TRENDS IN ADDITIONAL INSURED COVERAGE

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1 WORKSHOP T3 Tuesday, November 8 10:30 a.m. 12:10 p.m. and 2:20 p.m. 4:00 p.m. TRENDS IN ADDITIONAL INSURED COVERAGE Presented by Craig Stanovich Principal Consultant Austin & Stanovich Risk Managers, LLC Year in and year out, difficulties in obtaining adequate additional insured coverage from downstream parties are cited as a top risk management challenge for owners and contractors alike. With hundreds of nonstandard endorsements currently in use, determining if an endorsement provides coverage that complies with contract requirements is a significant challenge. This workshop will examine the impact of the 2013 changes in ISO endorsement language that ties additional insured coverage to the contract requirements and demonstrate the types of issues owners and contractors are encountering in nonstandard endorsements. Learn what to look for to avoid unexpected restrictions in coverage. Workshop T3 To print on both sides of the page, set your printer for duplex printing. Copyright 2016 International Risk Management Institute, Inc. 1 www. IRMI. com

2 JUNE 5TH, 11:08 A.M. A STAGGERING STATISTIC INSPIRES A LIFE-SAVING RULE IN AN INSTANT, CALVIN BERGER SAW THE VALUE OF IN-CAB BEHAVIOR TRAINING FROM CNA When a recent safety webinar revealed that 280,000 drivers are involved in serious accidents every year, Calvin Berger of Calberg Contracting took CNA s recommendation to heart, and posted placards restricting cell phone use in each of his company s vehicles. Now Calberg Contracting is filing fewer claims, and Calvin s enjoying a handsome bonus for worker safety and performance. When you re looking for risk control programs that keep contractors dialed in to relevant industry trends we can show you more. To learn more about CNA s coverages and programs for building contractors, contact your independent agent or visit The examples provided in this material are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice. CNA is a service mark registered by CNA Financial Corporation with the United States Patent and Trademark Office. Certain CNA Financial Corporation subsidiaries use the CNA service mark in connection with insurance underwriting and claims activities. Copyright 2016 CNA. All rights reserved.

3 Craig Stanovich Principal Consultant Austin & Stanovich Risk Managers, LLC Mr. Stanovich is principal consultant at Austin & Stanovich Risk Managers, where he specializes in commercial insurance. He has practical, in-depth experience in several areas, including construction, transportation, and petroleum marketers risk management and insurance. Mr. Stanovich is a regular contributor to various publications, including serving as an expert commentator for IRMI on liability insurance issues, and acts as an expert witness or consultant on a variety of complex insurance coverages and practices. He has served as president of the Central Massachusetts Chapter s Chartered Property Casualty Underwriter (CPCU) Society and is past chairman of the board of governors of the Society of Certified Insurance Counselors. He is also a national faculty member of the Society of Insurance Counselors and speaks throughout the country on various commercial insurance topics. Mr. Stanovich earned a BS in education from Bridgewater State College and holds the Associate in Underwriting (AU), CPCU, Certified Insurance Counselor (CIC), and Certified Risk Manager CRM professional designations. Workshop T3 3

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5 Trends in Additional Insured Coverage Craig F. Stanovich, CPCU, CIC, CRM, AU Austin & Stanovich Risk Manager LLC 1174 Main Street, Holden, MA or Education Connection Opportunity A Brief History of CRT. Traditionally, contractual risk transfer (CRT) was primarily dependent on contractual indemnity; Workshop T3 Additional Interest as it was known was used as a safety net when contractual indemnity failed; 2 5

6 A Brief History of CRT. The assumption of the liability of others in contracts, other than in incidental contracts was usually underwritten by individual contract; Contractual Liability Insurance was a separate coverage part specifically listing each contract; 3 A Brief History of CRT. Conversely, additional insured coverage was generally not closely underwritten; Premium charged for additional insured coverage was minimal; 4 6

7 A Brief History of CRT. Indemnity provisions restricted only by: Ability to draft with clarity; Clear and unequivocal (if required) for the indemnitor to assume the sole negligence of indemnitee; 5 A Little History of CRT. Legislation restricting contractual indemnification begins to develop; So-called anti-indemnity statutes restrict the contractual risk transfer via indemnity; May prohibit sole negligence indemnity; or May prohibit indemnity for any negligence of indemnitee; 6 Workshop T3 7

8 A Little History of CRT. Reliance on indemnity for CRT begins to wane; But reliance on additional insured for CRT begins to increase; Courts begin to find that additional insured coverage extends to AI s sole negligence; Courts begin to find that premises/operations only AI extends to BI or PD occurring after work is done; o Courts construe phrase arising out of broadly; 7 A Little History of CRT. Arising out of means originating from, incident to, having connection with, or flowing from ; Does not necessarily direct or proximate causation; May be close to but for causation; 8 8

