construction defect claims: horizontal vs. vertical of...
TRANSCRIPT
Presenting a live 90‐minute webinar with interactive Q&A
Construction Defect Claims: Horizontal vs. Vertical h fExhaustion of Insurance Coverage
Navigating Exhaustion of Primary Policies, Triggers for Excess Carriers and Additional Insured Coverage
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, SEPTEMBER 24, 2013
Today’s faculty features:
Richard B. Friedman, Partner, McKenna Long & Aldridge, New York
David G. Jordan, Associate, Saxe Doernberger & Vita, Hamden, Conn.
Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, TexasRebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
“Additional Insured” Coverage: CurrentIssues and Regional Peculiarities
by
J. Stephen Berry, Denis F. Shanagher and Richard B. Friedman*
I. INTRODUCTION
A. Overview
“Additional Insured” endorsements have been one of the most contested
aspects of liability insurance in recent years, particularly with regard to construc-
tion defect claims. The extent of coverage granted—to whom, for what, and
when—is frequently litigated, and often with results that differ based on the forum
and choice of law.
This article analyzes the issues most frequently litigated in courts today with
regard to Additional Insured coverage, with an eye toward the regions in which
those issues are disputed most often. For example, the extent of coverage afforded
* Stephen Berry is a partner in the Atlanta office of McKenna Long & Aldridge LLP. His practice
is nationwide and focuses on the areas of insurance coverage and insurance bad-faith, with particular
emphasis on general liability, construction defect, and catastrophic property damage claims. Stephen
is listed in Georgia Super Lawyers and has been listed in Best Lawyers in America, in the practice
area of Insurance Law, every year since 2007. He is author of Georgia Property and Liability
Insurance (West, 2012), the only comprehensive treatise on Georgia insurance law, and has
published numerous articles on coverage for third-party construction defect and first-party property
damage claims, and frequently speaks on those topics to public audiences and insurer in-house
training seminars.
Denis Shanagher is a partner in the San Francisco office of McKenna Long & Aldridge, LLP and
chairs the commercial, employment, insurance and real estate litigation practice groups in that office.
Mr. Shanagher has been actively in practice since 1981 and has handled jury trials, court trials,
mediations, and arbitrations in the western region of the United States throughout that period. His
litigation practice includes general commercial contracts and disputes; professional negligence
(emphasizing real estate agents and insurance brokers); directors’ and officers’ liability; and
insurance coverage. He also has an active land use and related litigation practice, including CEQA
litigation.
Richard B. Friedman is a partner in the New York office of McKenna Long & Aldridge LLP. He
principally handles complex commercial and construction litigation, arbitration, and mediation
matters for insurers and non-insurers in New York state and federal courts. Rich is one of the dozen
or so practitioner members of the Advisory Committee to the New York County Commercial
Division on which he serves with the nine judges of that court. The Commercial Division has
become the venue of choice for many of the most sophisticated business disputes in the country.
Rich has published numerous articles on so-called “alternative” and other non-hourly rate fee
arrangements as well as specific ways to improve the relationships between outside and in-house
counsel. Rich is also a frequent panelist and moderator on these and other topics at CLE programs.
The authors wish to acknowledge the assistance of Kristin Landis (in the Washington, D.C. office
of McKenna, Long & Aldridge, LLP) and Dee Ware (in the San Francisco office of McKenna, Long
& Aldridge, LLP).
1
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by endorsements applying only to “ongoing operations” is most frequently
litigated in Western courts, sometimes with different results. In the Northeast, and
particularly in New York, the priority of coverage afforded by Additional Insured
endorsements in subcontractor’s excess policies, vis-à-vis general contractors’
primary policies, is often disputed. In the Southeast, the most interesting
phenomenon is the cross-border differences on several issues of Additional
Insured coverage between Georgia and Florida law. This article will address each
of these in turn.
B. Construction: Insurance Procurement and Indemnification
Agreements
When an accident occurs on a construction site and persons are injured and/or
property is damaged, the injured parties usually look to hold the project owner and
general contractor liable for their injuries. In many cases, the owners and general
contractors are not directly involved in the accident but are sought to be held
vicariously liable for the actions of various trade or subcontractors.1 Because of
this vicarious liability, it has become common practice in the construction industry
for trade contracts to require subcontractors to procure a certain amount of
liability insurance for themselves as well as for those upstream parties, i.e, the
owner and general contractor.2 This additional insured coverage is intended to
transfer the risk to the trade subcontractor for liability arising out of the
subcontractor’s work for those parties. Because the insurance requirements in
trade contracts are usually substantial, trade subcontractors generally must
procure excess or umbrella coverage as well as a primary CGL policy.
The subcontractor’s procurement of liability insurance for the upstream parties
does not necessarily ensure a complete transfer of risk to the subcontractor. For
one, the transfer of risk is limited to the limits of insurance purchased by the
subcontractor. Moreover, the upstream parties’ access to the subcontractor’s
insurance is conditioned upon compliance with the terms and conditions of the
policies. Consequently, to ensure that the trade subcontractor bears the risk for the
work it provides, trade contracts usually also contain an indemnification provision
which requires the trade subcontractor to defend and indemnify the upstream
parties from any and all liability arising out of the subcontractor’s work. This
contractual indemnity is not limited to insurance policy limits but is limited, for
example, by New York public policy, which prohibits a subcontractor from
indemnifying upstream parties for their own negligence.3
1 In some jurisdictions, upstream liability can exceed the usual requirements for vicarious
liability. For example, N.Y. Labor Law §§ 240 and 241(6), often referred to as the “Scaffold laws,”
provide strict liability against construction project owners and contractors for the safety of the
construction site.2 The same is true for upstream parties beneath the owner. For instance, general contractors are
generally required to procure insurance for their own liability as well as for the benefit of the owner.3 N.Y. Gen. Oblig. Law § 5-322.1; Itri Brick & Concrete Corp. v. Aetna Cas. & Sur. Co., 89
N.Y.2d 786, 790-795 (N.Y. 1997). In California, construction contracts which purport to indemnify
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The interplay of insurance coverage for upstream parties and the indemnifica-
tion requirements contained in trade contracts often leads to vigorous disputes
regarding the payment obligations of the various parties.
C. “Additional Insured” Endorsement Forms: Evolution and
Distinctions
Appreciation of the coverage issues that arise out of “Additional Insured”
endorsements benefits from a historical analysis of the endorsement’s evolution.
The most commonly used endorsement is the “2010” form published by the
Insurance Services Organization (“ISO”). The 2010 form amends the “Who Is An
Insured” section of the policy to include “the person or organization shown in the
schedule.” Thus, it provides Additional Insured coverage only to upstream
contractors specifically named in the endorsement. The ISO has revised this
endorsement several times over the years. The versions are as follows:
ISO 2010 11 85: In November 1985, the ISO drafted the first of several
endorsements that are still commonly used. This version
provides coverage for liability “arising out of” the in-
sured’s work. The endorsement did not distinguish be-
tween ongoing operations and completed operations:
WHO IS AN INSURED is amended to include as an
insured the person or organization shown in the Schedule,
but only with respect to liability arising out of ‘your work’
for that insured by or for you.
ISO 2010 10 93 In October 1993, the ISO published a new form with more
narrowly tailored coverage.4 It limits coverage to parties
listed in the endorsement, but only with regard to the
insured’s ongoing operations:
WHO IS AN INSURED is amended to include as an
insured the person or organization shown in the Schedule,
but only with respect to liability arising out of your
ongoing operations performed for that insured.
ISO 2010 03 97: In March 1997, the ISO revised many aspects of its CGL
form, but the Additional Insured endorsement remained
the same as the 2010 10 93 edition.
ISO 2010 10 01: In October 2001, the ISO changed the form more
extensively by specifically excluding damages arising out
the indemnitee for its sole negligence or willful misconduct are void as against public policy. See
Cal. Civil Code § 2782.4 A court contrasted the clarification as to “ongoing operations” added to this form, to the broader
definition of coverage in the previous form, to find coverage for an insured’s completed operations
in Pardee Construction v. Insurance Co. of the West, 92 Cal. Rptr. 2d 443 (Cal. Ct. App. 2000).
3 ISSUES AND REGIONAL PECULIARITIES § I[C]
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of the insured’s work after it was complete or after it was
put to its intended use.
A. Section II—Who Is An Insured is amended to include as an insured
the person or organization shown in the Schedule, but only with
respect to liability arising out of your ongoing operations per-
formed for that insured.
