ADDITIONAL INSURED COVERAGE: INTERPRETING NEW ENDORSEMENTS AND APPLYING THE OLD. Benjamin F. Neidl, Esq. Wilson Elser Moskowitz Edelman & Dicker LLP

Transcription

1 ADDITIONAL INSURED COVERAGE: INTERPRETING NEW ENDORSEMENTS AND APPLYING THE OLD by Benjamin F. Neidl, Esq. Wilson Elser Moskowitz Edelman & Dicker LLP 103

2 104

3 Additional Insured Coverage: Interpreting New Endorsements and Applying the Old Benjamin F. Neidl 1 The institution of additional insured coverage has evolved into a standard riskallocation tool in the business world. But from a legal perspective, it has perhaps created almost as many problems as it has solved. The nuances of the policy language, coupled with the messy realities of how business is done and how losses occur, has spawned volumes of additional insured coverage litigation. The fact of the matter is, from loss to loss, the exercise of determining whether a particular occurrence is covered under an additional insured endorsement is a challenging and fact-driven one. This presentation will focus on the following topics pertinent to additional insured coverage: Coverage obligations in construction contracts, leases and permits. Addressing dilemmas such as unsigned agreements, other contracts incorporated by reference, and coverage for those not named. Notable amendments to the Insurance Services Office (ISO) additional insured endorsement forms made in The effect of a reservation of rights on defense and liability obligations. How to determine which insured s coverage comes first. I. Coverage Obligations in Construction Contracts, Leases and Permits A. TRANSACTIONS IN WHICH ADDITIONAL INSURED COVERAGE IS COMMONLY SOUGHT It is common in many business settings for parties to allocate risk-management burdens in their contracts. For instance, businesses are often required to represent and warrant that they maintain liability, property and other forms of insurance covering the kinds of risks associated with the transaction at hand. But more than that, many parties bargain for something extra an express promise to be added to the counterparty s insurance policies as an additional insured. 1 Benjamin Neidl is a partner at Wilson, Elser, Moskowitz, Edelman & Dicker, LLP in Albany, New York. 105

4 In theory, being covered as an additional insured gives a party a direct right of indemnification from the insurance company. Thus, the party bargaining for additional insured coverage in a business contract expects to be covered under his counterparty s insurance policy, at his counterparty s expense. Though additional insured promises are common in many settings, they are most prevalent in the following types of contracts: Construction, renovation and repair. In construction contracts, the project owner often requires the general contractor to purchase Comprehensive General Liability (CGL) and other insurance covering the contractor as the named insured, and covering the owner as an additional insured. Similarly, the general contractor often requires its subcontractors to procure coverage naming the general contractor and/or the owner as an additional insured. The objective is to insulate the upstream parties to a project (owner, general contractor, etc.) from losses arising from job site injuries or other liabilities connected to the work. By agreeing to purchase insurance with additional insured coverage, the downstream parties (contractors, subcontractors, materialmen) effectively agree to absorb the insurance costs. It is also common for property owners to extract additional insured promises from their repair and maintenance contractors. Commercial leases. Commercial landlords very often require their tenants to acquire CGL and property insurance covering the landlord as an additional insured. The landlord s objective is to protect itself from losses arising out of personal injuries or other damages sustained by visitors to the property (or the tenant s employees), at the tenant s expense. Product vending agreements. Product retailers particularly large ones with strong bargaining power often require product manufacturers to keep liability insurance naming the retailer as an additional insured, as a precondition to selling the manufacturer s products to consumers. The retailer s objective is to insulate itself from losses arising from products liability claims caused by a malfunction or negligent design of the manufacturer s product. Permits. Municipalities and government agencies issuing permits to private parties sometimes require the permitee to hold insurance naming the permitor as an additional insured. Such stipulations are found in building permits, demolition permits, and environmental remediation permits, among others. The objective is to insulate the agency issuing the permit from losses arising from the acts or omissions of the permitee which might occur in connection with the activities authorized in the permit. In many cases, the additional insured coverage is an extra, kind of belt and suspenders protection for the party that requires it construction owners, landlords and retailers very often maintain their own direct insurance policies in which they are the named insureds. Thus, the 106

