Coverage Pitfalls for Additional Insureds: Interplay With SIRS and "Other Insurance Provisions," Interpreting AI Endorsements

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Coverage Pitfalls for Additional Insureds: Interplay With SIRS and "Other Insurance Provisions," Interpreting AI Endorsements WEDNESDAY, SEPTEMBER 6, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Lawrence D. (Larry) Mason, Partner, Goldberg Segalla, Chicago John J. McLeod, Shareholder, McLeod Law Group, San Diego Matthew G. Jeweler, Counsel, Pillsbury Winthrop Shaw Pittman, Washington, D.C. Dawn A. Silberstein, Of Counsel, Wilson Elser Moskowitz Edelman & Dicker, San Francisco The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Strafford Publications Webinar Coverage Pitfalls for Additional Insureds: Interplay With SIRS and Other Insurance Provisions, Interpreting AI Endorsements September 6,

6 Faculty Matthew G. Jeweler Counsel Pillsbury Winthrop Shaw Pittman LLP John J. McLeod Shareholder McLeod Law Group, APC , x102 Lawrence Larry D. Mason Partner Goldberg Segalla, LLP Dawn A. Silberstein Of Counsel Wilson Elser Moskowitz Edelman & Dicker LLP

7 I. Overview of Key Issues Relating to Additional Insured Coverage Coverage Pitfalls for Additional Insureds: Interplay With SIRS and Other Insurance Provisions, Interpreting AI Endorsements Matthew G. Jeweler Counsel Pillsbury Winthrop Shaw Pittman LLP

8 Today s Agenda Overview of a few important issues to consider when obtaining additional insured (AI) coverage How a self-insured retention (SIR) in the named insured s policy is handled in the AI context Priority of coverage when multiple policies cover the same risk Differences in and interpretation of AI endorsement language 8

9 Scope of AI Coverage Location(s) covered Type of risks covered Property damage Bodily injury Personal and advertising injury Length of coverage period Completed operations How is coverage for years after the named insured finishes work accounted for? The right entities as AIs Beware of issues re contractual privity and blanket AI endorsements 9

10 Language of the AI Endorsement Not all AI endorsements are created equal Arising out of vs. caused, in whole or in part, by Watch out for other restrictive, potentially manuscript, language Damage arising solely out of the named insured s acts Exclusions Damage arising out of the acts/omissions of the AI The impact of the AI s own negligence Anti-indemnity statutes 10

11 Priority of Coverage Which of several applicable policies applies first? Do multiple policies share primary responsibility? Consider waiver of subrogation rights Named insured s excess policies Try to negotiate for clear policy language Consider an indemnity claim against the named insured 11

12 Policy Limits Make sure the limits required in the underlying contract are actually provided in the policy A policy that provides lesser limits obviously is a problem A policy that provides greater limits can present complications as well Consider pressing for one policy with combined limits The underlying contract should be clear that the named insured s indemnity obligation is not capped or limited by the amount of the AI policy limits 12

13 Certificate of Insurance At the very least you need to obtain a certificate of insurance that confirms AI status Best practice: do not rely on the certificate alone! Typically does not contain the key AI endorsement language AIs should request copies of the actual policies and have them reviewed by counsel as appropriate The named insured may push back As a fallback, request a copy of the AI endorsement 13

14 Think Ahead Terms of the Underlying Contract Try to incorporate as many of these items in the underlying contract as possible Include important items as part of the overall contract negotiation Be thoughtful about limitations or perceived limitations in the underlying contract insurers may seek to limit coverage accordingly Two overarching steps to securing proper AI coverage: Spelling out the parameters and key aspects of AI coverage in the underlying contract Later, reviewing the policy to confirm the coverage matches up with what was 14 agreed

15 II. Interplay of Additional Insured Coverage With SIRs in Named Insured s CGL Policy THE SIR SURPRISE John J. McLeod Shareholder McLeod Law Group, APC , x102 cgudaitis@vpl-law.com 15

16 SURPRISE noun sur prise sə(r)-ˈprīz A feeling caused by something unexpected or unusual PERSONAL LIFE BUSINESS 16

17 THE SIR SURPRISE SURPRISING IMPACTS AVOIDING SURPRISES 17

18 SIR BACKGROUND SIR Background The 411 on SIR S Historical Review- SIR s vs. Deductibles Modern trend to blur historical distinctions 18