9 A Little History of CRT. if the arising out of phrase were viewed as ambiguous it had to be construed liberally in favor of the additional insured and against the insurer, and thus would not exclude coverage for the additional insured's own negligence. Merchants Ins. Co of NH v. USF&G (1 st Cir. 1998) 143 F.3d 5 9 A Little History of CRT. California courts have consistently given a broad interpretation to the terms "arising out of or "arising from" in various kinds of insurance provisions. It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship. Workshop T3 Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal. Appl. 4 th 321 (1999) 10 9

10 A Little History of CRT. The majority view of these cases is that for liability to arise out of operations of a named insured it is not necessary for the named insured s acts to have caused the accident; rather, it is sufficient that the named insured s employee was injured while present at the scene in connection with performing the named insured s business, even if the cause of the injury was the negligence of the additional insured. Admiral Insurance Co. v. Trident NGL, Inc 11 A Little History of CRT. Result is insurers ended up paying numerous sole negligence claims of the additional insured without properly: Underwriting or Pricing AI exposure; What had been a safety net soon became the prime CRT approach

11 ISO 2004 Additional Insured Changes In early 2004, ISO filed revised additional insured endorsements to address the arising out of problem. Arising out of was replaced with caused in whole or in part by the acts or omissions of the named insured or by those acting on behalf of the named insured. 13 ISO 2004 Additional Insured Changes Some courts have ruled that, in the absence of specific language limiting coverage, the current additional insured endorsements do respond to injury or damage arising from the additional insured s sole negligence. Because the phrase "arising out of" has been interpreted broadly by some courts, we are revising several of the additional insured endorsements to add specific language to provide an additional insured with coverage for their vicarious or contributory negligence only. ISO CIRCULAR - GENERAL LIABILITY LI-GL MULTISTATE REVISIONS TO ADDITIONAL INSURED ENDORSEMENTS FILED March 12, Workshop T3 11

12 ISO 2004 Additional Insured Changes A major effect of that wording will be to prevent any alleged coverage for the additional insured s sole negligence. ISO CIRCULAR - GENERAL LIABILITY LI-GL MULTISTATE REVISIONS TO ADDITIONAL INSURED ENDORSEMENTS FILED March 12, ISO 2004 Additional Insured Changes 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 arising out of your ongoing operations performed for that insured 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. Insurance Services Office, Inc.,

13 Caused in Whole or in Part Vicarious Liability ONLY? There are some in the insurance industry that insist additional insured endorsements, regardless of the actual coverage wording, never provide any more coverage than for the vicarious liability imposed on the additional insured by the named insured s negligence. 17 Caused in Whole or in Part Vicarious Liability ONLY? Courts in Missouri and elsewhere have recognized that a common purpose of an additional insured provision is to provide... protection from vicarious liability and to provide specialized protection rather than all-encompassing coverage. Workshop T3 U.S. Fidelity & Guar. v. Drazic, 877 S.W.2d 140, 143 (Mo. Ct. App. 1994); 18 13

14 Caused in Whole or in Part Vicarious Liability ONLY? One of the primary functions of the additional insured endorsement is to protect the additional insured from vicarious liability for acts of the named insured. Northbrook Ins. v. American States Ins., 495 N.W.2d 450, 453 (Minn. Ct. App. 1993) 19 Caused in Whole or in Part Vicarious Liability ONLY? In the insurance industry, additional insureds provisions have a well established meaning. They are intended to protect parties who are not named insureds from exposure to vicarious liability for acts of the named insured Harbor Ins. Co. v. Lewis, 562 F. Supp. 800, 803 (E.D. Pa. 1983) 20 14

15 Caused in Whole or in Part Vicarious Liability ONLY? Where the additional insured is held no more than vicariously liable for the acts of the named insured, the additional insured would have an action for indemnity against the primary wrongdoer. Thus, an endorsement that provides coverage only for the additional insured's vicarious liability may be illusory and provide no coverage at all. In this light, it is obvious that additional insureds expect more from an endorsement clause than mere protection from vicarious liability. Marathon Ashland Oil Pipe Line LLC v. Md. Cas. Co 21 Vicarious Liability ONLY? Caused in Whole or in Part Notably, the liability... caused, in whole or in part, by language used in the Policy Additional Insured Endorsement indicates that the coverage afforded to Davis, as an additional insured, cannot be limited exclusively to claims of vicarious liability for Tricon's acts. In our view, it is unreasonable to interpret the term "liability" as used in the 2004 version of the ISO standard form additional insured endorsement as referring to "vicarious liability" because vicarious liability is an all or nothing proposition and thus a party could not be vicariously liable `in part' for [the named insured's] acts. Workshop T3 James G. Davis Construction Corp. v. Erie Insurance Exchange, 126 A.3d 753, 762 (Md. Ct. of Spec. Appeals 2015) 22 15