5 separate additional insured coverage they bargain for in their contracts and leases is often a second source of insurance protection. But not always. Some businesses self-insure (i.e., they do not buy their own, direct liability policies). For these entities, it is especially vital to confirm that their tenants, contractors and the like follow through on acquiring the additional insured coverage bargained for in the contract. Moreover, even parties who do maintain their own insurance polices as named insureds have an interest in confirming that they are also covered as an additional insured in a counterparty s insurance policy. A loss might exceed the coverage limits of a party s own policy, thus making the additional insured coverage indispensible to avoiding an out-of-pocket loss. Furthermore, many carriers insuring developers and contractors require their insureds to bargain for additional insured coverage with their counterparties as a means of spreading the risk among insurers. Thus, bargaining for additional insured coverage has become standard operating procedure in many businesses. B. NATURE AND SCOPE OF ADDITIONAL INSURED COVERAGE, GENERALLY The general rule is that an additional insured enjoys same protection as the named insured unless the language of the insurance policy states otherwise. See Kassis v. Ohio Cas. Ins. Co., 12 N.Y.2d 595, 600 (2009); Worth Construction Co., Inc. v. Admiral Ins. Co., 10 N.Y.3d 411 (2008); Pecker Iron Works of New York, Inc. v. Traveler s Ins. Co., 99 N.Y.2d 391, 393 (2003). Thus, generally, the policy benefits, limits and exclusions applicable to the named insured are also applicable to the additional insured. However, many policies place further, express limitations on the additional insured coverage which are not applicable to the named insured. For example, many endorsements limit the additional insured s protection to losses arising out of activities, acts or omissions of the named insured thus, the policy might indemnify an owner for a loss caused by its contractor s negligence, but might not indemnify the owner for losses caused by its own negligence. These kinds of limitations are discussed in more detail below. It is essential for the additional insured to understand the particular terms and conditions of the additional insured endorsement. Words and phrases commonly used in the endorsement forms may appear innocuous to the lay person, but can have the effect of excluding broad categories of losses from coverage. C. ADDITIONAL INSURED DOCUMENTATION: POLICY ENDORSEMENTS AND CERTIFICATES OF INSURANCE Additional insured coverage is typically created by a written endorsement that is added to the insurance policy. The endorsement is an amendment of the insurance contract, modifying its definition of who is an insured. 107

6 Insurers and their agents may also issue certificates of insurance broadly summarizing the coverage. However, as discussed more fully below, generally a certificate of insurance is regarded by the law as informational only and it does not, by itself, confer any coverage rights upon the additional insured. The operative document is the additional insured endorsement, not the certificate of insurance. 1. Additional Insured Endorsements There are two types of additional insured endorsements: (a) scheduled endorsements, and blanket endorsements. (a) Scheduled Endorsements A scheduled endorsement is a policy amendment that expressly adds the additional insured, by name, to the policy s definition of an insured. For example, the Insurance Services Office, Inc. ( ISO ) Form CG is an additional insured endorsement commonly found in construction policies, which provides as follows: Name of Additional Insured: [XYZ Corp.] Location of Covered Operations: [123 Main St.] Section II Who is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule [above], but only with respect to liability for bodily injury, property damage or personal and advertising injury caused in whole or in part by: 1. [The Named Insured s] acts or omissions; or 2. The acts or omissions of those acting on [the Named Insured s] behalf; in the performance of [the Named Insured s] ongoing operations for the additional insured(s) at the location(s) designated above. Under this endorsement, XYZ Corp. is now an expressly named additional insured. It is covered for bodily injury, property damage and personal and advertising injury caused by the contractor s acts or omissions (or caused by the acts or omissions of persons working on behalf 108

7 of the contractor) related to the contractor s ongoing operations at XYZ Corp. s premises at 123 Main Street. (b) Blanket Endorsements Unlike a scheduled endorsement, a blanket endorsement does not specifically name any person or entity as an additional insured. Instead, the endorsement states that certain classes of persons or firms doing business with the named insured will automatically be covered as additional insureds. Usually, the additional insureds are defined as customers for whom the named insured is performing services pursuant to a written service contract, in which the named insured has promised to make the customer an additional insured. For example, ISO Form CG provides, in part: Section II Who is An Insured is amended to include as an insured person any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. [] Under this endorsement, XYZ Corp. will automatically become an additional insured if it enters into a written agreement with the contractor, in which the contractor promises to make XYZ Corp. an additional insured in its insurance policy. It is not necessary for the contractor or the insurance company to make any further modification or amendment to the policy to effectuate the additional insured coverage. The blanket endorsement sets forth criteria for becoming an additional insured (a written contract containing an additional insured promise, etc.) and any customer of the contractor who meets those criteria is automatically covered. When an additional insured desires to submit a claim to the carrier, the additional insured must, at that time, demonstrate to the carrier that it met the qualifications of the blanket endorsement before the loss occurred: namely, that the contractor was performing operations for the claimant, that the claimant had a written agreement with the contractor, and that the written agreement required the contractor to procure additional insured coverage for the customer. Thus, in order to determine whether there is coverage, the insurance company will have to review the underlying service contract to determine whether it meets the specifications of the blanket endorsement. Blanket endorsements are very common in today s market and are becoming increasingly more so. The theoretical advantage of the blanket endorsement is efficiency. Contractors, for 109

