Court of Appeals Curbs Coverage for ‘Additional Insureds’
In 2015, when the Appellate Division, First Department, handed down its decision in Burlington Insurance Company v. NYC Transit Authority, 132 A.D.3d 127 (1st Dep’t 2015) (holding where an additional insured endorsement provides coverage for “acts or omissions” of the named insured, coverage is extended even when the named insured was not negligent), insurance law mavens noted that the court was continuing on a course of expansion of additional insured coverage. See, e.g., Dan D. Kohane & Audrey A. Seeley, “Insurance Law,” 66 Syracuse L. Rev. 999, 1004 (2016).
Recently, that course of expansion has reached its terminus at the Court of Appeals, which reversed the First Department by rejecting the argument that any additional insured obligation is owed under the language of the Burlington endorsement at issue when the named insured is without fault. Burlington Insurance Company v. NYC Transit Authority, ___N.Y.3d___ (2017), 2017 NY Slip Op. 04384. Specifically, the New York State Court of Appeals held that when an insurance policy states that additional insured coverage applies to bodily injury “caused, in whole or in part” by the “acts or omissions” of the named insured, the coverage applies when the injuries are “proximately caused by the named insured.”
Burlington is an important pronouncement in the liability insurance law regime and overrules entrenched First Department decisional law. First Department jurisprudence, until now, stood for the proposition that the phrase “caused by” does not materially differ from the phrase, “arising out of” and results in coverage even in the absence of the insured’s negligence. That is no longer the law in New York.
Therefore, W & W Glass Sys. v Admiral Ins. Co., 91 A.D.3d 530 (1st Dep’t 2013) and National Union Fire Ins. Co. of Pittsburgh, PA v. Greenwich Ins. Co., 103 A.D.3d 473 (1st Dep’t 2013), and in federal court National Union Fire Insurance Company of Pittsburgh, PA v. Greenwich Insurance, 11 Civ. 9357, 2014 U.S. Dist. LEXIS 42471, at *14-15 (S.D.N.Y. March 28, 2014), which were relied upon by the First department in Burlington, should no longer be cited as authority in additional insured coverage analysis.
Additional Insured Coverage
Generally, your business will add another party as an “additional insured” on your liability insurance policy to protect them against your company’s negligence. By having another entity add your business as an additional insured, that company is protecting you against their negligence.
The Additional-Insured Endorsement is a way to apportion risk. It provides the status of an insured under the named insured’s policy without the responsibility to pay premiums.
An additional insured is often entitled to direct rights under the named insured’s policy, which may include: immediate coverage for defense costs; prevention of subrogation claims; standing to sue the insurer for breach of contract; prevention of their own insurance carrier from being brought into the suit; prevention of depletion of their own liability insurance to defend claims; and prevention of increased premiums on future policies. The rationale is to make the party with the most control over the risk responsible for suffering the financial loss if it fails to prevent the loss.
To illustrate, general contractors (GC) often require subcontractors to name the GC on the subcontractor’s policies as an additional insured. When the GC is sued because of an accident arising out of the work of the subcontractor, the subcontractor’s insurance will protect the GC.
Facts of ‘Burlington’
Burlington issued a policy to nonparty Breaking Solutions, Inc. (BSI) listing the New York City Transit Authority as additional insured defendant. BSI agreed to use language in the endorsement adopted from the latest form issued in 2004 by Insurance Services Office (ISO Form CG 20 10), which provided that NYCTA was 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.
During the coverage period of the policy, an NYCTA employee fell off an elevated platform as he tried to avoid an explosion after a BSI machine touched a live electrical cable buried in concrete at the excavation site. Burlington denied coverage to NYCTA on the grounds that BSI was not an additional insured within the meaning of the policy because NYCTA was solely responsible for the accident that caused the injury.
The policy at issue stated that an entity is “an additional insured only with respect to liability for ‘bodily injury’ caused, in whole or in part, by [BSI’s] acts or omissions.” The issue presented was whether the additional insured language of the policy provided coverage where the named insured is not negligent. “According to the First Department, a blanket ‘acts or omission’ additional insured endorsement is triggered to provide coverage even when the named insured was not negligent.” Kohane & Seeley, “Insurance Law,” supra at 1006.
The court reasoned that the endorsement’s reference to “liability” caused by BSI’s acts or omissions confirmed that coverage for additional insureds was limited to situations where the insured is the proximate cause of the injury.
By hiring a subcontractor, a general contractor exposes itself to liability risks, including vicarious responsibility for its subcontractor’s negligence. The court concluded that to extend coverage to the additional insured under the circumstances of the Burlington case may frustrate the clear purpose of obtaining additional insured insurance in the first place. In this case, it would have allowed NYCTA to compel a subcontractor to pay for injuries to its employee that NYCTA proximately caused — an outcome not intended by the parties and contrary to the plain language of the endorsement.
The Court of Appeals reined in the expansive coverage afforded by the First Department in Burlington, and the decision provides clear statewide guidance to the insurance bar on the scope of additional insured coverage when the standard ISO language is in play.
Finally, when representing entities seeking to manage risk transfer, it is important to make sure the client understands that although the additional insured requirement is usually coupled in a contract with contractual indemnity language, the two mechanisms are separate, independent methods of accomplishing that goal. And, in New York, under Burlington, they will not be entitled to coverage as an additional insured unless the named insured is negligent, unless the additional insured endorsement specifically states otherwise.