Contractor Additional Insured Endorsements May Reduce Coverage Available to the Named Insured

Editor’s Note: This is part two of a two-part series on contractor additional insured endorsements. Part one was published in the Jan. 12, 2009, issue of Insurance Journal magazine.

Arising out of the named insured’s operations” does not legally equate to “arising out of the named insured’s negligence.” Further, for an injury to “arise out of” an operation, it is not necessary for the named insured’s acts to have caused the accident or injury. (Pulte Home Corp., plaintiff, v. American Southern Insurance Co. and Transamerica Investment LLC, defendants; No. COA06-747; Filed: 7 August 2007)

With these statements, the North Carolina Court of Appeals expanded the intended (and previously understood) breadth of coverage provided by all CG 20 10 (and CG 20 33) editions prior to the adoption of the 07/04 edition. Coverage granted to additional insureds by these older forms was no longer limited solely to the additional insured’s vicarious liability for the actions of the named insured; there was now provisional coverage for the direct actions of or charges against the additional insured (“provisional” as there were certain requirements to be met before coverage would extend to the actions of the additional insured).

The Pulte Case

Pulte Home (Pulte) was acting as the general contractor in the development of a residential community in Wake County, N.C. Pulte hired a group of subcontractors to complete the work; among this subcontractor pool, TransAmerica was contracted to do framing. As part of the subcontract agreement, TransAmerica was contractually required to name Pulte as an additional insured.

Apparently the 07 98 edition of the CG 20 was used to comply with the risk transfer requirements (it’s not likely it was the 10 01 edition since the injury occurred in October 2001). Pulte was listed “as an insured but only with respect to liability arising out of [TransAmerica’s] operation or premises owned by or rented to [TransAmerica]” (wording on the certificate of insurance).

In the course of normal operations, TransAmerica hired Rudolfo Sanchez (Sanchez) as a framing sub-subcontractor to complete some of the work Pulte had contracted TransAmerica to perform. Whether any contractual risk transfer existed between TransAmerica and Sanchez is not known, but evidence seems to suggest there was none (had there been, the outcome of this case may have been different).

Marcos Antonio Mejia, an employee of Sanchez, was struck by a crane operated by an employee of Morlando Enterprises, an unaffiliated entity, causing him to fall from the roof of a house and suffer severe injuries including paraplegia. Mejia’s August 2002 suit against Pulte, TransAmerica and Morlando claimed that in October 2001 he was directed to work on the said roof without the safety of fall protection. Mejia charged Pulte with failure to provide and/or enforce an overall safe working environment (a non-delegable duty); TransAmerica he charged as the contractor directly responsible for managing its subcontractors and Morlando was sued as the party directly negligent in causing the injury.

Seven months after receiving the suit papers, Pulte submitted the claim to American Southern Insurance Co. claiming coverage as an additional insured under TransAmerica’s commercial general liability policy. American Southern denied any obligation to provide defense or coverage on behalf of Pulte, stating that additional insured status provided only for the additional insured’s vicarious liability.

Pulte settled the claim with Mejia for $700,000, incurring another $105,000 in legal fees, expenses and expert costs, and in September 2004 filed an action against TransAmerica and American Southern to recover these costs alleging breach of contract. A Superior Court Judge entered summary judgment in favor of American Southern in December 2005; Pulte and TransAmerica jointly appealed.

At trial, American Southern again argued that it had no duty to defend Pulte because the additional insured wording made Pulte insured “only with respect to liability arising out of [TransAmerica’s] operations ….” American Southern interpreted this to mean “arising out of” TransAmerica’s negligence. Therefore, Pulte was only protected against its “vicarious liability” for the wrongful acts committed by or at the direction of TransAmerica. Since Mejia sued Pulte for its individual negligence, American Southern felt it was not obliged to defend or indemnify.

‘Arising out of…’

The Court of Appeals’ analysis of the additional insured wording focused on the meaning of the phrase “arising out of.” The CGL does not define this phrase, which left the determination to the court.

A long-standing insurance contract interpretation principle compels the court to interpret exclusions in their most restrictive terms and coverage in the broadest possible terms. Applying this principle, the Court of Appeals took the position that “arising out of” requires only a “causal nexus … and not causation rising to the level of proximate cause.” Therefore, “arising out of” and “caused by” are not legally equivalent. Additionally, the wording of the endorsement uses “arising out of (the named insured’s) ongoing operations” as the trigger for coverage not “arising out of (the named insured’s) negligence,” which the court proved could have been done by reference to a similar St. Paul endorsement that did limit coverage to the named insured’s negligence.

In essence, the Court of Appeals found that the operations of TransAmerica put Mejia in harms way leading them to establish a “causal nexus.” The court decided that the injured employee would not have been on the premise and, therefore, subject to injury “but for” the operations of TransAmerica.

The last provisional requirement addressed by the court in determining whether an injury “arises out of” a particular operation is the issue of the activity itself; is the activity that lead to the injury reasonably related to the insured’s expected and/or anticipated operations? To “arise out of,” the operation or activity giving rise to the injury must be a part of the insured’s operations for the additional insured. In the subject case, the installation of trusses was an anticipated operation of the named insured.

For these and other legal reasons not related to the question of contract wording, the Court of Appeals concluded that the injury did “arise out of” TransAmerica’s operations and that Pulte was an insured deserving of defense and indemnity. The Court of Appeals reversed the Superior Court summary judgment and awarded Pulte $805,957.74 plus pre-judgment interest.

The pre-07/04 contractor’s additional insured endorsements may extend coverage to the scheduled additional insured when sued for its own actions or inactions. Such extension of coverage may act to lower the per occurrence limits available to the insured for the same incident.

The 07/04 Fix

“Arising out of…” was replaced in the 07/04 edition of the three highlighted forms with “caused in whole or in part by….” This seemingly minor change may have returned the contractor’s additional insured endorsements to their intended breadth of protection — covering only the additional insured’s vicarious liability for the actions of the named insured.

Applying the 07/04 wording, the injury or damage must be “caused by” the named insured, not simply “arise out of” its operations. “Caused by” is an active term where “arising out of” was passive.

Secondly, the term “ongoing operations” was augmented by the requirement that the injury be caused by the named insured’s “acts or omissions” or “the acts or omissions of those acting on [the named insured’s] behalf.”

This wording may have mitigated the “but for operations” provision applied in Pulte by requiring either complete or partial contribution to the injury by the actions or inactions of the named insured.

Is Coverage Reduced?

Does naming an additional insured reduce the amount of coverage available to the named insured?

The answer for contractor classifications revolves around the edition date of the additional insured endorsement. If a pre-07/04 edition is being used, there is the possibility that coverage limits could be compromised by the independent actions or inactions of the additional insured (if prescribed provisions are met). But, the limits do not appear to be compromised if the most current 07/04 edition is being used. The use of the “caused by” wording tends to limit coverage to the additional insured’s vicarious liability.

Keep in mind this article dealt only with ISO’s additional insured endorsements, no proprietary forms were contemplated. Proprietary endorsements must be analyzed on their own merits and compared against ISO wording for similarities and differences, but interpretation and application are based on that form’s specific wording.

Topics Contractors