8 example, frequently need to add and remove customers as additional insureds as they begin and complete new construction projects. Using a scheduled endorsement every time the contractor needs to add a customer to the coverage requires more paperwork from everyone a request for the endorsement from the named insured, and issuance of the endorsement by the carrier or insurance agent. The blanket endorsement eliminates the need for repetitive amendments to the policy. However, as discussed more fully below, determining whether a party actually meets the criteria of the blanket endorsement can be complicated, and the coverage case law has led to some unexpected results. 2. Certificates of Insurance Most of us have seen a certificate of insurance. It is typically a one-page document which purports to summarize the basic terms of the insurance policy: the named insured(s), the additional insured(s), the types of coverage (GCL, property, auto), the coverage limits and the term of the policy (when coverage begins and when it ends). It is customary for a party expecting additional insured coverage to request a certificate of insurance from his contractor, tenant or supplier as proof that the insurance has been procured. That practice notwithstanding, it is essential to understand that, most of the time, certificates of insurance are not insurance contracts. New York courts generally hold that the certificate of insurance is informational only; it confers no rights to coverage and is not, by itself, enforceable against the insurance company. See Hargob Realty Assocs., Inc. v. Fireman s Fund Ins. Co., 73 A.D.3d 856 (2d Dep t 2010); West 64 th Street, LLC v. Axis U.S. Ins., 63 A.D.3d 471 (1st Dep t 2009); Nicotra Group, LLC v. American Safety Indem. Co., 48 A.D.3d 25 (1st Dep t 2008). Suppose that an insurance company (or its agent) erroneously issues a certificate of insurance identifying a party as an additional insured, but an additional insured endorsement is never added to the policy. Under those circumstances, may the additional insured enforce the certificate of insurance as a basis for coverage? Surprisingly, the answer, generally, is no. See Hargob Realty, 73 A.D.3d at 856; West 64 th Street, 63 A.D.3d at 471; Nicotra, 48 A.D.3d at 25. The Third and Fourth Departments of the Appellate Division have recognized that the insurer may be estopped from denying coverage if it, or its authorized agent, issued the certificate of insurance in error, and if the recipient acted in reliance on the certificate. Niagara Mohawk Power Corp. v. Skibeck Pipeline Co., 270 A.D.2d 867 (4th Dep t 2000); Bucon, Inc. v. Pa. Mgg. Ass n Ins. Co., 151 A.D.2d 207 (3d Dep t 1989). But even then, the burden of proof is on the would-be insured to prove its detrimental reliance. Meanwhile, the First and Second Departments have been reluctant to embrace the estoppel exception at all. Thus, the party who relies on a certificate of insurance as proof of coverage does so at his own risk. 3. Practice Recommendation If you are representing a client in the negotiation of a lease, construction agreement or other contract in which the other party promises to procure additional insured coverage, do not 110

9 rest on a certificate of insurance. Rather than require the counterparty to furnish merely a certificate of insurance, it is surely a better practice to require the counterparty to furnish a copy of the additional insured endorsement. This is so not only because the certificate, by itself, is informational only, but also because the only way to evaluate fully the scope and limitations of the additional insured coverage is to scrutinize the language of the endorsement itself. D. CONTRACTUAL INDEMNITY CLAUSES AND CONTRACTUAL LIABILITY COVERAGE ENDORSEMENTS DISTINGUISHED. Aside from additional insured promises, it is also common for construction contracts, leases and other agreements to include direct indemnification covenants. In these clauses, one party agrees to indemnify and hold the other party harmless from some type of loss, irrespective of whatever insurance coverage either party might have. For example, a contractor might agree to indemnify and hold harmless its customer from and against any damages, judgments or other losses arising out of any acts or omissions of contractor in the performance of the work. A party that makes such an indemnification promise can obtain insurance covering that liability. A Contractual Liability Coverage Endorsement will typically insure the promisor for losses triggered by its contractual indemnification obligations. This does not make the promisee an additional insured of the policy, but does indirectly give the promisee another means of recovery if the contractor or tenant s acts or omissions result in a loss. II. Addressing Dilemmas Such as Unsigned Agreements, Other Contracts Incorporated by Reference, and Coverage for Those Not Named. This section will provide an overview of recurring coverage issues arising in the realm of additional insured coverage. A. THE IMPORTANCE OF WRITTEN AGREEMENTS AND EXECUTED AGREEMENTS IN ESTABLISHING COVERAGE UNDER A BLANKET ENDORSEMENT. As discussed above, a blanket additional insured endorsement does not identify additional insureds by name. Instead, it typically specifies that the named insured s customers are additional insureds, provided that there is a written service agreement in place in which the named insured has promised to make the customer an additional insured in its insurance policy. While this seems straightforward enough in concept, ambiguities in the underlying contracts, lost contracts and unsigned contracts, among other problems, have spawned a great 111

10 deal of coverage disputes over the years. Below is a discussion of the most commonly occurring coverage problems. 1. Unwritten Agreements The great majority of blanket endorsements in use require that there be an agreement in writing between named insured and the additional insured. For example, ISO Form CG provides in relevant part: Section II Who is An Insured is amended to include as an insured person any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. [] (Emphasis added) The courts have applied this in writing requirement literally. In New York jurisprudence, it is clear that the absence of a written agreement between the named insured and the party claiming additional insured status is fatal to additional insured coverage under this form. When there is no written agreement, the insurer has no obligation to defend or indemnify the party seeking coverage as an additional insured. See Empire Builders & Dev., Inc. v. Delos Ins. Co., 78 A.D.3d 759, 760 (2d Dep t 2010). The party seeking coverage cannot overcome the absence of a written agreement by offering testimony (even undisputed testimony) that the parties arrived at an oral or unwritten contract for the procurement of additional insured coverage. Id. Even though, as a matter of general contract law, parties can bind themselves to an unwritten contract, it has been held that this precept has no bearing on whether there is a written contract pursuant to [a] policy endorsement. National Abatement Corp. v. Nat l Union Fire Ins. Co., 33 A.D.3d 570, 571 (1st Dep t 2006). A blanket endorsement s requirement of a contract or agreement in writing has been deemed unambiguous, and requires strict compliance. Id. However, the courts have been reasonably flexible with regard to the types of writings that will be deemed a contract or agreement. For example, a written purchase order may suffice, provided that the purchase order contains a written promise by one party to acquire additional insured coverage for the other. See LMIII Realty, LLC v. Gemini Ins. Co., 90 A.D.3d 1520 (4th Dep t 2011); Structure Tone, Inc. v. Fifth Avenue Owner, LLC, 2014 N.Y. Misc. LEXIS 862, at *17 (S. Ct. N.Y. Co., Feb. 27, 2014). So long as a clear written intent to include 112

