemnity by the named insured for any liability arising out of his work. This passes down the liability to the named insured, again creating a reduction of the aggregate even if not negligent. The indemnity provision must be well drafted to survive local statutes etc.. but I have drafted many such provisions myself for the desired effect.

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