B. With respect to the insurance afforded to these additional insureds,
the following additional exclusions apply:
This insurance does not apply to “bodily injury” or “property
damage” occurring after:
1. All work, including materials, parts or equipment furnished
in connection with such work, on the project (other than
service, maintenance or repairs) to be performed by or on
behalf of the additional insured(s) at the location of the
covered operations has been completed; or
2. That portion of “your work” out of which the injury or
damage arises has been put to its intended use by any person
or organization other than another contractor or subcontractor
engaged in performing operations for a principal as a part of
the same project.
ISO 2010 07 04: In July 2004, the ISO expanded the language of the 2010
form further, to include a causal connection to the named
insured’s work, while maintaining the restriction to on-
going operations:
A. Section II Who Is An Insured is amended to include as an
additional insured the person(s) or organization(s) shown in the
Schedule, but only with respect to liability for “bodily injury”,
“property damage” or “personal and advertising injury” caused, in
whole or in part, by:
1. Your acts or omissions; or
2. The acts or omissions of those acting on your behalf; in the
performance of your ongoing operations for the additional
insured(s) at the location(s) designated above.
The evolution of the 2010 form has not been linear and exclusive. Each version
is still available, for a different premium to reflect the coverage afforded.
Accordingly, many construction contracts require downstream parties to add a
specific version to its policy (ISO 2010 11 85 being the most frequently requested
due to its broader coverage).
Other forms are also available. For example, the 2009 form is similar in content
§ I[C] CURRENT CRITICAL ISSUES 4
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to the 2010 form,5 but contains an additional Contractual Liability exclusion,
barring coverage for liability assumed via contract that would not otherwise exist
outside of the contract. This change significantly reduces the coverage afforded by
the endorsement with respect to one of the claims most commonly made against
subcontractors, but it remains available (in versions parallel to the 2010 form
options listed above) when the premium is right.
The 20 33 form is more flexible in terms of who can have Additional Insured
coverage. Often called the “Blanket Additional Insured” or “Omnibus Additional
Insured” endorsement, the form defines as an insured “any person or organization
who you become obligated to include as an additional insured to this policy, as a
result of any contract or agreement. . ..” This form has also evolved over the
years, to provide more limited coverage when desired by the parties. The original
version is ISO 2033 03 97, which limited coverage to “ongoing operations.” In
October 2001, ISO published a newer version more clearly limiting coverage for
“ongoing operations,” as in the 2010 form. For less flexibility, the 20 37 form is
available for coverage limited to a specific premises.
II. CRITICAL ISSUES OF REGIONAL SIGNIFICANCE
A. California and the West: “Ongoing Operations” Coverage
In several Western states, the courts have struggled with the meaning of the
term “ongoing operations” in the CG 2010 93 form, as that term is not defined in
the ISO form insurance policies. As a result, the courts have issued divergent
rulings as to the extent of coverage afforded by Additional Insured endorsements
applying to the subcontractor’s “ongoing operations” only. Some courts have
focused on the underlying contractual obligations to help define the meaning of
the term. Many courts have relied on a dictionary definition of “ongoing”, while
at least one other has interpreted the absence of a policy definition of the term
“ongoing” to impose a broader definition in order to ensure coverage.
The first California case to discuss the scope of coverage afforded by an
additional insured endorsement applying only to a subcontractor’s “ongoing
operations” is Pardee Construction Company v. Insurance Company of the West.6
There, a general contractor brought suit as an additional insured against certain
insurers that refused to defend or indemnify it in underlying construction defect
litigation. The issue for determination by the appellate court was whether
completed operations coverage in pre-1993 Comprehensive General Liability
policies, that were not limited by policy language as to time or particular project,
provided coverage to the general contractor for its vicarious liability for
subcontractors’ acts on operations completed prior to inception of the policies.
The court concluded that absent language excluding such coverage, the insurers
5 This form provides that the additional insured becomes an insured “but only with respect to
liability arising out of [the named insured’s work] for the additional insured or acts or omissions of
the additional insured in connection with their general supervision of your work.”6 77 Cal. App. 4th 1340 (2000).
5 ISSUES AND REGIONAL PECULIARITIES § II[A]
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owed the general contractor a duty to defend.7
In reaching its decision, the Pardee court discussed in dicta that in 1993, the
Insurance Services Office (“ISO”) had revised the language of the form 2010
endorsement to “expressly restrict” coverage for an additional insured to the
“ongoing operations” of the named insured. In that regard, the court cited various
treatises and insurance commentators who have opined that the change in form
was to eliminate additional insured coverage of the completed operations hazard,
and to apply additional insured coverage to a contractor’s work in progress only.
The court noted that the revised language, i.e., the inclusion of the phrase “your
ongoing operations,” albeit without further definition, “effectively precludes
application of the endorsement’s coverage to completed operations losses.”8
A subsequent California case addressing this question was St. Paul Fire and
Marine Insurance Company v. American Dynasty Surplus Lines Insurance
Company.9 This was an action brought by a general contractor and its insurer
against a subcontractor and its insurer to recover amounts paid to defend and settle
litigation brought by an employee of the subcontractor who suffered injuries as a
result of a pipe explosion occurring during pressure testing conducted by the
general contractor.10 The appellate court determined that the injury to the
electrical subcontractor’s employee resulted entirely from the activities of the
general contractor that were unrelated to the work called for in the subcontract and
that the mere presence of the employee on the jobsite was not sufficient to
constitute an act or omission on the electrical subcontractor’s part.11 Accordingly,
the electrical subcontractor’s promise of contractual indemnity did not embrace
the liability claim for which the general contractor and its insurer sought
indemnity, nor did the additional insured endorsement covering liability arising
out of the subcontractor’s ongoing operations performed for the general contractor
provide coverage.12
The appellate court concluded that the “ongoing operations” additional insured
endorsement was subject to two or more reasonable interpretations as to the scope
of coverage provided to the general contractor.13 According to the court, the
“arising out of [Subcontractor’s] ongoing operations” language could be inter-
preted by a reasonable layperson to embrace “either (1) any liability arising while
the [Subcontractor] was on the. . . premises doing work under the Subcontract or
(2) liability restricted to that arising, at least in part, from [Subcontractor’s] actual
7 Id. at 1344-1345, 1356-1358.8 Id. at 1358-1359.9 101 Cal. App. 4th 1038 (2002).10 Id. at 1045-1046.11 Id. at 1042.12 Id.
13 Id. at 1049.
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performance of such work.”14 To resolve any ambiguity, the court held that it was
necessary to read the provisions of the additional insured endorsement together
with, and in the context of, the operative Subcontract, which provided that only
liability arising out of the electrical subcontractor’s ongoing operations performed
for the general contractor would be covered.15 Further, the indemnity provision in
the subcontract limited protection to all “claims arising out of or resulting from
the performance of the work.” The appellate court held that the insurance
provision “provides the means of doing so, that is, by purchasing insurance for
that purpose.” Thus, the insurance provision necessarily encompasses the more
specific and narrower language of the indemnity provision and cannot reasonably
be read as broader.16 The court, therefore, concluded that the additional insured
endorsement must be interpreted to only provide coverage for liability arising, at
least in part, from the electrical subcontractor’s acts or omissions in its
performance of the subcontract.17 .
In Weitz Company, LLC v. Mid-Century Insurance Company,18 the Colorado
Court of Appeals applied the dictionary definitions of “ongoing” to interpret the
undefined phrase “ongoing operations” as used in the insurance policy at issue.19
The court concluded that that the insurance policy is unambiguous—“under the
plain and ordinary meaning of ‘arising out of your ongoing operations,’ the
endorsement does not cover ‘completed operations,’ and the subcontractor’s
insurer had no duty to defend or indemnify the general contractor. . .”20
In American International Specialty Lines Insurance Company v. Kindercare
Learning Centers, Inc.,21 the U.S. District Court in Oregon, in granting the
defendant insurance companies’ motion for summary judgment, also applied
dictionary definitions to interpret an insurance policy containing the undefined
phrase “ongoing operations.” The court determined that “ongoing” means
“continuing without termination or interruption” and “operations” means “a
course or procedure of productive or industrial activity.”22 The court concluded
that the underlying injury sustained by a child who fell at a daycare facility
occurred outside the time that the named insured supplied products to the facility
and that the additional insured endorsement providing coverage for liability
arising out of the named insured’s “ongoing operations” did not extend to liability
14 Id. at 1056.15 Id.
16 Id. at 1057, 1059.17 Id. at 106018 181 P.3d 309 (Colo. Ct. App. 2007).19 Id. at 313.20 Id. at 313, 315.21 Nos. 07–642–KI, 07–978–KI, 2010 U.S. Dist. LEXIS 78374 (D. Or. Aug. 2, 2010).22 Id. at *9-10.