11 an entity as an additional insured is manifested prior to the loss, the party may qualify as an additional insured. Town of Fort Ann v. Liberty Mut. Ins. Co., 69 A.D.3d 1261, 1262, 1264 (3d Dep t 2010). 2. Un- Executed or Unsigned Written Agreements. Does the written agreement have to be signed by one or both of the parties in order to satisfy the conditions of the blanket endorsement? That is another oft-litigated question. It depends, to some degree, on the language of the endorsement. (a) Endorsements that expressly require executed agreements. Some endorsement forms specifically require that the written agreement have been executed by the parties before the loss occurs. For example, in Burlington Ins. Co. v. Utica First Ins. Co., 71 A.D.3d 712 (2d Dep t 2010), the endorsement required that the underlying contract must: Id. at 713 (emphasis added). [Be] [c]urrently in effect or [be] effective during the term of this policy and executed prior to the bodily injury or personal injury. Burlington was a construction case: a building owner retained a contractor to perform renovations in its building. It was undisputed that the owner requested the service in a written purchase order, which required the contractor to have insurance naming the owner as an additional insured. However, neither the owner nor the contractor signed the purchase order. When a third-party was later injured in the vicinity of the work the owner sought coverage under the policy. The carrier rejected the claim because there was no executed written agreement between the owner and the named insured only an unsigned writing (the purchase order). In the ensuing coverage litigation, the Appellate Division (Second Department) agreed with the insurer. The court held that the blanket endorsement s requirement of an executed agreement was clear and unambiguous it required a signed agreement. Thus, the court held that the owner was not an additional insured under the policy. Moreover, the court rejected the argument that the owner and contractor s partial performance of the purchase order (the contractor had begun work before the accident) was sufficient to constitute an execution of the agreement. Id. Other courts have likewise taken a strict view, holding that the term execution generally requires that the writing be signed. See 10 Ellicott Square Ct. Corp. v. Mountain Valley Indem. Co., 634 F.3d 112 (2d Cir. 2010); Nicotra Group, LLC v. American Safety Indem. Co., 48 A.D.3d 25 (1st Dep t 2008); National Abatement Corp. v. Nat l Union Fire Ins. Co., 33 A.D.3d 570, 571 (1st Dep t 2006). 113

12 Moreover, in National Abatement Corp., 33 A.D.3d at 571, the First Department held that the absence of a signed agreement cannot be overcome by testimony from the parties that they intended to be bound by the agreement even though it was unsigned. [T]he fact that an unsigned contract may be enforceable if there is objective evidence the parties intended to be bound or the eventual writing was intended to be valid retroactively [] has no bearing on whether there is a written contract pursuant to the policy endorsement. Id. There are, however, two federal cases (applying New York law) which indicate that there may at least two narrow exceptions to the requirement of a signed contract: Complete Performance: 10 Ellicott Square Ct. Corp. v. Mountain Valley Indem. Co., 634 F.3d 112 (2d Cir. 2010). In this case, the Second Circuit was confronted with an endorsement that required an executed agreement for additional insured coverage, and an unsigned service contract between a building owner and its demolition contractor. The court held that at common law, there are two meanings of the phrase executed agreement : (i) an agreement that has been signed by the parties; or (ii) an agreement that has been fully performed by the parties. In Ellicot, it was undisputed that the demolition contract had not been fully performed at the time of the loss (work was ongoing). Thus, the court concluded that the contract was not executed and there was no coverage. Implied in the court s rationale, however, was the premise that if the unsigned agreement had been fully performed when the loss occurred, it would have been deemed executed (and thus there would have been additional insured coverage). Evidence of custom and practice in the case of a lost agreement: Sunbelt Rentals, Inc. v. Charter Oak Ins. Co., 839 F. Supp. 2d 680 (S.D.N.Y. 2012). In this case, a construction equipment company frequently rented equipment to a building owner. There was evidence that the parties routine practice was for the customer to sign a written rental order in which it agreed to have the rental company covered as an additional insured on the owner s liability insurance policy. A loss occurred when some workers using a piece of rented equipment fell and sustained fatal injuries. The rental company misplaced the signed rental order for that particular transaction and, thus, could not directly demonstrate the existence of an executed agreement. However, the court held that the company s undisputed testimony about its routine practice of extracting signed rental orders, coupled with the presentation of a rental order signed by the customer for an earlier transaction, was sufficient to demonstrate the probable existence of a written agreement. Thus, the rental company was entitled to additional insured coverage. 114