19 Relationship with AI & SIR Confers insured status Subject to limitations in AI endorsement Subject to terms and conditions of the policy Including SIR 19

20 Minimizing Contractual Indemnity Risks 1. AIE S serve an important function 2. AI S can transfer indemnity obligations on to the additional insurer 3. SIR s limit the extent of this transfer 20

21 SIR Endorsements SIR endorsements are often manuscripted endorsements Huge variance in language Critical to read the endorsement 21

22 $500,000 22

23 THE SIR SURPRISE 23

24 DELIVERY OF THE AI Certificate of insurance doesn t disclose SIR Unless you do more, you will never know 24

25 QUESTIONS TO ASK YOURSELF Is the AI attached to the certificate? Does the certificate disclose an SIR or deductible? What did you just get? 25

26 IS THERE A LIABILITY EXPOSURE FOR THE BROKER? 26

27 $100,000 $100,000 $100,000 $100,000 $100,000 27

28 SURPRISING IMPACTS The unexpected ways a SIR can affect the coverage you think you are getting 28

29 WHAT DOES IT APPLY TO? A. DEFENSE B. INDEMNITY C. BOTH 29

30 PER OCCURRENCE VS. PER CLAIM SIGNIFICANCE Occurrence = accident or event Claim = Claimant 30

31 Why would an insurer limit who can satisfy an SIR? Forecast Homes, Inc. v. Steadfast Ins. Co 31

32 Why does an insurance company care where you got the money to pay an SIR? 32

33 STACKING OF SIR S 33

34 34

35 AVOIDING SURPRISES 35

36 USING YOU CONTRACT TO AVOID SURPRISES Draft your contracts to get what you want A contract requirement is only as good as the effort taken to insure compliance Don t forget about renewals 36

37 DID YOU GET WHAT YOU ORDERED? 1. Is the additional insured endorsement attached? 2. Is an SIR or deductible identified in the certificate? 3. Do you want to ask for a copy of the SIR endorsement? 37

38 IF ALL ELSE FAILS Is there another way to get coverage under the AI policy? 38

39 PLAN VS. SURPRISE 39

40 III. Priority of Coverage for Additional Insureds When Several Policies Cover the Same Risk Lawrence Larry D. Mason Partner Goldberg Segalla, LLP

41 Priority of coverage Priority of coverage refers to the proper sequence in which concurrent policies will be liable to indemnify a loss, up to their respective limits A policy s other insurance clause describes what occurs if other coverage is available for a particular loss 41

42 Priority of coverage challenge Contract between General Contractor and Subcontractor requires additional insured coverage on a primary and non-contributory basis How is primary and non-contributory coverage up to the total limits promised to the additional insured achieved? What happens if policies are not properly endorsed? 42

43 Traditional Rule: Policy Controls Traditional rule: policy provisions take precedence over conflicting provisions found in contracts between insureds. U.S. Liab. Ins. Co. v. Mountain Valley Indem. Co., 371 F. Supp. 2d 554, 558 (S.D.N.Y. 2005). In Mountain Valley, Mobile Air agreed in a lease to procure coverage for Leroy Holding; the lease also stated that insurance of Mobile Air shall be primary and Leroy Holding s excess Mobile Air obtained a policy from U.S. Liability; Leroy Holding obtained a policy from Mountain Valley. The U.S. Liability policy contained an other insurance clause that stated it would be excess to any other valid and collectible policy, while the Mountain Valley policy stated it provides primary insurance with respect to any covered auto. Therefore, if the terms of the lease govern, then U.S. Liability would be liable for the full disputed amount; if the terms of the insurance policies govern, Mountain Valley would be liable for the full amount The court held the terms of the policy take precedence over the lease agreement to which the insurers were not party, so Mountain Valley was liable for the full amount of the claim 43