7 ISSUES AND REGIONAL PECULIARITIES § II[A]
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arising from a product sold to the additional insured.23
A similar result was recently reached in Washington in Absher Construction
Company v. North Pacific Insurance Company.24 In ruling on a motion for
summary judgment, the Absher court interpreted insurance policies issued by an
insurer with the following slightly different language than the ISO additional
insured 1993 form:
1. WHO IS AN INSURED (Section II) is amended to include as an insured
the person or organization (called Additional Insured) shown in the
Schedule, but only with respect to:
(a) Vicarious liability arising out of your ongoing operations per-
formed for the additional insured; or
(b) Liability arising out of any act or omission of the additional
insured for which you have entered into an enforceable “insured
contract” which obligates you to indemnify the additional insured,
or to furnish insurance coverage for the additional insured, arising
out of your ongoing operations for that additional insured.25
But again, the policies at issue did not define the term “ongoing operations.”26
Citing Hartford Insurance Co. v. Ohio Casualty Insurance Co.,27 which in turn
quoted and relied on the California Pardee case discussed above, the court noted
that Washington courts have interpreted similar “ongoing operations” clauses to
evince an intent to provide coverage to the additional insured only for liability that
arises while the work is still in progress.28 The court therefore rejected an
interpretation of the “ongoing operations” language that would trigger a defense
simply because the underlying complaint included allegations of property damage
“which may have begun as soon as its installation,” finding that such a broad
construction would effectively write the word “ongoing” out of the policy and
make it equivalent to the phrase “arising out of your operations.”29
In the cases discussed above, despite the fact that the ISO policy forms do not
define the term “ongoing operations”, the courts have relied on the dictionary
definition of the term “ongoing” to distinguish it from the term “completed
operations,” which is a defined term. Accordingly, a majority of the courts in the
Western states that have addressed the issue (e.g., California, Washington,
Oregon, and Colorado) have concluded that the term “ongoing operations” as used
in the ISO CG 2010 93 form means only those operations of the insured that are
23 Id.
24 2012 U.S. Dist. LEXIS 38555 (W.D. Wash. Mar. 20, 2012).25 Id. at *16-17.26 Id. at *17.27 145 Wash. App. 765 (2008).28 2012 U.S. Dist. LEXIS 38555, at *18 (W.D. Wash. Mar. 20, 2012).29 Id. at *21.
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in progress, and that additional insured status under a subcontractor’s policy will
exist only for damages or claims arising during those operations, and not for
damages or claims arising from or after those operations are completed.
The Ninth Circuit has come to a different conclusion in an unpublished case
arising under Arizona law, Tri-Star Theme Builders, Inc. v. OneBeacon Insurance
Co.30 There, a general contractor brought an action against its subcontractor’s
insurer, as an additional insured, for failure to defend and indemnify it against
claims arising from the construction of a resort and casino project. The policy at
issue defined “Who Is An Insured” to include the general contractor “but only
with respect to liability arising out of. . . [the subcontractor’s] ongoing opera-
tions performed for. . . [the general contractor] on the [Project]. . ., and only to
the extent of liability resulting from occurrences arising out of. . . [the subcon-
tractor’s] negligence.” The District Court granted summary judgment in favor of
the insurer, and the Court of Appeals reversed and remanded the case.31 Unlike in
the other cases discussed above, the court in Tri-Star held that the undefined key
phrase—“arising out of the Named Insured’s ongoing operations” addressed only
the type of activity (ongoing operations) from which the [additional insured’s]
liability must arise in order to be covered, not when the injury or damage must
occur. According to the court, this language does not state that injury must occur,
or liability must arise, during the Named Insured’s ongoing operations, but rather
requires only that the liability arise “out of” the ongoing operations, which may
require only a minimal causal connection between the liability and the “ongoing
operations.” In the court’s view, at the very least, there is an argument that the
endorsement’s undefined language is ambiguous and should be construed against
the drafter.32
In that regard, the court went on to suggest its own language for an “ongoing
operations” additional insured endorsement. According to the court, if the intent
was to end the general contractor’s coverage as an additional insured for damages
as soon as the subcontractor’s work was complete, this could have been
accomplished by including language providing coverage for property damage
“arising from and occurring during” the subcontractor’s ongoing operations. In
this court’s view, such language in the additional insured endorsement would
more clearly and distinctly communicate to the insured the nature of the limitation
of additional insured status.33
With one notable exception, while courts in the Western States have been
troubled by the absence of a definition of “ongoing operations” in the ISO forms,
most courts have followed the insurance commentators and ISO comments, and
30 426 Fed. Appx. 506 (9th Cir. 2011) (applying Arizona law). This case was not selected for
publication in the Federal Reporter and is not precedent except as provided by 9th Cir. R. 36-3.31 Id. at 508.32 Id. at 510.33 Id. at 512-513.
9 ISSUES AND REGIONAL PECULIARITIES § II[A]
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have been willing to use the dictionary definition of “ongoing” to interpret the CG
2010 93 additional insured endorsement as applying only to the work of a
subcontractor in progress, and not providing additional insured status to a general
contractor for completed operations. Some courts have also looked to the
language of the operative subcontract to determine the scope of the additional
insured obligation, and to limit that obligation to liability arising out of those
specific ongoing operations of the named insured. Obviously, if and when the ISO
or individual insurers specifically define the meaning of “ongoing operations” in
their policy forms, the extent of any confusion in this regard might be reduced.
III. NEW YORK AND THE NORTHEAST: PRIORITY OF EXCESS
“ADDITIONAL INSURED” COVERAGE
A. Background
Another hot topic in the field of Additional Insured coverage is the priority and
allocation of coverage between a subcontractor’s excess policy and the primary
coverage of its Additional Insured general contractor. This issue has been
especially relevant in New York. Until recently, New York law was clear that such
an allocation was determined without regard to the indemnification agreements in
trade contracts. Instead, the courts compared the terms and intended purposes of
each policy to ascertain the priority of coverage. Such priority of coverage
determinations almost always resulted in horizontal exhaustion of the parties’
primary commercial general liability (“CGL”) policies prior to the triggering of
excess or umbrella coverage. However, with the recent decision by the First
Appellate Department in Indemnity Insurance Company of North America v. St.
Paul Mercury Insurance Company,34 upstream insurers can argue that, under
certain circumstances, courts should bypass such a priority determination and
require the vertical exhaustion of the downstream party’s primary CGL and excess
insurance prior to triggering the upstream primary CGL coverage. In view of the
substantial number of insurance-related cases in New York courts, this section of
the article discusses the current state of New York law on horizontal and vertical
exhaustion and provides insurers for owners, general contractors, and trade
subcontractors with the tools needed to understand and navigate the new legal
landscape.
B. Horizontal Exhaustion Is Generally the Law in New York
1. Disputes Arise When Limits of Subcontractor’s Primary CGL
Policy Are Insufficient to Cover the Loss
It is well settled under New York law that, when a trade subcontractor’s work
on a construction site results in injury or property damage, the trade subcontrac-
tor’s primary CGL insurer will defend and indemnify those upstream parties
added as an additional insured for liability arising out of the subcontractor’s
34 74 A.D.3d 21 (N.Y. App. Div. 2010).
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work.35 Often, however, the limits of the subcontractor’s primary CGL policy are
insufficient to cover the loss to the injured party. It is in these instances when
disputes arise as to who pays when.
2. The Upstream Parties’ Point of View: Vertical Exhaustion
In such disputes, the owner’s and/or general contractor’s insurer generally takes
the position that, once the subcontractor’s primary policy limits have been
exhausted, it is the responsibility of the subcontractor’s excess carrier to defend
and indemnify the upstream parties despite the presence of other primary
insurance maintained by those upstream parties. This concept is known as vertical
exhaustion. There are two typical arguments made in support of vertical
exhaustion. First, upstream insurers argue that requiring the upstream primary
insurers to respond after the subcontractor’s primary insurer violates the trade
contract, which usually requires that all insurance procured on behalf of the
upstream parties respond on a primary basis. Second, upstream insurers generally
argue against “circuity of litigation.” Essentially, circuity of litigation is the
concept that it is a waste of judicial resources to require the upstream insurers to
pay for their portion of the allocated loss and then separately seek to recoup, via
subrogation, that payment from the contractor, who will then be indemnified by
their excess carrier under insured contract coverage. Vertical exhaustion short
circuits this process by having the excess insurer directly pay the loss.
C. The Subcontractor’s Point of View: Horizontal Exhaustion
Trade subcontractors’ excess carriers generally take the position that a
subcontractor’s excess coverage is not triggered until all applicable underlying
insurance (i.e., primary CGL coverage) is exhausted. This concept is known as
horizontal exhaustion. Horizontal exhaustion results when the terms of the
insurance contracts and intended purposes of the contracts, without reference to
the underlying trade contracts, are deemed to dictate how the loss will be allocated
among policies covering the same risk.
