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Construction Defect Claims: Horizontal vs. Vertical h fExhaustion of Insurance Coverage

Navigating Exhaustion of Primary Policies, Triggers for Excess Carriers and Additional Insured Coverage

T d ’ f l f

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TUESDAY, SEPTEMBER 24, 2013

Today’s faculty features:

Richard B. Friedman, Partner, McKenna Long & Aldridge, New York

David G. Jordan, Associate, Saxe Doernberger & Vita, Hamden, Conn.

Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, TexasRebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas

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“Additional Insured” Coverage: CurrentIssues and Regional Peculiarities

by

J. Stephen Berry, Denis F. Shanagher and Richard B. Friedman*

I. INTRODUCTION

A. Overview

“Additional Insured” endorsements have been one of the most contested

aspects of liability insurance in recent years, particularly with regard to construc-

tion defect claims. The extent of coverage granted—to whom, for what, and

when—is frequently litigated, and often with results that differ based on the forum

and choice of law.

This article analyzes the issues most frequently litigated in courts today with

regard to Additional Insured coverage, with an eye toward the regions in which

those issues are disputed most often. For example, the extent of coverage afforded

* Stephen Berry is a partner in the Atlanta office of McKenna Long & Aldridge LLP. His practice

is nationwide and focuses on the areas of insurance coverage and insurance bad-faith, with particular

emphasis on general liability, construction defect, and catastrophic property damage claims. Stephen

is listed in Georgia Super Lawyers and has been listed in Best Lawyers in America, in the practice

area of Insurance Law, every year since 2007. He is author of Georgia Property and Liability

Insurance (West, 2012), the only comprehensive treatise on Georgia insurance law, and has

published numerous articles on coverage for third-party construction defect and first-party property

damage claims, and frequently speaks on those topics to public audiences and insurer in-house

training seminars.

Denis Shanagher is a partner in the San Francisco office of McKenna Long & Aldridge, LLP and

chairs the commercial, employment, insurance and real estate litigation practice groups in that office.

Mr. Shanagher has been actively in practice since 1981 and has handled jury trials, court trials,

mediations, and arbitrations in the western region of the United States throughout that period. His

litigation practice includes general commercial contracts and disputes; professional negligence

(emphasizing real estate agents and insurance brokers); directors’ and officers’ liability; and

insurance coverage. He also has an active land use and related litigation practice, including CEQA

litigation.

Richard B. Friedman is a partner in the New York office of McKenna Long & Aldridge LLP. He

principally handles complex commercial and construction litigation, arbitration, and mediation

matters for insurers and non-insurers in New York state and federal courts. Rich is one of the dozen

or so practitioner members of the Advisory Committee to the New York County Commercial

Division on which he serves with the nine judges of that court. The Commercial Division has

become the venue of choice for many of the most sophisticated business disputes in the country.

Rich has published numerous articles on so-called “alternative” and other non-hourly rate fee

arrangements as well as specific ways to improve the relationships between outside and in-house

counsel. Rich is also a frequent panelist and moderator on these and other topics at CLE programs.

The authors wish to acknowledge the assistance of Kristin Landis (in the Washington, D.C. office

of McKenna, Long & Aldridge, LLP) and Dee Ware (in the San Francisco office of McKenna, Long

& Aldridge, LLP).

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Reprinted from New Appleman on Insurance: Current Critical Issues in Insurance Law with permission. Copyright 2012 Matthew Bender & Company, Inc., a LexisNexis company. All rights reserved.

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by endorsements applying only to “ongoing operations” is most frequently

litigated in Western courts, sometimes with different results. In the Northeast, and

particularly in New York, the priority of coverage afforded by Additional Insured

endorsements in subcontractor’s excess policies, vis-à-vis general contractors’

primary policies, is often disputed. In the Southeast, the most interesting

phenomenon is the cross-border differences on several issues of Additional

Insured coverage between Georgia and Florida law. This article will address each

of these in turn.