13 (b) Endorsements that do not expressly require executed agreements. Some blanket endorsement forms, while requiring written agreements, do not explicitly require that the written agreement be signed or executed to trigger additional insured coverage. The courts have been divided on the question of whether unsigned agreements are sufficient to establish additional insured coverage under these forms. The First Department has held that, even under this form, a signed agreement is a prerequisite to establishing coverage. See Cusamano v. Extell Rock, LLC, 86 A.D.3d 448 (1st Dep t 2011). In Cusamano, there was a comprehensive written building agreement between a contractor and an owner which was not signed by either party before the loss occurred. Even though the additional insured endorsement did not expressly require an executed agreement, the court held that an unsigned writing was insufficient to satisfy the endorsement s requirement of a written agreement. Other courts, however, have held that an unsigned agreement or purchase order can suffice to operate as a written agreement for coverage purposes, so long as there is evidence that the parties in fact agreed to be bound by it. See LMIII Realty, LLC v. Gemini Ins. Co., 90 A.D.3d 1520 (4th Dep t 2011)(holding that there was coverage because the evidence in the record establishes that the parties intended to be bound by an unsigned purchase order); 10 Ellicott Square Ct. Corp. v. Mountain Valley Indem. Co., 634 F.3d 112 (2d Cir. 2010)(holding that there was additional insured coverage despite parties failure to sign a construction agreement, because the blanket endorsement did not require that the agreement be executed and because it was undisputed that the parties intended to be bound by the Construction Agreement ); Structure Tone, Inc. v. Fifth Avenue Owner, LLC, 2014 N.Y. Misc. LEXIS 862, at *17 (S. Ct. N.Y. Co., Feb. 27, 2014)(holding that affidavit by the party stating that an unsigned purchase order had been delivered and accepted and that the parties had begun performing pursuant to it was sufficient to raise triable question of fact as to whether party was an additional insured). Clearly the best course is to avoid any of this uncertainty. If there is a lesson to be learned from the case law, it is that any party expecting additional insured coverage in a given transaction should make sure that the underlying contract is in writing and that it is signed by both parties. 3. Agreements that do not contain express additional insured promises. As noted, most blanket endorsement forms provide additional insured coverage to parties who have entered into written contracts with the named insured, in which the named insured has agreed that such person or organization be added to as an additional insured on [the] policy. 115

14 Thus, in the underlying contract, the named insured must promise to make the other party an additional insured. A mere promise by the named insured to maintain certain kinds of insurance for itself does not satisfy this requirement. See QBE Ins. Corp. v. Adjo Contracting Corp., 112 A.D.3d 686 (2d Dep t 2013); 140 Broadway Property v. Schindler Elevator Co., 73 A.D.3d 717, (2d Dep t 2010); Hargob Realty Assocs., Inc. v. Fireman s Fund Ins. Co., 73 A.D.3d 856 (2d Dep t 2010). Therefore, if you are negotiating a lease or construction contract for your client and your objective is for the client to be named as an additional insured in the other party s policies, it is imperative that this be stated explicitly in the agreement. It should be noted that the Court of Appeals has held that a party s promise to maintain insurance for the mutual benefit of both parties to the contract can be construed as a promise to make the other party an additional insured. Kassis v. Ohio Cas. Ins. Co., 12 N.Y.2d 595, 600 (2009). 4. Lack of privity Yet another problem sometimes arises when there is no direct contractual privity between the named insured and the party seeking coverage as an additional insured. This is particularly likely to occur in the construction context, in which a project owner has direct contractual privity with the general contractor, but may not have direct privity with the subcontractors (hired by the general contractor). In the subcontract between the general contractor and the subcontractor, the subcontractor may promise to make the project owner an additional insured. The owner is not a party to that subcontract, but is clearly an intended beneficiary of the subcontractor s promise to obtain additional insured coverage. Is that sufficient to make the owner an additional insured under the subcontractor s blanket endorsement? Under most endorsement forms published up to 2013, the answer is no. Consider, once again, the language of ISO Form CG : Section II Who is An Insured is amended to include as an insured person any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. [] (Emphasis added.) The phrase when you and such other person have agreed read literally means that there must be direct contractual privity between the named insured and the party seeking 116

15 coverage as an additional insured. And that is precisely how the First Department read the language in AB Green Gansevort, LLC v. Peter Scalamandre & Sons, Inc., 102 A.D.3d 425 (1st Dep t 2013). In that case, the subcontractor did promise to make the owner an additional insured, but that promise was made in an agreement between the subcontractor and the general contractor to which the owner was not a party. In holding that there was no additional insured coverage, the court explained: The policy does not provide that there be only some writing, but rather that there be a written contract between the named insured and the organization seeking coverage. In a similar case, the Western District of New York reached the same conclusion, interpreting the same endorsement language. See Zoological Soc'y of Buffalo, Inc. v. Carvedrock, LLC, 2014 U.S. Dist. LEXIS (W.D.N.Y. Jul. 29, 2014). Significantly, in 2013, ISO made amendments to its blanket endorsement forms, which may eliminate the privity requirement. For example, in ISO Form CG , the endorsement extends additional insured status to: Any other person or organization you are required to add as an additional insured under [your] contract or agreement []. Under the new forms, therefore, courts may find that non-parties to the contract may be additional insureds. 117