D. New York Law Generally Requires Horizontal Exhaustion
In 1985, the Court of Appeals in State Farm Fire & Casualty Company v.
LiMauro,36 made clear that insurers have the right to rely upon the terms of their
contracts with their insureds, and, as such, the terms of the insurance contracts
dictate the priority of coverage.37 Since LiMauro, a number of Appellate
Department cases have held that the priority of insurance coverage in construction
cases is determined by the terms and conditions of the applicable insurance
35 Pecker Iron Works of New York, Inc. v. Traveler’s Ins. Co., 99 N.Y.2d 391, 393-394 (N.Y.
2003) (holding that when a subcontractor agrees to provide additional insured coverage, the
subcontractor’s policy is primary coverage for that additional insured).36 65 N.Y.2d 369 (1985).37 Id. at 373.
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policies without reference to the underlying trade contracts.38 When such
determinations have involved primary and excess insurance, the result has been
horizontal exhaustion of primary policies prior to the triggering of excess policies.
For instance, in the 2008 case of Bovis Lend Lease LMB, Inc. v. Great American
Insurance Company,39 the First Appellate Department relied on the reasoning of
LiMauro to hold that the upstream owner’s and construction manager’s primary
policies were triggered prior to the subcontractor’s umbrella policy.40 The
coverage dispute arose out of losses sustained from a wrongful death action
resulting from a construction accident. The decedent was employed by a
subcontractor on the site and it was undisputed that the subcontractor’s primary
policy provided additional insured coverage to the owner and construction
manager up to the policy’s $1 million limits. At issue in the case was the priority
of coverage upon exhaustion of the subcontractor’s primary policy. The owner and
construction manager (the Bovis Plaintiffs) argued that the priority of coverage
should be determined by the terms of the underlying trade contracts, which
required the subcontractor to obtain $5 million of additional insured coverage that
would be primary to any other insurance maintained by the owner and construc-
tion manager.
The First Appellate Department disagreed with the Bovis Plaintiffs. Relying on
LiMauro for support, the court held that “[a]n insurance policy is a contract
between the insurer and the insured. Thus, the extent of coverage (including a
given policy’s priority vis-à-vis other policies) is controlled by the relevant policy
terms, not by the terms of the underlying trade contract that required the named
insured to purchase coverage.”41 Accordingly, the court reviewed and considered
all of the relevant policies at issue to determine the priority of coverage. The court
took into consideration the purpose each policy was intended to serve as
evidenced by both its stated coverage and the premium paid for it, as well as upon
the wording of the provisions concerning excess insurance. Because the subcon-
tractor’s umbrella policy contained language making it a “true excess” policy and
also contained a reduced premium, the court held that the umbrella policy was
intended to constitute a final tier of insurance over and above the Bovis Plaintiffs’
primary policies.42
38 See, e.g., Bovis Lend Lease LMB, Inc. v. Great Am. Ins. Co., 53 A.D.3d 140 (N.Y. App. Div.
2008); Tishman Constr. Corp. v. Great Am. Ins. Co., 53 A.D.3d 416 (N.Y. App. Div. 2008);
Harleysville Ins. Co. v. Travelers Ins. Co., 38 A.D.3d 1364 (N.Y. App. Div. 2007); U.S. Fidelity &
Guaranty Co. v. CNA Ins. Cos., 208 A.D.2d 1163 (N.Y. App. Div. 1994); United States Liab. Ins.
Co. v. Mt. Valley Indem. Co., 371 F. Supp. 2d 554, 558 (S.D.N.Y. 2005); Travelers Indem. Co. v.
Am. & Foreign Ins. Co., 286 A.D.2d 626 (N.Y. App. Div. 2001).39 53 A.D.3d 140 (N.Y. App. Div. 2008).40 Id. at 155.41 Id. at 145.42 Id. at 155. Also at issue was the Bovis Plaintiffs’ primary policies vis-à-vis the downstream
general contractor’s primary policy. Based upon the language contained in the general contractor’s
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The court was not swayed by the Bovis Plaintiffs’ argument against circuity of
litigation—that, once the underlying action concludes, the subcontractor will
likely be required to indemnify the Bovis Plaintiffs based upon the requirements
of the indemnification provision in the trade contract; and once the subcontractor
indemnifies the Bovis Plaintiffs, the subcontractor will ultimately be entitled to
indemnification for its liability on that claim under the coverage for contractual
liability afforded by the umbrella policy. While the court noted that this scenario
might eventually play out, it held that such an eventuality at this stage does not
negate the priority of coverage among the applicable policies arising from the
terms of those policies.43
Soon after Bovis, the First Appellate Department addressed almost the same
issues in Tishman Construction Corp. v. Great American Insurance Company.44
Relying on its holding in Bovis, the Tishman court held that a subcontractor’s
umbrella policy could not be invoked prior to the exhaustion of the general
contractor’s primary CGL policy.45 The Second, Third, and Fourth Appellate
departments have similarly held that a priority of insurance coverage determina-
tion must be made based upon the terms and conditions of the applicable policies
without regard to the underlying trade contracts.46
E. The St Paul Mercury Decision, An Exception to Horizontal
Exhaustion
The First Appellate Department’s 2010 decision in Indemnity Insurance
Company of North America v. St. Paul Mercury Insurance Company47 seems to
provide a significant exception to New York’s established rule of horizontal
exhaustion. In St. Paul Mercury, the coverage dispute arose out of an injury
sustained by the general contractor’s employee caused by the subcontractor’s
failure to remove a cable from the work site. The injured employee sued both the
owner and the subcontractor for his injuries. The owner tendered defense to the
general contractor’s primary insurer who accepted defense of the owner. The
general contractor’s insurer then asked the subcontractor’s primary insurer to
assume the defense of the owner pursuant to the indemnification clause in the
subcontractor’s contract with the general contractor. The subcontractor’s primary
insurer agreed to defend and indemnify the owner without reservation or
qualification. Soon thereafter, the subcontractor’s primary insurer tendered
defense of the owner to the subcontractor’s excess carrier because it looked as
policy and the Bovis plaintiffs’ policies, the general contractor’s primary policy was required to
respond prior to the Bovis plaintiffs’ primary policies. Id.
43 Id. at 154.44 53 A.D.3d 416 (N.Y. App. Div. 2008).45 Id. at 421.46 See, e.g., Harleysville Ins. Co. v. Travelers Ins. Co., 38 A.D.3d 1364 (N.Y. App. Div. 2007);
U.S. Fid. & Guar. Co. v. CNA Ins. Cos., 208 A.D.2d 1163 (N.Y. App. Div. 1994); Stout v. 1 E. 66th
St. Corp., 90 A.D.3d 898, 904-905 (N.Y. App. Div. 2011).47 74 A.D.3d 21 (N.Y. App. Div. 2010).
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though the claim would exceed the primary insurer’s policy limits. The excess
carrier accepted tender without reservation or qualification. A directed verdict was
thereafter entered against the owner as to liability on the “scaffold law” claim,
finding the owner vicariously liable as the owner of the construction site. The
subcontractor’s excess insurer then settled the remaining claims within policy
limits. The general release stated that the settlement was made with respect to the
claims against the owner and subcontractor. The general contractor’s insurer did
not participate in either the defense or settlement of the action, having determined
that the subcontractor was ultimately liable as a result of its agreement to
indemnify the owner, a position that the subcontractor had agreed with.
The subcontractor’s excess carrier subsequently commenced a coverage action
against the general contractor’s primary insurer seeking to recoup the amounts it
paid to settle the underlying action. In its first cause of action, the excess carrier
maintained that the general contractor’s primary policy was the primary insurance
covering the loss and sought a declaration that its policy was excess to the general
contractor’s primary policy. In its second cause of action sounding in subrogation,
the excess carrier argued that it was entitled to reimbursement from the general
contractor. The Supreme Court granted summary judgment to the general
contractor and its primary insurer. An appeal followed.