16 Caused in Whole or in Part Vicarious Liability ONLY? Indeed, because vicarious liability is used to impute liability to an innocent third party, such liability cannot be caused merely in part. The third party to whom liability is imputed would not be innocent unless the wrongdoer's acts caused the liability in whole. We, therefore, hold that the word liability in the policy at issue relates to proximate causation and not vicarious liability. James G. Davis Construction Corp. v. Erie Insurance Exchange, 126 A.3d 753, 762 (Md. Ct. of Spec. Appeals 2015) 23 Acts or Omissions Does Named Insured have to be negligent? Over twelve years since ISO introduced the acts or omissions wording in its additional insured endorsements; Does not appear to be any clear consensus as to whether acts or omissions requires a finding of negligence on the part of the named insured; Reference to 2004 and later ISO additional insured endorsements as fault-based is common; 24 16

17 Acts or Omissions Does Named Insured have to be negligent? The language of the additional insured provision indicates that ECI's coverage under the additional insured endorsement cannot be divorced from the concept of fault. We therefore decline to interpret the additional insured endorsement in the manner urged by ECI, and instead conclude that the meaning of the additional insured endorsement is that it limits coverage to those instances in which the acts or omissions (i.e., negligence) of Bolduc [named insured] leads to ECI's liability. Engineering & Construction Innovations, Inc. v. L.H. Bolduc Co. Inc. et al. 825 N.W.2d 695 (Minn. 2013) 25 Acts or Omissions Does Named Insured have to be negligent? If a finding of negligence is required to trigger coverage for an additional insured, then the acts or omissions wording has within it an obvious flaw; A very common claim against an additional insured is made by an employee of the named insured who is injured at the jobsite while in the course of employment for the named insured; 26 Workshop T3 17

18 Acts or Omissions Does Named Insured have to be negligent? Most states workers compensation statutes exclusive remedy provision prohibits the injured employee (or members of the employee s family) from bringing a negligence claim directly against his or her employer; Exclusive remedy may also prohibit a common law indemnity claim or a common law contribution claim against the named insured employer by the additional; insured.; 27 Acts or Omissions Does Named Insured have to be negligent? The named insured employer may never be a party to the lawsuit brought by the employee or in an action over claim against the employer by the additional insured; Thus, there will not be a court finding or adjudication of negligence against the named insured employer; If acts or omissions requires a finding that the named insured is negligent, won t this frustrate the purpose of additional insured coverage? 28 18

19 Acts or Omissions Defense of an Additional Insured? In those states that determine the duty to defend strictly on the pleadings and prohibit the consideration of extrinsic evidence ( four corners or eight corners states), no defense may be provided to the additional insured; It is unlikely that the named insured s employee will plead the fault of his or her employer or the employee s own fault; Duty to defend the additional insured may never be triggered; 29 Acts or Omissions Admiral owes Gilbane a duty to defend only if the underlying pleadings allege that Empire, or someone acting on its behalf, proximately caused Parr's injuries. Applying the correct standard, the allegations in the pleadings do not implicate either Parr's or Empire Steel's fault. Gilbane asks us to create an exception to the eight-corners rule because, it argues, a plaintiff would never allege his own negligence. We are without authority to create an exception where the Texas Supreme Court has specifically declined to do so. Workshop T3 Gilbane Bldg. Co. v. Empire Steel Erectors, LP 664 F.3d 589 (5 th Cir. 2011) 30 19

20 May negligence be inferred? Acts or Omissions The district court found that Parr was injured when he slipped while descending a ladder carrying an extension cord. He told a co-worker immediately after he fell that his feet got wrapped up in the extension cord. The district court concluded that Parr's own conduct was a contributing proximate cause of his damages claimed in the Underlying Lawsuit and that [a] jury in the Underlying Lawsuit would have found Michael Parr or his employer, Empire Steel [named insured], 1% or more responsible for causing the occurrence and/or injuries at issue. Thus, under the terms of the policy, the district court concluded that Admiral had a duty to indemnify. Gilbane Bldg. Co. v. Empire Steel Erectors, LP 664 F.3d 589 (5 th Cir. 2011) 31 Acts or Omissions Is only proximate causation required? The language of the relevant endorsement, on its face, defines the additional insured coverage afforded in terms of whether the loss was "caused by" the named insured's "acts or omissions," without regard to whether those acts or omissions constituted negligence or were otherwise actionable. The Burlington Insurance Company v. NYC Transit Authority et al. 132 A.D.3 rd 127 (NY Appellate Division, First Department, 2015) 32 20