44 Alternative Rule: Indemnity Agreement Controls There is no bright line rule with respect to priority of coverage. Some courts inquire into the intentions and relationships of the parties to determine whether an indemnity agreement takes precedence over the language of the policy. See, e.g., Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583, (8th Cir. 2002). In Wal-Mart Store, Wal-Mart entered a vendor agreement with Cheyenne, which was insured by RLI Insurance Co.; Wal-Mart was insured by National Union. The policies had competing other insurance clauses The Eighth Circuit found it unnecessary to resolve the other insurance issue because on the facts of this case, the indemnity agreement controls the outcome, not the other insurance clause. Id. at 587. The court reached this result because: (1) the relationship between the parties shows Cheyenne intended to indemnify Wal-Mart and that RLI provided insurance to Cheyenne that covered the claim; (2) to make Wal-Mart, an insured of RLI, liable to RLI, would frustrate the purpose of insurance; and (3) to make Wal-Mart or National Union liable to RLI would start a circular chain of litigation that would ultimately leave RLI liable 44

45 Horizontal versus Vertical Exhaustion Horizontal Exhaustion: Priority that dictates that an excess policy does not respond to a loss until all applicable primary insurance policies have been exhausted. [Policy terms control over the intent of the parties in indemnity agreements: CA; IL; NY; NJ.] Vertical Exhaustion: Courts look to indemnity agreements to determine intent of parties. [Intent of the parties controls over the policy terms: Arkansas; Kentucky; Missouri; Texas; Virginia.] 45

46 Minority Priority Approach: Targeted Tender The targeted tender or selected tender rule is unique to Illinois. John Burns Construction Co. v. Indiana Ins. Co., 189 Ill. 2d 570, 727 N.E.2d 211 (2000) Insured entitled to a defense from two or more primary insurers can designate a particular carrier to defend and indemnify a specific lawsuit The selected or targeted insurer will owe the sole duty to defend and indemnify the action and be precluded from seeking contribution from a nonselected or deselected insurer, regardless of any other insurance clause in the targeted insurer s policy Horizontal exhaustion of underlying insurance is still required even in a selective tender situation. Kajima Constr. Servs. v. St. Paul Fire & Marine Ins. Co., 227 Ill. 2d 102, 879 N.E.2d 305 (Ill. 2007) 46

47 2013 ISO Changes Impacting Priority of Coverage The Insurance Services Office ( ISO ) provides commonly used CGL coverage forms. New forms, for both claims-made (claim must be brought during coverage period) and occurrence policies, came into effect on April 1, The new forms provide a new AI endorsement and a revised optional endorsement changing the definition of insured contract. The 2013 ISO AI forms include several major changes. For example: 1. Insurance provided to an AI will apply only to the extent permitted by law. See, e.g., Form No. CG If AI coverage is required in a contract or agreement, the AI will not be provided coverage that is any broader than is required in that contract or agreement. See id 3. The limits available to an AI will be the lesser of the limits required by contract or available under the policy to the NI. See id 47

48 Scope of coverage limited by state law With respect to the first change, this language is intended to address state anti-indemnity statutes. Some states limit the types of acts or omissions for which a party to a contract may be covered as an AI, or otherwise regulate indemnity and insurance requirements In Florida, indemnification provisions in a construction contract where the downstream party agrees to indemnify the upstream party for the upstream party s negligence are void unless the contract contains a monetary limit on the extent of indemnification, among other requirements. See FLA. STAT (1) (2014) Other states outright prohibit construction contracts from requiring AI coverage that extends beyond liability for the negligence or fault of the named insured. See, e.g., COLO. REV. STAT (6)(d)(I) (2014) 48

49 Uniformity? The new AI language is intended to be an easy fix given the myriad state laws that could feasibly apply. Accordingly, even if the policy otherwise affords broader coverage, coverage will be restricted for the AI to conform to the relevant state anti-indemnity law. The new language likely precludes any argument that the parties contracted around the law for broader coverage 49

50 No coverage for sole negligence More recent editions of standard AI endorsements preclude coverage for AI s sole negligence This language does not necessary preclude coverage if the NI was also partially at fault 50

51 Coverage limited by contract The second change ensures that insurers do not provide greater coverage than required by the contract; in other words, the AI s coverage will not be broader than that required by the contract even if the policy affords greater coverage to the NI. See Form No. CG (If AI coverage is required in a contract or agreement, the AI will not be provided coverage that is any broader than required in that contract or agreement with the NI.) For example, if the contract states that the NI only provides coverage to an AI for the NI s vicarious liability, then the 2013 AI endorsement only provides coverage for the NI s vicarious liability, even though the policy would ordinarily provide broader coverage This change also seems to mean that insurers can deny the AI coverage even when the NI has broader coverage. For example, if the contract documents require the contractor to maintain CGL limits of $1 million per occurrence, but the contractor obtains coverage for $2 million per occurrence, the owner would only receive the benefit of the $1 million in coverage 51