16 B. OTHER COMMON LIMITATIONS ON ADDITIONAL INSURED COVERAGE Aside from the requirement of a signed writing, additional insured endorsements commonly contain other prerequisites for, or restrictions on, additional insured coverage. Most significantly, endorsements usually provide that the additional insured is only covered for losses that are connected in some way with the activities of the named insured. Below are two examples of language commonly used in endorsements: provisos restricting coverage to losses arising out of the named insured s work, or caused in whole or in part by the named insured s acts or omissions. ISO Form CG ISO Form CG Section II Who is An Insured is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured. Such person or organization is an additional insured only with respect to liability arising out of your ongoing operations performed for that insured. A person s or organization s status as an insured under this endorsement ends when your operations for that insured are completed. Section II Who is An Insured: is amended to include as an additional insured: Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured. Such person(s) or organization(s) is an additional insured 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; (Emphasis added.) in the performance of your ongoing operations for the additional insured(s). These restrictions are pervasive in both scheduled and blanket additional insured endorsements. Thus, the meanings of phrases such as arises out of, caused in whole or in part by your acts or omissions, and ongoing operations are paramount in determining the availability of coverage for many additional insureds. 118

17 1. Arising out of (a) A Liberal Standard New York Courts have interpreted the phrase arising out of as used in additional insured endorsements liberally. According to the Court of Appeals, arising out of means: originating from, incident to, or having connection with. Regal Constr. Corp. v. Nat l Union Fire Ins. Co., 15 N.Y.3d 34, 38 (2010). This standard requires only that there be some causal relationship between the injury and the risk for which coverage is provided. Id.; see also Nat l Union Fire Ins. Co. of Pittsburgh v. Greenwich Ins. Co., 103 A.D.3d 473, 474 (1st Dep t 2013); Hunter Roberts Constr. Co. v. Arch Ins. Co., 75 A.D.3d 404, 408 (1st Dep t 2010). Significantly, the arising out of standard does not mean that the loss must have been caused by the negligence or culpable conduct of the named insured. [T]he focus of the inquiry is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained. Regal, 15 N.Y.3d at 38. Indeed, as the First Department has put it, fault is immaterial to the determination. Hunter Roberts, 75 A.D.3d at 408; see also Lafarge Building Materials, Inc. v. J. Hall Ltd., 3 A.D.3d 651 (3d Dep t 2004). The loss will be deemed to arise out of the named insured s operations as long as it has some causal connection with the named insured s activities, regardless of whether the loss was the named insured s fault. (b) Injuries to the Named Insured s Employees Performing the Work Often, liability coverage issues are triggered when a named insured s employee is injured in the course of his work performed at the additional insured s premises. The worker s compensation laws bar the laborer from suing his employer, but he may sue the property owner for negligence or even Labor Law (safe work site) violations. In New York, it is now settled that if the injured party is the named insured s employee, and the injury occurred in the course of the named insured s operations for the additional insured, the loss is covered under the arises out of additional insured endorsement: Where, as here, the loss involves an employee of the named insured who is injured while performing the named insured s work under the [contract], there is a sufficient connection to trigger the additional insured arising out of operations endorsement and fault is immaterial to the determination. Hunter Roberts, 75 A.D.3d at 408; see also Regal, 15 N.Y.3d at 38; Admiral Ins. Co. v. Amer. Empire Surplus Lines, 96 A.D.3d 585, (1st Dep t 2012); Shawmut Woodworking & Constr. v. Harleysville Ins. Co, 2014 N.Y. Misc. LEXIS 972 (Mar. 6, 2014). Since a large portion of construction site injury cases are, in fact, brought by laborers working for a contractor or subcontractor, these precedents bring a substantial share of cases within the scope of the arises out of endorsements. 119