B. Construction: Insurance Procurement and Indemnification

Agreements

When an accident occurs on a construction site and persons are injured and/or

property is damaged, the injured parties usually look to hold the project owner and

general contractor liable for their injuries. In many cases, the owners and general

contractors are not directly involved in the accident but are sought to be held

vicariously liable for the actions of various trade or subcontractors.1 Because of

this vicarious liability, it has become common practice in the construction industry

for trade contracts to require subcontractors to procure a certain amount of

liability insurance for themselves as well as for those upstream parties, i.e, the

owner and general contractor.2 This additional insured coverage is intended to

transfer the risk to the trade subcontractor for liability arising out of the

subcontractor’s work for those parties. Because the insurance requirements in

trade contracts are usually substantial, trade subcontractors generally must

procure excess or umbrella coverage as well as a primary CGL policy.

The subcontractor’s procurement of liability insurance for the upstream parties

does not necessarily ensure a complete transfer of risk to the subcontractor. For

one, the transfer of risk is limited to the limits of insurance purchased by the

subcontractor. Moreover, the upstream parties’ access to the subcontractor’s

insurance is conditioned upon compliance with the terms and conditions of the

policies. Consequently, to ensure that the trade subcontractor bears the risk for the

work it provides, trade contracts usually also contain an indemnification provision

which requires the trade subcontractor to defend and indemnify the upstream

parties from any and all liability arising out of the subcontractor’s work. This

contractual indemnity is not limited to insurance policy limits but is limited, for

example, by New York public policy, which prohibits a subcontractor from

indemnifying upstream parties for their own negligence.3

1 In some jurisdictions, upstream liability can exceed the usual requirements for vicarious

liability. For example, N.Y. Labor Law §§ 240 and 241(6), often referred to as the “Scaffold laws,”

provide strict liability against construction project owners and contractors for the safety of the

construction site.2 The same is true for upstream parties beneath the owner. For instance, general contractors are

generally required to procure insurance for their own liability as well as for the benefit of the owner.3 N.Y. Gen. Oblig. Law § 5-322.1; Itri Brick & Concrete Corp. v. Aetna Cas. & Sur. Co., 89

N.Y.2d 786, 790-795 (N.Y. 1997). In California, construction contracts which purport to indemnify

§ I[B] CURRENT CRITICAL ISSUES 2

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The interplay of insurance coverage for upstream parties and the indemnifica-

tion requirements contained in trade contracts often leads to vigorous disputes

regarding the payment obligations of the various parties.

C. “Additional Insured” Endorsement Forms: Evolution and

Distinctions

Appreciation of the coverage issues that arise out of “Additional Insured”

endorsements benefits from a historical analysis of the endorsement’s evolution.

The most commonly used endorsement is the “2010” form published by the

Insurance Services Organization (“ISO”). The 2010 form amends the “Who Is An

Insured” section of the policy to include “the person or organization shown in the

schedule.” Thus, it provides Additional Insured coverage only to upstream

contractors specifically named in the endorsement. The ISO has revised this

endorsement several times over the years. The versions are as follows:

ISO 2010 11 85: In November 1985, the ISO drafted the first of several

endorsements that are still commonly used. This version

provides coverage for liability “arising out of” the in-

sured’s work. The endorsement did not distinguish be-

tween ongoing operations and completed operations:

WHO IS AN INSURED is amended to include as an

insured the person or organization shown in the Schedule,

but only with respect to liability arising out of ‘your work’

for that insured by or for you.

ISO 2010 10 93 In October 1993, the ISO published a new form with more

narrowly tailored coverage.4 It limits coverage to parties

listed in the endorsement, but only with regard to the

insured’s ongoing operations:

WHO IS AN INSURED is amended to include as an

insured the person or organization shown in the Schedule,

but only with respect to liability arising out of your

ongoing operations performed for that insured.

ISO 2010 03 97: In March 1997, the ISO revised many aspects of its CGL

form, but the Additional Insured endorsement remained

the same as the 2010 10 93 edition.

ISO 2010 10 01: In October 2001, the ISO changed the form more

extensively by specifically excluding damages arising out

the indemnitee for its sole negligence or willful misconduct are void as against public policy. See

Cal. Civil Code § 2782.4 A court contrasted the clarification as to “ongoing operations” added to this form, to the broader

definition of coverage in the previous form, to find coverage for an insured’s completed operations

in Pardee Construction v. Insurance Co. of the West, 92 Cal. Rptr. 2d 443 (Cal. Ct. App. 2000).

3 ISSUES AND REGIONAL PECULIARITIES § I[C]

















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of the insured’s work after it was complete or after it was

put to its intended use.