With regard to the excess carrier’s first claim concerning the priority of
coverage, the First Appellate Department held the priority of coverage to be
irrelevant under the circumstances.48 The court’s determination relied upon the
fact that the court in the underlying action had determined that the owner’s
liability was strictly vicarious of the subcontractor’s liability. Thus, the subcon-
tractor was required to indemnify the owner under the trade contract.49 In
addition, the court stated, the fact that the subcontractor’s insurers, including the
excess insurer, agreed to defend and indemnify the owner without any qualifica-
tions or reservations further supported its decision.50 Moreover, the court pointed
out, the excess insurer settled the action without the general contractor’s
participation or consent. According to the court, where an insurer rightfully does
not take part in settlement negotiations or agree to the settlement of an underlying
personal injury action, it is not required to contribute to that settlement.51
On the excess insurer’s second claim sounding in subrogation, the court held,
the excess carrier could not seek reimbursement from the general contractor due
to the principles of antisubrogation. Because the general contractor was an
additional insured under the excess policy, the court stated, antisubrogation
prohibits the excess carrier from seeking subrogation from the general contrac-
48 Id. at 26.49 Id. at 25–26.50 Id. at 26.51 Id. at 25.
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tor.52
F. St. Paul Mercury’s Ramifications: Tools for the Insurance Industry
1. Strict Vicarious Liability Can Alter the Results
The decision in St. Paul Mercury has important ramifications for insurers
insuring owners, general contractors, and subcontractors in New York because it
seems to provide an exception in certain limited circumstances to the general rule
of horizontal exhaustion. According to St. Paul Mercury, a priority determination
in a construction case will be irrelevant if (1) a court has found that the upstream
additional insured’s, i.e, the owner’s or general contractor’s, liability is strictly
vicarious to that of the named insured subcontractor and (2) the subcontractor’s
insurers agreed to defend and indemnify the upstream party without reservation or
qualification. In light of this decision, insurers when faced with a construction
case where the liability may exceed the primary policy’s limits should consider
taking the measures discussed in this section.
2. Insurers for Subcontractors
In cases where the priority of coverage is determined prior to any liability
determination in the underlying case, St. Paul Mercury should not apply because
the additional insured’s right to indemnification from the named insured has not
been established. Insurers should rely on LiMauro and its progeny, including
Bovis and Tishman, to argue that the policy terms control coverage priority and
that those terms establish horizontal exhaustion. Insurers for subcontractors
should file a declaratory action promptly upon the filing of the underlying action
in order to increase the chances of obtaining a decision on the priority of coverage
prior to a finding of liability in the underlying action.
But, because a priority of coverage determination may not always be possible
prior to a liability determination, it is also important for insurers to reserve their
rights to a priority of coverage determination when agreeing to defend and
indemnify upstream insureds. As the court noted in St. Paul Mercury, an
important factor in determining that a priority of coverage determination was
irrelevant was the fact that that subcontractor’s insurers had “accepted tender of
the [owner’s] defense and unconditionally and without reservation agreed to
defend and indemnify the [owner].”53 Moreover, if the upstream insurers are
aware, via a reservation of rights, that they may be called upon to contribute to
payment of the loss, such insurers should participate in any settlement negotia-
tions, negating another basis for the decision to apply vertical exhaustion in St.
Paul Mercury.54
3. General Contractors and Owners and Their Insurers
In light of St. Paul Mercury, general contractors and owners with contractual
52 Id. at 26-27.53 Id. at 26.54 Id.
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indemnity rights against the trade subcontractors will want to establish as quickly
as possible their right to contractual indemnity from a trade subcontractor in the
event of injuries or property damage from an accident. This may be accomplished
via a third party claim in the underlying action. The feasibility of establishing the
right to indemnity will depend, however, on the claims in the underlying action.
If the owner’s and/or general contractor’s liability is premised solely on the strict
liability afforded by New York’s “scaffold laws,” establishing the right to
contractual indemnity by summary judgment will be easier than if the injured
party also alleges active negligence against these parties. If a right to contractual
indemnity is established prior to a determination regarding the priority of
coverage, the upstream insurers should argue that, pursuant to St Paul Mercury,
the upstream parties’ liability passes to the subcontractors and its insurer, and thus
the priority of coverage is irrelevant. Whether a New York court will extend the
St Paul Mercury reasoning beyond the specific circumstances in that case,
however, is yet untested.
Upstream insurers should also be aware that St Paul Mercury is only binding
precedent in the First Appellate Department in New York. It may be more difficult
to make a vertical exhaustion argument in the other three New York appellate
departments, which have consistently applied horizontal exhaustion. Moreover,
even in cases in the First Appellate Department, Bovis is still good law, which
counsels that the courts may be unwilling to extend St. Paul Mercury beyond its
specific circumstances.
G. Conclusion
Although horizontal exhaustion remains generally the law in New York, the
First Appellate Department’s recent decision in St. Paul Mercury shows that
insurance coverage law is ever changing and provides insurers with the ammu-
nition to argue for greater use of vertical exhaustion in certain circumstances.
IV. FLORIDA AND THE SOUTHEAST: INCONSISTENT
JURISDICTIONAL RULINGS ON “ADDITIONAL INSURED”
COVERAGE
A. The Florida-Georgia “Border War”
A review of recent rulings on Additional Insured coverage by the courts in
Florida and Georgia shows that the two states conflict more often than their annual
football matchup in Jacksonville. On at least three issues, Georgia courts have
found coverage where Florida courts have not. Although the facts of each case (in
particular, the policy language at issue) may explain part of the divergence, a
degree of disparity is clear regardless of the circumstances. The conflict is most
notable because Florida law usually (at least, until recently) has provided broader
coverage than its northern neighbor.55 Recent decisions on critical issues of
55 Three prominent examples are:
(1) the notice condition (compare Travelers Indem. Co. of Conn. v. Douglasville Dev., LLC, No.
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Additional Insured coverage are discussed below.
B. Certificates of Insurance
Several recent decisions have rejected the use of a Certificate of Insurance
(“COI”) to establish coverage for a non-party to the contract on an Additional
Insured basis. For example, an opinion written by Florida’s First District Court of
Appeals is indicative of Florida law, in Interstate Fire & Casualty Co. v.
Abernathy.56 A girl was injured at a “Jelly Fish Festival” while using an
“inflatable bungee run.” The festival was held at the Choctaw Touchdown Club
(the “Club”) and equipment was supplied by Emerald Coast Entertainment, LLC
(“Emerald”). Emerald had a liability policy with an Additional Insured endorse-
ment entitled “ADDITIONAL INSURED-OWNERS, LESSEES, OR
CONTRACTORS-SCHEDULED PERSON OR ORGANIZATION” accompa-
nied by a schedule that named only “AS REQUIRED BY WRITTEN CON-
TRACT.” However, Emerald had no written contract with the club.
Two days after the incident, a representative of the Club contacted the owner of
Emerald to request a certificate of insurance (“COI”) backdated to the date of the
accident. Emerald’s owner requested the same from its broker, which provided a
COI two days later. The COI included a standard language “CONFERS NO
RIGHTS UPON THE CERTIFICATE HOLDER” but also stated that the Club “is
named as additional insured” for “operations at Jelly Fish Festival on 4/13/07 to
4/14/07.” The insurer denied coverage for the Club, which then entered into a
Coblentz agreement with the plaintiff (consenting to a judgment and assigning
rights under the policy).
Surprisingly (but not unusually for Florida) the trial court denied the insurer’s
motion for summary judgment and granted the plaintiff’s motion for summary
judgment, enforcing the Coblentz agreement against the insurer. The Court of
Appeals reversed, applying the plain language of the COI stating that it confers no
rights upon the certificate holder: “it could not then have conferred new coverage
on the Club.”57 The remainder of the decision consisted of a discussion and
adoption of the “known loss” doctrine. While the case was correctly decided, it
CIVA 1:07-CV-0410JOF, 2008 U.S. Dist. LEXIS 71956 (N.D. Ga. Sept. 19, 2008) (notice not
required for insurer to raise notice condition to defeat coverage) with Bankers Ins. Co. v. Macias,
475 So. 2d 1216 (Fla. 1985) (insurer must show prejudice to raise notice condition));
(2) coverage for construction defects (compare Custom Planning & Dev., Inc. v. Am. Nat’l Fire
Ins. Co., 270 Ga. App. 8, 10, 606 S.E.2d 39 (2004) (faulty workmanship not an “occurrence”) with
United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) (faulty workmanship was
an occurrence)); and
(3) whether standard CGL policies are ambiguous as to the number of “occurrences” involved
when multiple claimants are injured (compare State Auto Prop. & Cas. Co. v. Matty, 286 Ga. 611,
690 S.E.2d 614 (2010) (policy not ambiguous); with Koikos v. Travelers Ins. Co., 849 So. 2d 263
(Fla. 2003) (policy was ambiguous, compelling a ruling against insurer)).56 No. 1D11-1905, 2012 Fla. App. LEXIS 8278 (Fla. 1st Dist. Ct. App. May 24, 2012).57 Id. at 13.
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stands as a warning with regard to how trial courts can grant coverage (even
retroactive coverage) based solely on a COI.