18 (c) What losses do not arise out of the named insured s operations? Though the arises out of standard is liberal, it is not unlimited. For example, a personal injury does not arise out of a contractor s operations merely because the accident occurred in the part of the building where the contractor performed its work. Worth Constr. Co., Inc. v. Admiral Ins. Co., 10 N.Y.3d 411 (2008). In Worth, the named insured subcontractor was responsible for building a particular staircase in a building. After the subcontractor s part of the work was finished and the subcontractor had left the job site, a thirdparty (employed by another subconstractor) tripped and fell on the stairs. It was undisputed that material on which the worker tripped was left by another subcontractor, not the named insured. The Court of Appeals held that this loss did not arise out of the named insured s operations because: (i) the named insured was no longer on the job site; (ii) the injured party was not the named insured s employee; and (iii) it was undisputed that the named insured did not create the dangerous condition that caused the tripping accident. Thus, the owner was not covered as an additional insured. A First Department case also demonstrates the limits of the arises out of standard, in the landlord/tenant context. 333 Fifth Avenue Assocs. V. Utica First Ins. Co., 107 A.D.3d 568 (1st Dep t 2013). In that case, two tenants occupied the same building, a pizzeria and a retail store. The retail store misplaced its elevator key, so it borrowed an elevator key from the pizzeria. A retail store employee was then injured while using the key (the injury was caused by an elevator malfunction). In the resulting personal injury suit, the landlord sought coverage under the pizzaria s policy as an additional insured. The First Department held that the injury did not arise out of the pizzaria s operations at the premises because: (i) the injured party was not the pizzaria s employee; (ii) the injury did not occur in the pizzaria s space; (iii) it was undisputed that the pizzeria had no control over, or responsibility for, the elevator; and (iv) the pizzaria s mere act of lending an elevator key to a neighbor (which had misplaced its own key) was not sufficiently connected with the pizzaria s operations to arise out of them. 2. Caused by the named insured s acts and omissions. As noted, another common endorsement form limits the additional insured s coverage to losses caused in whole or in part by [the named insured s] acts and omissions. One might expect the courts to read this language differently than the arising out of endorsement. After all, the terms caused by, in whole or in part and acts and omissions arguably imply that a loss is covered only if the named insured is at least partially responsible for causing the loss. In other words, whereas the arising out of standard does not require any fault of the named insured to trigger coverage, arguably the named insured s fault should be a prerequisite to trigger coverage under the acts and omission form. However, New York courts have not read it that way. In fact, the courts have generally held that the meaning of the acts and omissions endorsement is no different than the arising 120

19 out of endorsement, and should be interpreted the same way. As the First Department explained: The phrase caused by does not materially differ from the... phrase, 'arising out of'. In turn, the phrase arising out of focuses not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained. National Union Fire Ins. Co. v. Greenwich Ins. Co., 103 A.D.3d 473, 474 (1st Dep t 2013)(citations omitted); see also W & W Glass Sys., Inc. v Admiral Ins. Co., 91 A.D.3d 530 (1st Dep t 2012). Other courts have followed the First Department s lead, and have applied the identical arising out of standard in cases involving the caused by. acts and omissions endorsements. See Liberty Mut. Ins. Co. v. Zurich Am. Ins. Co., 2014 U.S. Dist. LEXIS (S.D.N.Y. Mar. 28, 2014); Petrillo Stone Corp. v. QBE Ins. Corp., 42 Misc. 3d 1207(A)(S. Ct. Westchester Co. 2014). Thus, the weight of authority in New York holds that a loss will be covered under the acts and omissions endorsement so long as the loss bears some causal connection with the named insured s operations, regardless of fault. There is, however, a Second Department opinion which suggests that a complaint must, at least, allege some acts or omissions by the named insured in order to trigger coverage for the additional insured. Wilson Cent. Sch. Dist. v. Utica Mut. Ins. Co., 123 A.D.3d 920 (2d Dep t 2014). In Wilson, a school district sought coverage in a personal injury case as an additional insured on the liability policy of its school bus vendor. The court concluded that the school district was not covered because [t]he underlying complaints seek to hold the District liable only for its own independent acts and omissions, and because the school bus company [wa]s not even referred to in the underlying complaints. Therefore, while an allegation that the named insured s fault may not be necessary to trigger additional insured coverage, some allegation of the named insured s conduct may be necessary to do so. 3. Ongoing operations The courts likewise construe the phrase ongoing operations liberally. It is not necessary for a contractor s operations to be continuous in order to be deemed ongoing. Work may be considered as ongoing during a short lapse of time necessary to conduct tests designed to assure proper performance where such testing is an essential element of the work by the insured. Town of Fort Ann v. Liberty Mut. Ins. Co., 69 A.D.3d 1261, (3d Dep t 2010). Thus, for example, a contractor s work might be ongoing even if it has finished all physical construction, and is simply awaiting a final inspection and approval from the project engineer. Id. In the Fort Ann case, the construction contractor had been finished with its work and was off site for two months, but the court deemed its work to be ongoing because the underlying contract required that the project engineer inspect and approve the final construction 121