21 Acts or Omissions In a large building project for Pitney Bowes, the general contractor Sordoni/Skanksa (Sordoni) engaged the subcontractor Berlin Steel (Berlin) to perform iron and steel erection. Norman Pelletier, an employee of Berlin, was installing metal decking between two steel columns, when he was called away by his fellow workers so they could install a two-ton cross beam between the columns. 33 Acts or Omissions One of the seat connections of the cross beam was only tack welded, a weak provisional weld intended only to hold the piece in place pending a full, load-bearing weld. After seating the crossbeam, Mr. Pelletier returned to work beneath the crossbeams. Within minutes after he returned, the seat broke and the cross beam fell, striking Mr. Pelletier and causing him severe injuries. Workshop T

22 Acts or Omissions Mr. Pelletier brought suit against Sordoni on the theories of negligence and breach of contract. The trial court found that Sordoni had a legal duty to inspect the welds to confirm they met contract and building code specifications. 35 Acts or Omissions IF Berlin added Sordoni as an additional insured on their CGL using CG (07 04) ISO or later edition. Would Sordoni be protected as an additional insured on Berlin s policy for the following? 1) Defense of the suit by Pelletier? 2) Damages awarded (up to the policy limit) to Pelletier? Was Named Insured (Berlin) negligent? 36 22

23 Additional Insured By Written Contract Is a direct contract necessary with Named Insured? YES Notably, the provision does not refer to any person or organization. By repeatedly using the terms "such" instead of "any," the provision necessarily requires that, in order to qualify as an additional insured, an entity must enter into a direct written agreement with JAK [the sub-subcontractor] listing them as additional insured. Westfield Ins. Co. v. FCL Builders, Inc., 407 Ill. App. 3d 730 (Ill. App. Ct. 1st Dist. 2011) 37 Additional Insured By Written Contract Is a direct contract necessary with Named Insured? YES We find that the language in the Additional Insured By Written Contract clause of the Liberty policy clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured. Since there is no dispute that Samson did not enter into a written contract with the JV, Samson's agreement in its contract with DASNY to procure coverage for the JV is insufficient to afford the JV coverage as an additional insured under the Liberty policy. Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co NY Slip Op , September 15, 2016, Appellate Division, First Department 38 Workshop T3 23

24 Additional Insured By Written Contract Is a direct contract necessary with Named Insured? NO First Mercury and National Union contend that Shawmut does not qualify as an additional insured under the Policy because the Policy requires that Shawmut and Fast Trek have agreed in writing in a contract or agreement that [Shawmut] be added as an additional insured on [the] [P]olicy. In its written agreement with Shepard, Fast Trek agreed to name as an additional insured not only Shepard, but also the Project owner and construction manager. 39 Additional Insured By Written Contract Is a direct contract necessary with Named Insured? NO Shawmut was the construction manager. Moreover, Fast Treks agreement with Shepard incorporated as part of the Subcontract Documents the agreement between Shawmut and Shepard, which included a requirement that Shepard and each sub-subcontract name Shawmut as an additional insured. Hence, Shawmut and Fast Trek clearly agreed in writing in a contract or agreement to include Shawmut as an additional insured. First Mercury Ins. Co. v. Shawmut Woodworking & Supply, Inc., 2016 U.S. App. LEXIS (2d Cir. Conn. Aug. 29, 2016) 40 24

25 ISO 2013 Additional Insured Three Major Changes: 1. The insurance afforded to such additional insured only applies to the extent permitted by law; and Insurance Services Office, Inc Through the 2013 language, ISO could be attempting to address circumstances in which the 2004 language provides broader coverage than is allowed under the antiindemnification laws of certain states, such that, for example, if a state antiindemnification statute prohibits the transfer of any liability, the additional insured coverage would be limited to vicarious liability arising out of the named insured s acts or omissions. ABA Section of Litigation, Insurance Coverage, ISO s 2013 Additional Insured Endorsement Changes Merit Closer Attention, by Roberta Anderson, July 11, ISO 2013 Additional Insured An alternative and better reading appears to be that ISO is attempting to harmonize, without the need for state-specific endorsements, the scope of coverage where the state antiindemnification law at issue extends to additional insured coverage. In this regard, some states have expanded their antiindemnification statutes to void contract provisions that seek to transfer risk via additional insured coverage. ABA Section of Litigation, Insurance Coverage, ISO s 2013 Additional Insured Endorsement Changes Merit Closer Attention, by Roberta Anderson, July 11, Workshop T3 25