Another recent decision, Centimark Corporation v. Gonzales,58 shows that the
same Court of Appeals considered the ability of a COI to extend Additional
Insured coverage. In Centimark, a subcontractor to a roofing company had the
roofing company added as an Additional Insured to its workers compensation
policy; in addition to the standard language, the COI stated it applied “only to
those employees leased, not to subcontractors.” Afterward, an employee of the
subcontractor was injured on the construction site, and made a claim against the
roofing company. Remarkably, the claimant argued (and the court considered)
coverage under a theory of promissory estoppel. Specifically, the court noted that
a “promise which should reasonably be expected to induce action” could be cited
establish coverage—even by third parties to the contract.59 The Court of Appeals
ultimately rejected the promissory estoppel argument, citing the plain language of
the COI.60
Georgia courts, however, have rendered different results. For example, in
Sumitomo Marine & Fire Ins. Co. of America v. Southern Guar. Ins. Co. of
Georgia,61 a developer’s insurer sought a declaration that a general contractor’s
insurers had a duty to indemnify and defend the developer in an underlying
lawsuit. The latter insurers argued that the developer was not an “additional
insured” under their policies because the agent who issued a COI naming it such
was an “independent agent” representing policyholders rather than the insurers.
However, the District Court disagreed and found coverage, ruling that under
Georgia law, the agent had actual authority to issue the COI to the contractor’s
existing insurance policies. This is because the agent’s agreements with the
contractor’s insurers were drafted and signed by those insurers, and allowed the
agent to bind coverage, countersign contracts on behalf of insurers, sign and issue
certificates of insurance, collect premiums, and change existing policies. Critical
to the court’s ruling (and perhaps explaining the distinction from Florida law) was
the court’s finding that “Georgia law also recognizes the concept of dual agency,
whereby an agent can act on behalf of both the insured and the insurer.”62
Another recent trend has been the use of a COI to change the choice-of-law
analysis applicable to a liability policy. Florida and Georgia are both lex loci
contractus states, which interpret contracts according to the law of the state in
which a contract was finalized. Insureds have cited the location to which their COI
was delivered as the determining factor under this analysis, but so far no published
decision in either state has adopted it.
58 10 So. 3d 644 (Fla. 1st Dist. Ct. App. 2009).59 Id. at 645.60 Id.61 337 F. Supp. 2d 1339 (N.D. Ga. 2004).62 Id. at 1352. See also Grange Mut. Cas. Co. v. Snipes, 298 Ga. App. 405, 680 S.E.2d 438
(2009) (citing ambiguity in COI to find Additional Insured coverage for third party).
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One example is Bailey v. Netherlands Ins. Co.63 The named insured was a gold
cart lessor whose liability policy named as Additional Insured any person driving
a covered auto leased by the insured. During an event at the Daytona International
Speedway, the driver of a golf cart leased by the insured injured another person
while performing tasks in the infield of the track. The policy had been delivered
to the insured in North Carolina, but a subsequent COI had been delivered in
Florida. Cleverly, the insured filed in Florida, and cited its lex loci contractus rule
to argue that Florida law should apply to coverage issues affecting it as the
Additional Insured. The court disagreed, ruling that the sole inquiry should be
where the contract between the insurer and the Named Insured was finalized.
Georgia courts appear to agree on this point.64
C. Pleading Additional Insured Status and the Duty to Defend
A second issue of Additional Insured coverage, in which Florida law differs
from its northern neighbor, is whether a putative insured can cite allegations in a
complaint in order to trigger its status as an insured. Generally, courts of all
jurisdictions rule that the duty to defend is “broad.” The basis for this is the broad
language of the defense obligation in standard liability policies. But, if a party
cannot establish that it is a party (or third-party beneficiary) to the contract
containing that broad language, then it is not always given the same deference.
In Florida, “the duty to indemnify is determined by the underlying facts of the
case, whereas the duty to defend is controlled by the allegations in the complaint
against the insured.”65 This is sometimes called the “eight corners” rule because
coverage is determined by comparing the four corners of the insurance policy with
the four corners of the complaint against the insured. The same is true in
Georgia.66
However, both states have exceptions to the “eight corners” rule with regard to
“true facts” not plead in the complaint, with divergent implications. Georgia law
provides an exception benefiting the insured: even if the pleadings do not trigger
coverage, if the insured notifies the insurer of “true facts” indicating coverage, the
insurer is bound to investigate those facts before it can safely deny coverage.67
However, Florida law provides an exception benefiting the insurer: if its
investigation uncovers “true facts” disproving coverage, then it can safely deny
63 615 F. Supp. 2d 1332 (M.D. Fla. 2009).64 See Ryder Truck Rental, Inc. v. St. Paul Fire & Marine Ins. Co., 540 F. Supp. 66 (N.D. Ga.
1982) (applying Georgia law to policy delivered to named insured in Georgia, where COI granting
“additional insured” status was delivered in Tennessee).65 State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1077 n.3 (Fla. 1988).66 Fireman’s Fund Ins. Co. v. University of Georgia Athletic Ass’n, Inc., 288 Ga. App. 355, 654
S.E.2d 207 (2007).67 Anderson v. S. Guar. Ins. Co. of Ga., 235 Ga. App. 306, 508 S.E.2d 726 (1998) (where insured
was convicted of aggravated battery but reported to the insurer that the resulting injuries were
unexpected, insurer breached duty to defend by not investigating insured’s report).
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despite allegations indicating (if true) the existence of coverage.68
As a result, Florida courts have ruled differently than Georgia courts in the
scenario where a complaint filed against a purported Additional Insured attempts
to invoke the Additional Insured coverage through allegations that are not in fact
true.
The seminal case in Florida is Nateman v. Hartford Cas. Ins. Co.69 In Nateman,
one doctor (Valdez) sued another doctor (Nateman) for defamation. Nateman
sought coverage as an Additional Insured from his hospital’s liability insurer
(Hartford). Hartford denied coverage. Nateman contended there was arguable
coverage, triggering a duty to defend, because “Valdez’s complaint alleged that
Nateman as Director of Emergency Services at Baptist Hospital was acting in his
capacity as a representative, agent or employee of the hospital.”70 The court found
no coverage, pointing to Nateman’s contract with the hospital: “Under their
contractual arrangement, Nateman, on behalf of his professional association, had
disclaimed that he or any of his associate physicians or employees would be
considered agents or employees of Baptist Hospital. That contract in plain and
unambiguous terminology established Nateman’s association as an independent
contractor for the rendition of medical services at the hospital.”71
The following is a helpful discussion from Nateman:
While, as a general rule, the obligation to defend an insured against an action,
whether groundless or not, must be measured and determined by the allegations
of the petition rather than the outcome of the litigation, an obvious exception
must be made in those instances where, notwithstanding allegations in the
petition to the contrary, the insurer successfully urges the alleged insured is not
in fact an insured under the policy. . . .
The insurer is not obligated to provide a defense for a stranger merely because
the plaintiff alleges that the defendant is an insured or alleges facts which, if true,
would make the defendant an insured. The mere allegations of the plaintiff’s
petition may not create an obligation on the part of the insurer to defend where
no such obligation previously existed. Michaels v. U.S. Fid. & Guar. Co., 129 So.
2d 427 (Fla. 2d DCA 1961) (where contractor’s policy afforded no coverage to
crane operator, contractor’s insurer was under no duty to defend).
At the outset, we observe that in cases where one is alleged to be an additional
insured, it is much more feasible to ascertain initially the question of who is
covered as opposed to the issue of what the coverage is. While we acknowledge
the viability of the general rule that the allegations of the complaint determine an
insurer’s duty to defend, it would be imprudent and illogical to confer such a duty
68 Nationwide Mut. Fire Ins. Co. v. Keen, 658 So. 2d 1101 (Fla. 4th Dist. Ct. App. 1995)
(plaintiff’s statement that he was operating a boat with a 40-horsepower engine relieved the insurer
of the duty to defend because the boat was more powerful than coverage allowed).69 544 So. 2d 1026 (Fla. 3d Dist. Ct. App. 1989).70 Id. at 1027.71 Id.
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upon an insurer as to a party who is not an insured. We agree with the courts cited
above that the creation of the basic insurer-insured relationship and the ensuing
duty to defend cannot be left to the imagination of the drafter of a complaint
. . . .72
The Northern District of Florida relied on Nateman in Scottsdale Ins. Co. v. Big
Bend Timber Services, Inc.,73 where a realtor sought coverage as an Additional
Insured under a timber dealer’s policy. The court began by recognizing that
“Florida courts sometimes have described the eight corners rule in terms
suggesting it is universal and inflexible.”74 However, the court continued:
Nonetheless, there are and most assuredly should be exceptions to the eight
corners rule. . . . Courts in various jurisdictions have articulated the exceptions
in different ways. Thus, for example, it has been said that facts alleged in an
underlying complaint that are not material to the claim need not be taken as true
for purposes of determining the insurer’s duty to defend. Or it has been said (as
in Nateman) that the true facts may be considered in determining who is an
insured.75
The Big Bend court distinguished Nateman, finding that its exception to the
“eight corners rule” did not apply to incorrect allegations as to the insured’s
liability to a claimant:
In this respect, the case at bar is different from Nateman. There the plaintiff
alleged that the defendant physician was an employee of the named insured
hospital. In fact, the physician was an independent contractor. Hospital employ-
ees were insureds under the hospital’s liability policy; independent contractors
were not. . . . The same is not true, however, in the case at bar. To the contrary,
the Realtor had a duty to its client, the Seller, but was alleged to have acted in
violation of that duty and in league with the Timber Dealer. The Realtor was
alleged to have violated its duty to the Seller by failing to disclose to the Seller
the true nature of its relationship with the Timber Dealer. The Realtor’s
relationship with the Timber Dealer thus was important to the Seller’s claim on
the merits. This is the kind of allegation that must be taken as true for purposes
of determining the Insurer’s duty to defend; that the allegation is unfounded does
not matter.76
The court ultimate found no Additional Insured coverage for the realtor under the
eight corners rule itself, rather than any exception.
