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Risk Management
Weighing every word
Courts scrutinize current additional insured endorsements
By Donald S. Malecki, CPCU
No matter how distasteful the subjects of additional insured status and insurance certificates have become, producers must keep pace with developments.
While it appears that the demand for the infamous ISO additional insured endorsement (referred to in short as “CG 20 10 11-85”) has subsided, some insurers may still issue it, so producers need to watch for that to avoid problems.
Additionally, producers must now contend with a wide variety of additional insured endorsements often poorly drafted, ambiguous and with questionable purposes. As this has become evident, their purposes and scope often need to be litigated to figure what insurers had intended.
For a while now, producers have not seen any decisions dealing with the ISO additional insured endorsements that were introduced in 2004. The time is now ripe to revisit what these endorsements say, since they are now being litigated and what the courts say about them will be important—if they are not overruled, of course.
What the ISO 2004 endorsements say, in a nutshell, is that no coverage is intended for the sole fault of the additional insured. This is unlike the endorsements replaced in 2004 where coverage for sole fault of the additional insured was a definite possibility and, of course, the reason for their demand.
The 2004 ISO endorsements are worded so that before coverage applies to the additional insured, liability for injury or damage must first be caused in whole or in part by the named insured’s acts, or the acts or omissions of those acting on the named insured’s behalf.
Case explains coverage application
Fortunately, a case has just been decided, dealing with this endorsement language, which helps to make clear the “in whole or in part” requirement for coverage. It is Judith A. Schafer, et al. v. Paragano Custom Building, Inc. v. Harleysville Insurance Company, et al., No. A-2512-08T3 (N.J. Super. App. Div. 2010).
During the renovation of a house, the general contractor subcontracted a portion of the work to a subcontractor. The plaintiff was a principal of the subcontracting firm. In order to install a window on a second floor bathroom, the general contractor erected a scaffold which turned out not to be high enough.
The plaintiff, therefore, allegedly erected an A-frame ladder on top of the scaffold. While perched on this ladder and trying to fit the window into place, the plaintiff lost his balance and fell to his death. During the lawsuit, the plaintiff’s expert opined that the scaffolding had been improperly erected by the general contractor. The general contractor’s expert, in turn, stated that the fall was the result of the plaintiff’s negligence in placing the ladder on top of the scaffolding.
It turned out that the Occupational Safety and Health Administration (OSHA) cited both parties. The general contractor received a citation for improper construction of the scaffold. The subcontractor was cited for improperly placing a ladder on the scaffold.
At the time that the general contractor retained the services of the subcontractor, it insisted that it be shown as an additional insured on the subcontractor’s liability policy.
As part of this litigation, the general contractor also filed a complaint against the insurer seeking defense and indemnification under the subcontractor’s policy. The trial court’s order directing that defense and indemnification be provided prompted the insurer here to also appeal that decision.
Ultimately, the parties negotiated a settlement of the plaintiff’s damages claim but still preserving a right of appeal by the subcontractor’s insurer. Under that settlement both the general contractor’s insurer and subcontractor’s insurer each paid $230,000. This amount also took into account the comparative negligence of the plaintiff (decedent).
One has to wonder whether the subcontractor’s insurer knew what it was doing in these proceedings because both insurers, as part of this settlement, agreed that “outside of the acts, errors or omissions of the plaintiff himself, there was no evidence or claim that any act, error or omission of the subcontractor caused the plaintiff’s accident in whole or in part.”
The reason for the above question is that the endorsement adding the general contractor as an additional insured consisted, at least in part, of the 2004 ISO endorsement wording. Thus, the additional insured was considered covered “only with respect to liability for ‘bodily injury’, ‘property damage’, or ‘personal and advertising injury’ caused, in whole or in part, by: 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf, in the performance of your ongoing operations for the additional insured.”
The foregoing agreement by the general contractor’s insurer that the subcontractor did nothing wrong was the death knell of this case.
The reason is best explained by the court which stated that the additional insured endorsement was clear that the general contractor was covered only as to liability caused by the acts or omissions of the subcontractor. In other words, the endorsement provided coverage for a claim asserted against the general contractor for its vicarious liability. But it did not provide coverage for the general contractor’s own direct negligence.
If the general contractor’s insurer had not agreed that the subcontractor did nothing wrong and, instead, had maintained that the subcontractor was at least 1% at fault, the outcome might have been different. That is to say, had the court agreed that the subcontractor was at least 1% at fault, its insurer would have been obligated to cover the general contractor’s sole fault.
A more pressing question
By far, the most important reason persons and organizations seek additional insured status, in relation to construction work, is for protection in third-party-over actions. These kinds of actions occur when an employee of a subcontractor is injured, collects workers compensation benefits or postpones such payment, and sues the general contractor or project owner for damages.
Keeping in mind what the 2004 ISO additional insured endorsements state, the question here is whether the insurer that has issued such an endorsement to a general contractor and/or project owner has the obligation to provide defense, if the only party named in the action is the general contractor and/or project owner.
Some insurers will say no, because liability for injury would still have to first be caused in whole or in part by the named insured, the subcontractor in this example. This writer, among others, has said yes, because an employee is precluded from filing a liability claim against his or her own employer, and it may turn out where the employer is proven contributorily at fault.
Who is right will likely depend on the facts and on what the courts say. While the consensus may not be one-sided, a good beginning in developing this score is the case of Gilbane Building Company, v. Empire Steel Erectors, and Admiral Insurance Company, No. H-08-1707 (S.D. Tex. 2010).
This is an interesting case with many different issues. It is worth reading by those who are interested in the subjects of additional insured status and contractual liability. For purposes here, it is necessary to discuss only the primary issue of the third-party-over action.
The general contractor was issued an additional insured endorsement that was not of ISO issue, but it did contain the ISO wording dealing with liability caused in whole or in part by the named insured. The insurer that issued this endorsement maintained in the suit brought by an employee of the subcontractor against the general contractor that the general contractor (additional insured) was owed no defense or indemnity.
The rationale for the insurer’s denial of defense and indemnity was that the employee’s complaint did not allege that his employer (subcontractor and named insured) or someone acting on his employer’s behalf caused his injuries. Thus, in absence of the named insured’s fault, there should be no coverage for the additional insured.
The general contractor, however, pointed out that the employee of the subcontractor, at the time of the accident, was statutorily barred from naming his employer as a liable party because the subcontractor had a workers compensation policy in place.
The U.S. District court disagreed with the insurer and held that it was obligated to provide the general contractor with defense. In doing so, it stated that the insurer’s argument—that the complaint contained no allegations of negligence against the named insured (subcontractor) and thus barred coverage—ignored the named insured’s “inchoate immunity under the workers compensation act to a suit by its employee.”
In other words, the court explained, a petition that does not, and cannot, state allegations of negligence against the employer does not indicate that the employer was not at fault, only that it was statutorily immune from suit. The court also stated that it could not say that the employee himself, acting on behalf of his employer, was not possibly a contributing, proximate cause of his injuries.
Conclusion
For those producers who are interested in developments over additional insured status, these are interesting times, since a lot of activity is beginning to gel. Whether producers are interested or not, however, they need to keep up with developments because additional insured status is a rapidly developing discipline and it is on the minds of many businesses interested in obtaining protection by those endorsements.
Unfortunately, however, it is not only the ISO endorsements with which producers must keep pace. Burgeoning numbers of other additional insured endorsements are being issued that need to be scrutinized, since some are nothing to write home about.
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