26 ISO 2013 Additional Insured In sum, the text of ORS , and its historic evolution, strongly suggests that the statute prohibits not only 'direct' indemnity arrangements between parties to construction agreements but also 'additional insurance' arrangements by which one party is obligated to procure insurance for losses arising in whole or in part from the other's fault. Walsh Construction Co. v. Mutual of Enumclaw 104 P.3d 1146 (Oregon 2005) 43 Texas June 17, 2011 ISO 2013 Additional Insured House Bill 2093 revises Texas anti-indemnity law. Agreements in construction contracts executed after January 1, 2012 are void and unenforceable to the extent that the agreement requires an indemnitor to indemnify an indemnitee for a claim caused by the negligence or fault of the indemnitee or any party under the control of the indemnitee. The bill contains an exception permitting an indemnitor to indemnify an indemnitee against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier. The bill also prohibits provisions in construction contracts which require the purchase of additional insured coverage to the extent that it provides coverage that is void under the bill

27 Other States: ISO 2013 Additional Insured California California Civil Code (e) Colorado Colo. Rev. Stat (6) Kansas Kan. Stat. Ann (c) Montana - Mont. Code. Ann New Mexico N.M Stat. Ann Oklahoma Okla. Stat (b) Utah Utah Code Ann Louisiana LA Rev. Stat. Ann. 9: ISO 2013 Additional Insured Three Major Changes: 2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured. Insurance Services Office, Inc Is intended to provide the bare minimum promised in construction contracts? What if contract request only to add as additional insured? 46 Workshop T3 27

28 ISO 2013 Additional Insured Three Major Changes: 3. If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance: 1. Required by the contract or agreement; or 2. Available under the applicable Limits of Insurance shown in the Declarations; whichever is less. Insurance Services Office, Inc ISO 2013 Additional Insured- Challenges Requires looking outside of additional insured endorsements to determine coverage contrary to past practices: the extent of coverage is controlled by the relevant policy terms, not by the terms of the underlying trade contract that required the named insured to purchase coverage. Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Marine Ins. Co NY Slip Op , September 15, 2016, Appellate Division, First Department 48 28

29 ISO 2013 Additional Insured- Challenges Will a legal interpretation of the applicable statutes and underlying contract be necessary for each coverage determination? This increased focus on the trade contract presents substantial problems because the insurance requirements provisions are not crafted with the same level of detailed precision as an insurance policy (and they are not supposed to be). Today s Additional Insured Endorsements: Revisiting The Impact of ISO Form Changes, Gregory Podolak, March 2015, IRMI.com, Expert Commentary 49 Other Additional Insured Trends Workshop T3 No coverage is provided to an additional insured for damages because of bodily injury to an employee of the named insured 50 29

30 Other Additional Insured Trends This insurance does not apply to any bodily injury to: a. An employee of any insured 51 Other Additional Insured Trends Employee of subcontractor deemed a statutory employee of named insured - Florida Anchorage is the contractor building modular homes for owner Kirkland; Team Fritz is subcontractor to Anchorage; Employee of Team Fritz, Charles Becker, falls while descending ladder at jobsite and dies of his injuries; Representative of Becker sues Anchorage for damages; 52 30

31 Other Additional Insured Trends Employee of subcontractor deemed a statutory employee of named insured Florida Anchorage insurer Mid-Continent Casualty Co. denies coverage via CGL employee exclusion; It is undisputed the Becker is employed by a subcontractor and not Anchorage; Mid-Continent contends CGL employee exclusion applies to both actual and statutory employees; 53 Other Additional Insured Trends Appeals court upholds Mid-Continent s interpretation of who is considered an employee under CGL employee exclusion; While it is undisputed the Becker is an actual employee of Team Fritz, court agrees exclusion also applies to statutory employees as defined by Florida WC law. Stephens v. Mid-Continent 11 th Circuit April, 2014 (Florida law) Workshop T

32 Other Additional Insured Trends ISO primary and noncontributory endorsement CG now available. This ISO endorsement now allows contractor to obtain primary and noncontributory, provided contract or agreement requires the insurance would be primary and would not seek any other insurance available to the additional insured. Does this actually resolve the issue? Presumes primary and noncontributory is equivalent of not seeking contribution. Terminology still not defined!! 55 Questions and Closing 56 32