More recently, courts have followed Nateman in HC Waterford Properties, LLC
72 Id.73 No. 4:02cv279, 2004 U.S. Dist. LEXIS 29149 (N.D. Fla. Jan. 5, 2004).74 Citing Reliance Ins. Co. v. Royal Motorcar, 534 So. 2d 922, 923 (Fla. 4th Dist. Ct. App. 1988)
(“The duty of an insurer to defend is determined solely by the allegations of the complaint against
the insured, not by the actual facts, nor the insured’s version of the facts or the insured’s defenses.”).75 Id. at *27.76 Id. at *30-31.
21 ISSUES AND REGIONAL PECULIARITIES § IV[C]
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v. Mt. Hawley Ins. Co.,77 and Wilson ex rel. Estate of Wilson v. General Tavern
Corp.78 In Wilson, a claimant attempting to “plead into coverage” filed a
complaint against the insured that was silent as to whether the insured was acting
in the course and scope of employment at the time of an automobile accident
(because being in the “course and scope” would have triggered the Additional
Insured coverage). The insured claimed to be acting in the “course and scope” in
order to trigger coverage, but the court disagreed, stating: “the insurer is not
obligated to provide a defense for a stranger merely because the plaintiff alleges
that the defendant is an insured or alleges facts which, if true, would make the
defendant an insured. The mere allegations of the plaintiff’s petition may not
create an obligation on the part of the insurer to defend where no such obligation
previously existed.”79
Georgia courts have held otherwise, allowing much more leeway with regard to
the ability of a third party’s complaint to determine Additional Insured coverage.
For example, in Atlanta Postal Credit Union v. International Indem. Co.,80 a
credit union argued that it was an insured under the relevant policy; the court
noted that “in order for the Credit Union to establish that it too was entitled to a
defense by International Indemnity, the Credit Union must show, as required by
the policy, that it was ‘liable for the conduct’ of National Vehicle.” The court
found coverage because “plaintiffs alleged in their complaint that the Credit
Union is liable for the acts of the other defendants ‘under the Doctrine of
Respondeat Superior.’ ”81 That court relied on the decision in Aetna Cas., etc., Co.
v. Empire Fire, etc., Co.82 In Aetna, a lumber company was sued because of the
negligence of a trucker carrying its lumber. The court found the lumber company
was an “insured” under the trucker’s policy because the policy defined “insured”
as “anyone liable for the conduct of an insured” and the underlying complaint
alleged the lumber company was liable for the trucker’s conduct. A similar ruling
was issued in BBL-McCarthy, LLC v. Baldwin Paving Co.,83 where BBL was a
general contractor and selected Baldwin as its subcontractor to perform road work
requiring Baldwin to name BBL an “additional insured.” When both parties were
sued for negligent construction, Baldwin’s insurer defended Baldwin but not
77 No. 08-22158-CIV-MORENO/TORRES, 2009 U.S. Dist. LEXIS 81355 (S.D. Fla. Aug. 21,
2009) (“creation of the basic insurer-insured relationship and the ensuing duty to defend cannot be
left to the imagination of the drafter of a complaint”).78 469 F. Supp. 2d 1214 (S.D. Fla. 2006).79 Id. at 1221. But see Continental Cas. Co. v. Charleston, 704 So. 2d 137 (Fla. 1st Dist. Ct. App.
1997) (finding a duty to defend where the complaint against the putative Additional Insured alleged
both that the putative Additional Insured was the passively negligent party, and that there was a high
degree of control of the putative Additional Insured by the Named Insured which was the actively
negligent party).80 228 Ga. App. 887, 494 S.E.2d 348 (Ga. Ct. App. 1997).81 Id. at 350.82 212 Ga. App. 642, 442 S.E.2d 778 (1994).83 285 Ga. App. 494, 646 S.E.2d 682 (2007).
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BBL. The insurer argued that BBL did not qualify under the Additional Insured
provision (essentially similar to that in the Zurich policies) because the plaintiff’s
claims were attributable to BBL rather than Baldwin. The Georgia Court of
Appeals disagreed because the additional insured provision applied if the liability
“arose out of” “your work” and that phrase should be broadly applied. Each of
these cases are similar to the fact pattern in Charleston because, in each (1) it was
uncontested that the named insured agreed to provide Additional Insured coverage
for the putative insured; and (2) it was alleged that the putative insured was liable
for the obvious insured’s conduct.
Indeed, this divergence in these and other states’ positions was noted in Allan
D. Windt, 1 Insurance Claims and Disputes 5th:
Several courts, therefore, have held that the insurer is not obligated to provide a
defense for a stranger merely because the plaintiff alleges facts that, if true,
would make the stranger an additional insured as defined in the policy. They
have, instead, allowed the insurer to avoid providing a defense if extrinsic
evidence demonstrates that the plaintiff’s allegations are untrue, and that the
defendant is not an insured.84
D. Coverage for the Additional Insured’s Sole Negligence
A third frequently litigated issue of Additional Insured coverage involves
attempts made by general contractors to seek coverage under their subcontractors’
policies for claims resulting from the general contractors’ sole negligence. As
explained in the introduction above, this was an issue that the ISO attempted to
address through modified language over the years; however courts have not
always followed ISO’s intentions.
One recent decision that does enforce the ISO expectations is United Rentals,
Inc. v. Mid-Continent Cas. Co.85 In United Rentals, the court ruled that an
employer’s policies did not afford Additional Insured coverage to the lessor of a
scissors lift for claims arising from an employee’s fatal accident. Specifically, the
federal court ruled that under the plain language of the ISO 2010 10 93 form,
coverage was extended by an “insured contract” or written agreement only for
vicarious liability on behalf of the employer, while the claims at issue were
premised solely on the lessor’s own acts or omissions. Critical to the court’s ruling
was the fact that Florida law holds a contractual clause void to the extent it
required the employer to indemnify the lessor for its own acts, with no monetary
limitation on the extent of indemnification, and thus, there was no legally valid
insured contract or written agreement pursuant to which the lessor could be
considered an additional insured. As the court wrote:
[T]he Estate’s State Court Complaint alleges claims against United Rentals
premised solely on theories of strict liability and negligence arising from United
84 Allan D. Windt, 1 Insurance Claims and Disputes 5th § 4.5, citing Nateman and courts of eight
other states for the proposition that Florida’s rule is the nationwide majority rule.85 No. 11–61586–CIV, 2012 U.S. Dist. LEXIS 25065 (S.D. Fla. Feb. 16, 2012).
23 ISSUES AND REGIONAL PECULIARITIES § IV[D]
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Rentals’s own acts or omissions. . . . Therefore, because the indemnification
clause of the Rental Agreement is void as to United Rentals’s own “acts,
omissions, or defaults” per Florida Statute section 725.06(1), there is no legally
valid insured contract or written agreement pursuant to which United Rentals can
be considered an additional insured under either of the insurance policies with
respect to the Estate’s claims. Additionally, given that the indemnification clause
of the Rental Agreement is void as to United Rentals’s own acts or omissions, it
necessarily follows that United Rentals is also not an Additional Insured under
clause “e” of the Excess Policy because it is not an insured under the Primary
Policy as to its own acts or omissions.86
The United Rentals case follows the Florida Supreme Court’s decision in
Garcia v. Federal Ins. Co.87 In Garcia, the claimant (Garcia) worked as a
caregiver for the named insured, and sought coverage as an additional insured
under her homeowner’s insurance policy.88 While using the named insured’s
vehicle as part of her caregiver duties, Garcia was involved in an accident and
seriously injured a pedestrian. The victim sued the insured and Garcia, alleging
that each was independently negligent. The relevant homeowners policy extended
coverage to “any other person or organization with respect to liability because of
acts or omissions of you or a family member. . ..” Garcia alleged that she met the
definition of insured because she qualified as “any other person or organization
with respect to liability because of acts or omissions” of the named insured.