52 Limits of coverage The final change affects the amount, or limits, of coverage available to the AI. See Form No. CG (The limits available to an AI will be the lesser of the limits required by contract or available under the policy.) The restrictive effect of this language is that if the construction contract requires limits of liability that are less than the policy limits, the lower limits required in the contract will cap the coverage available to the AI even though the policy limits would otherwise be greater. 52

53 Scope of coverage This revision creates additional complications when the contract contains separate primary and umbrella or excess coverage requirements. See Form No. CG (The limits available to an AI will be the lesser of the limits required by contract or available under the policy.) For example, a contract may require at least $2 million in AI coverage under a primary CGL policy and at least $5 million in umbrella coverage. If the party required to obtain the AI coverage procures a CGL policy with $3 million limits and an umbrella policy with $5 million limits, the new language would restrict the AI limits of the primary policy to $2 million. The umbrella carrier would argue that its policy could never be triggered for the AI, because the $3 million in underlying limits can never be exhausted. A gap in coverage results. There is not much law on the 2013 amendments; time will tell how these changes affect insureds rights 53

54 Fixing the Priority of Coverage Challenge Policy Solution: endorse excess and umbrella policies to provide primary/non-contributory coverage [and take special precautions with followform policies] Contract Solution: require primary/non-contributory coverage on primary, excess and umbrella policies 54

55 IV. Interpreting the Additional Insureds Endorsement Language Coverage Pitfalls for Additional Insureds Dawn A. Silberstein Of Counsel Wilson Elser Moskowitz Edelman & Dicker LLP

56 In The Beginning Arising Out Of CG Blanket AI Endorsement: Where Required By Written Contract 56

57 ARISING OUT OF Broadly interpreted Causation Any but for cause in the chain of causation As broad as the indemnity agreement Can include active negligence of the AI Can apply when Named Insured not at fault Temporal No temporal limitation 57

58 A Carrier s Perspective 58

59 AI Coverage Limitations: CG Ongoing Operations During Construction Bodily Injury Off-Site Property Damage Arising Out of Broadly Interpreted No Causation Required No Temporal Limitation 59

60 CAUSED IN WHOLE OR IN PART BY CG Ongoing Ops. CG Completed Ops. Caused in whole or in part by 60

61 Caused In Whole Or In Part By But For v. Proximate Cause The term [ but for ] refers to a link in the chain and in the abstract does no more than state the obvious, that "any given event, including an injury, is always the result of many causes and "[m]ost causes can be ignored in tort litigation. In contrast, "proximate cause" refers to a "legal cause" to which the Court has assigned liability (Burlington Ins. Co. v NYC Tr. Auth., 2017 N.Y. LEXIS at p. 9 [N.Y. Ct. App. June 6, 2017] quoting Derdiarian v Felix Contracting Corp., 51 NY2d 308, 314, 414 N.E.2d 666, 434 N.Y.S.2d 166 [1980]) 61

62 Burlington Ins. Co. v NYC Tr. Auth N.Y. LEXIS 1404 (29 N.Y.3d 313). Caused, in whole or in part" requires proximate or legal causation. (Id. at p. 10.) 62

63 Privity of Contract (Some Jurisdictions) Section II Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the schedule 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 63

64 Privity of Performance v. Privity of Contract GC

65 Read the Schedule 65

66 AI Horror Stories 66

67 Worker Injured 5 Years After Completion NI Installed A Chandelier Subcontract Required: Subcontractor to Name GC as AI A Certificate evidencing continuation of liability coverage, including coverage for completed operations, for ten (10) years after final completion of the Project Custodian Electrocuted While Changing a Light Bulb 5 year after completion Sustains serious brain injury falling off a ladder 67

68 When Wrap Go Wrong Policy Exclusions Defeating AI Coverage Roof repair during the winter Storm of the Century Shrink Wrap System Failed Water and Mold Shrink Wrap Contractor Not Enrolled Under Wrap/OCIP Provided GC An AI Endorsement Policy Excluded: Projects Covered by a Wrap/OCIP Mold 68

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70 Questions? 70