20 before it would be deemed completed. See also Wausau Underwriters Ins. Co. v. Cincinnati Ins. Co., 198 Fed. Appx. 148 (2d Cir. 2006); Perez v. N.Y. City Hous. Auth., 302 A.D.2d 222 (1st Dep t 2003). C. OTHER INTERPLAY BETWEEN ADDITIONAL INSURED ENDORSEMENTS AND THE UNDERLYING CONTRACTS DEEPWATER HORIZON Sometimes an additional insured endorsement might incorporate the underlying contract between the parties in more significant ways than merely as an instrument for determining whether a party is an additional insured. In some instances, the policy might incorporate other terms of the underlying contract for the purpose of limiting the scope of coverage. The Supreme Court of Texas recently decided a high-profile case involving such an endorsement. See In re Deepwater Horizon, 2015 Tex. LEXIS 141 (Tx. Feb. 13, 2015). That case concerned insurance coverage for the catastrophic BP oil spill in the Gulf of Mexico in The key parties were BP, an oil field developer, and Transocean, the owner of a drilling rig operating in BP s permit zone. BP and Transocean entered into a written agreement defining their respective rights and obligations to each other. The contract contained crossindemnification provisions. BP agreed to indemnify Transocean for losses arising from subsurface pollution, while Transocean agreed to indemnify BP for losses arising from abovesurface pollution. The contract also required Transocean to have BP covered as an additional insured under Transocean s liability insurance policies. Transocean s policies had a blanket additional insured endorsement which did not name BP specifically. Instead, the policies extended additional insured status to: Any person or entity to whom [Transocean] is obliged by oral or written Insured Contract. to provide insurance [] The additional insured endorsement further defined the term Insured Contract as: (Emphasis added.) [A]ny written or oral contract or agreement entered into by [Transocean] and pertaining to business under which [Transocean] assumes the tort liability of another party []. In April 2010, Transocean s rig exploded, killing 11 people and spilling oil into the Gulf for approximately three months. The incident resulted in scores of lawsuits alleging personal injury and environmental damage. BP submitted a proof of loss to Transocean s insurance carrier pursuant to the additional insured endorsement. The insurer denied the claim (for reasons discussed below), resulting in a coverage action. 122

21 The Texas Supreme Court concluded that BP was not covered for the Deepwater Horizon loss, based on the particular interplay of the additional insured endorsement and the BP/Transocean contract. As noted, the additional insured endorsement only afforded coverage to persons for whom Transocean had agreed to assume tort liability in an Insured Contract. In order to determine the coverage, therefore, the court scrutinized the underlying contract to ascertain what tort liability Transocean had agreed to assume. The court determined that, under the plain meaning of the contract, Transocean had only agreed to assume BP s tort liability for above-surface pollution. Since the losses at issue did not arise from above-surface pollution (but rather from subsurface pollution and personal injuries) the court reasoned that BP was not entitled to defense or indemnification as an additional insured. The case demonstrates the extraordinary degree to which additional insured endorsements may be intertwined with the underlying contracts in which the parties bargained for the additional insured coverage. The case also reiterates the lesson that the party expecting additional insured coverage is well-advised to obtain a copy of the additional insured endorsement at the outset of the contract, and to understand the limitations on the coverage. III. The 2013 Amendments to the IOS Additional Insured Endorsements In 2013, ISO made several amendments to a number of its additional insured endorsement forms. One of the amendments, discussed above, was intended to eliminate the privity problem that existed in some of the pre-2013 forms. (See pg , supra.) Two of the other 2013 amendments are coverage limitations which may have a material impact in some cases, in some jurisdictions. A typical iteration of the two new restrictions appears in ISO Form CG , which contains the following clause: [T]he insurance afforded to such additional insured described above: 1. Only applies to the extent permitted by law; and 2. Will not be broader than that which you are required by the [underlying] contract or agreement to provide for such additional insured. Below is a discussion of the potential impact of these two limitations. 123

22 A. TO THE EXTENT PERMITTED BY LAW. ISO added the provision limiting the application of the coverage to the extent permitted by law to address anti-indemnity statutes in effect in a number of jurisdictions. This new language will eliminate additional insured coverage in some instances in jurisdictions outside of New York, but should have little impact, if any, inside New York. Most states have some form of anti-indemnity statute(s) in place. In general, these statutes declare that certain kinds of contracts requiring one party to indemnify another party for its own negligence are null and void. Anti-indemity laws generally apply to specific targeted industries, in which the state, as a matter of public policy, has an interest in prohibiting a party from attempting to assign its duty of care (and the consequences of breaching it) away to another party. For example, in New York, in the construction context, General Obligations Law prohibits contracts requiring a party to indemnify an owner or contractor for its own negligence: A covenant [] in connection with or collateral to a contract or agreement relative to the construction, alteration, repair or maintenance of a building, structure, appurtenances and appliances []purporting to indemnify or hold harmless the promisee against liability for damage arising out of bodily injury to persons or damage to property contributed to, caused by or resulting from the negligence of the promisee, his agents or employees, or indemnitee, whether such negligence be in whole or in part, is against public policy and is void and unenforceable. The legislative policy behind the statute is that if an owner or contractor is prohibited from delegating his duty of care to a third party, he will be more likely to exercise due care and maintain safe job sites for laborers. New York has similar anti-indemnity statute that applies to leases, Gen. Ob. Law That statute renders null and void an indemnity provision that would require a tenant to indemnify the landlord for the landlord s own negligence. Importantly, neither of these two statutes applies to insurance policies they apply only to private indemnification covenants between non-insurers. And, the Court of Appeals has held that, while the statutes prohibit contractors and tenants from directly indemnifying owners, contractors and landlords for their own negligence, the statutes do not prohibit contracts that require parties to purchase additional insured coverage for the owner, contractor or landlord. See Great Northern Ins. Co. v. Interior Constr. Corp., 7 N.Y.3d 412 (2006); Kinney v. G. W. Lisk Co., 76 N.Y.2d 215 (1990). Thus, New York law does not prohibit contracts in which one party agrees to procure additional insured coverage for another. 124