Federal denied coverage and argued that the clause only covered individuals who
become vicariously liable for the acts or omissions of the named insured. Federal
argued that because the victim had sued Garcia for her own negligent acts, she did
not qualify as an additional insured.
Noting that the particular language at issue had not been interpreted by any
Florida court, the Supreme Court of Florida cited Container Corp. of America v.
Maryland Cas. Co.89 holding that an endorsement naming the owner as Additional
Insured “only with respect to operations by or on behalf of the Named Insured”
did not limit coverage to vicarious liability. In Container Corp., the court held that
coverage would not be limited to a claim of vicarious liability unless so specified.
With respect to the language at issue in Garcia, the court noted that two phrases
were particularly relevant: “with respect to” and “because of.” The court
determined that, based on dictionary definitions, the phrase “with respect to”
meant “concerning” and the phrase “because of” meant “by reason of.” When
considered in that context, the court held that an additional insured is only entitled
to coverage “concerning” liability that is “caused by” or occurs “by reason of”
86 Id. at *19.87 969 So. 2d 288 (Fla. 2007).88 Although Garcia involved a homeowners policy, the court cited cases involving Additional
Insured endorsements in CGL policies. Further, the Southern District of Florida relied on Garcia in
analyzing Additional Insured coverage under a CGL policy. See Monticello Ins. Co. v. City of Miami
Beach, No. 06-20459-CIV-GOLD, 2009 U.S. Dist. LEXIS 19181 (S.D. Fla. Mar. 11, 2009).89 707 So. 2d 733 (Fla. 1998).
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acts or omissions of the named insured. Thus, the court held that a clause covering
“any other person with respect to liability because of acts or omissions” of the
named insured covers only vicarious liability for the negligence of the named
insured. The court reasoned that the policy language was clear and unambiguous
in its intent to limit coverage to the vicarious liability of the named insured.
A federal court applied the rationale of Garcia to an Additional Insured
endorsement in a CGL policy in Monticello Ins. Co. v. City of Miami Beach.90 In
Monticello, the City of Miami Beach sought coverage as an additional insured
under an insurance policy issued to Hurricane Beach Rentals, a beach conces-
sionaire, for two drownings that occurred in the Atlantic Ocean. The policy issued
to Hurricane Beach Rentals contained an additional insured endorsement which
stated that the City of Miami Beach was an insured “but only with respect to
liability arising out of the operations performed for [the City of Miami Beach] by
or on behalf of [Hurricane Beach Rentals]”. The court noted in its findings of fact
that the policy issued did not contain specific language stating that coverage for
the city was limited to its vicarious liability for the negligence of Hurricane Beach
Rentals or that there was no coverage for the city’s own negligence. Notably, the
court held that while the term “arising out of” was not ambiguous, there was still
a question regarding whether the remaining language in the additional insured
endorsement is ambiguous to the extent it is unclear whether the endorsement
covers the additional insured for its own negligence or only for the vicarious
liability for the negligence of the named insured. Relying on the Florida Supreme
Court decisions in the Container Corp. and Garcia, the court held that the policy
endorsement at issue in the Monticello case was ambiguous as to the scope of
coverage. Specifically, the court noted that under one interpretation, the endorse-
ment could be viewed to limit coverage to circumstances in which the named
insured’s negligent acts or operations directly caused the plaintiff’s injury, that is,
circumstances in which the additional insured is held vicariously liable for the
named insured’s negligence. But, under another interpretation, the endorsement
could likewise be read to cover the additional insured’s direct negligence, as long
as the plaintiff’s injury has some connection to the operations that the named
insured performed for the additional insured.
In a recent decision contrary to the Florida decisions mentioned above,
Georgia’s Court of Appeals found coverage for a general contractor named as an
additional insured under its subcontractor’s liability policy in JNJ Foundation
Specialists, Inc. v. D.R. Horton.91 The subcontractor’s policy provided that one
added to the named insured’s policy as an Additional Insured is an insured “only
with respect to liability for [injury] caused, in whole or part, by [the subcontrac-
tor’s] acts or omissions.”92 After a traffic accident on the construction property,
the general contractor was sued in part for “failing to properly train and supervise
90 No. 06-20459-CIV-GOLD, 2009 U.S. Dist. LEXIS 19181 (S.D. Fla. Mar. 11, 2009).91 311 Ga. App. 269, 717 S.E.2d 219 (2011).92 Id. at 276.
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John Doe” [an unknown and unnamed defendant].93 Based on this record, the
Court of Appeals upheld a trial court’s ruling that the general contractor was
entitled to Additional Insured coverage.
It is noteworthy that the JNJ Foundation Specialists decision does not stand
alone in Georgia Jurisprudence. In Service Merchandise Co. v. Hunter Fan Co.,94
the Georgia Court of Appeals addressed the issue of the enforceability of an
additional insured clause. Service Merchandise had entered into agreements with
Hunter Fan Company for the purchase of air purifiers. The contract obligated
Hunter Fan Company to indemnify Service Merchandise for lawsuits and
liabilities arising out of death or injury allegedly caused by a defective Hunter Fan
Company product. The contract also required Hunter Fan Company to obtain
liability insurance with Service Merchandise listed as an additional insured on the
policy. A customer filed a wrongful death suit against Service Merchandise
alleging that Service Merchandise failed to provide necessary information during
a recall of a defective Hunter Fan Company fan product. Service Merchandise
sought indemnity from Hunter Fan Company. The Georgia Court of Appeals
found that the indemnity provision was inapplicable because it failed to expressly,
plainly, clearly and unequivocally state that the Hunter Fan Company agreed to
indemnify Service Merchandise for Service Merchandise’s own negligence. The
Court of Appeals further found that the insurance clause did not independently
require Hunter Fan Company to defend and indemnify Service Merchandise as a
matter of law for the customer’s claims. The court concluded that nothing in the
contract obligated Hunter to insure against Service Merchandise’s negligence.
The court explained:
The requirement that Hunter name SM as an additional insured did not create an
independent basis that would require Hunter to defend and indemnify SM for
SM’s own negligence or gross negligence. To find otherwise would effectively
negate the public policy that one cannot be indemnified for one’s own negligence
unless the contracting parties expressly and explicitly agree to such indemnifi-
cation in writing.95
Likewise, in Ryder Integrated Logistics, Inc. v. BellSouth Telecommunications,
Inc.,96 the Georgia Court of Appeals interpreted the phrase “only with respect to
liability arising out of your operations” in an AI endorsement. The court
concluded this language does not limit AI coverage to the additional insured’s
vicarious liability for the named insured’s negligence. The court gave the phrase
“arising out of your operations” a “transactional” definition: “we construe the
phrase ‘arising out of your operations’ to mean arising out of ‘a business
93 Id.94 274 Ga. App. 290, 617 S.E.2d 235 (2005).95 617 S.E.2d at 241.96 277 Ga. App. 679, 627 S.E.2d 358 (2006), rev’d on other grounds, 281 Ga. 736, 642 S.E.2d
695 (2007).
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transaction’ or work performed by” the named insured.97 The court rejected the
carrier’s argument that “operations” referred to the negligence that was the cause
of the underlying plaintiff’s injury. The Court of Appeals went on to hold the
named insured liable for breach of contract for failing to procure insurance, a
holding later reversed by the Supreme Court, as it operated as an indemnification
agreement for the indemnitee’s own negligence.
Further, in BBL-McCarthy, LLC v. Baldwin Paving Co.,98 a general contractor
and its liability insurer brought an action against subcontractors and their liability
insurers to recover for breach of duties to defend and indemnify the general
contractor in underlying tort suits. The subcontractor was hired to construct a
deceleration lane going into an office complex. An accident occurred in the
deceleration lane whereby several motorists were killed, and their estates sued the
general contractor. The general contractor tendered the defense of the suit to the
subcontractor’s carrier as an additional insured under the policy, but the tender
was denied. In holding that the general contractor was an AI under the
subcontractor’s policy, the Georgia Court of Appeals held that the “arising out of”
language in an AI endorsement means “[a]lmost any causal connection or
relationship. . .” and grants coverage “without regard to whether the injury was
attributable to the named insured or the additional insured.”
V. CONCLUSION
Clearly, both litigants and courts continue to disagree over numerous issues of
Additional Insured coverage. This requires agents, attorneys, and adjusters who
make coverage determinations to always monitor both the specific form involved
and all possible jurisdictional law that might apply.
97 277 Ga. App. at 684, 627 S.E.2d at 363.98 285 Ga. App. 494, 646 S.E.2d 682 (2007).
27 ISSUES AND REGIONAL PECULIARITIES § V
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