A. Section II—Who Is An Insured is amended to include as an insured

the person or organization shown in the Schedule, but only with

respect to liability arising out of your ongoing operations per-

formed for that insured.

B. With respect to the insurance afforded to these additional insureds,

the following additional exclusions apply:

This insurance does not apply to “bodily injury” or “property

damage” occurring after:

1. All work, including materials, parts or equipment furnished

in connection with such work, on the project (other than

service, maintenance or repairs) to be performed by or on

behalf of the additional insured(s) at the location of the

covered operations has been completed; or

2. That portion of “your work” out of which the injury or

damage arises has been put to its intended use by any person

or organization other than another contractor or subcontractor

engaged in performing operations for a principal as a part of

the same project.

ISO 2010 07 04: In July 2004, the ISO expanded the language of the 2010

form further, to include a causal connection to the named

insured’s work, while maintaining the restriction to on-

going operations:

A. 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 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.

The evolution of the 2010 form has not been linear and exclusive. Each version

is still available, for a different premium to reflect the coverage afforded.

Accordingly, many construction contracts require downstream parties to add a

specific version to its policy (ISO 2010 11 85 being the most frequently requested

due to its broader coverage).

Other forms are also available. For example, the 2009 form is similar in content

§ I[C] CURRENT CRITICAL ISSUES 4

















































to the 2010 form,5 but contains an additional Contractual Liability exclusion,

barring coverage for liability assumed via contract that would not otherwise exist

outside of the contract. This change significantly reduces the coverage afforded by

the endorsement with respect to one of the claims most commonly made against

subcontractors, but it remains available (in versions parallel to the 2010 form

options listed above) when the premium is right.

The 20 33 form is more flexible in terms of who can have Additional Insured

coverage. Often called the “Blanket Additional Insured” or “Omnibus Additional

Insured” endorsement, the form defines as an insured “any person or organization

who you become obligated to include as an additional insured to this policy, as a

result of any contract or agreement. . ..” This form has also evolved over the

years, to provide more limited coverage when desired by the parties. The original

version is ISO 2033 03 97, which limited coverage to “ongoing operations.” In

October 2001, ISO published a newer version more clearly limiting coverage for

“ongoing operations,” as in the 2010 form. For less flexibility, the 20 37 form is

available for coverage limited to a specific premises.

II. CRITICAL ISSUES OF REGIONAL SIGNIFICANCE

A. California and the West: “Ongoing Operations” Coverage

In several Western states, the courts have struggled with the meaning of the

term “ongoing operations” in the CG 2010 93 form, as that term is not defined in

the ISO form insurance policies. As a result, the courts have issued divergent

rulings as to the extent of coverage afforded by Additional Insured endorsements

applying to the subcontractor’s “ongoing operations” only. Some courts have

focused on the underlying contractual obligations to help define the meaning of

the term. Many courts have relied on a dictionary definition of “ongoing”, while

at least one other has interpreted the absence of a policy definition of the term

“ongoing” to impose a broader definition in order to ensure coverage.

The first California case to discuss the scope of coverage afforded by an

additional insured endorsement applying only to a subcontractor’s “ongoing

operations” is Pardee Construction Company v. Insurance Company of the West.6

There, a general contractor brought suit as an additional insured against certain

insurers that refused to defend or indemnify it in underlying construction defect

litigation. The issue for determination by the appellate court was whether

completed operations coverage in pre-1993 Comprehensive General Liability

policies, that were not limited by policy language as to time or particular project,

provided coverage to the general contractor for its vicarious liability for

subcontractors’ acts on operations completed prior to inception of the policies.

The court concluded that absent language excluding such coverage, the insurers

5 This form provides that the additional insured becomes an insured “but only with respect to

liability arising out of [the named insured’s work] for the additional insured or acts or omissions of

the additional insured in connection with their general supervision of your work.”6 77 Cal. App. 4th 1340 (2000).

5 ISSUES AND REGIONAL PECULIARITIES § II[A]










































owed the general contractor a duty to defend.7

In reaching its decision, the Pardee court discussed in dicta that in 1993, the

Insurance Services Office (“ISO”) had revised the language of the form 2010

endorsement to “expressly restrict” coverage for an additional insured to the

“ongoing operations” of the named insured. In that regard, the court cited various

treatises and insurance commentators who have opined that the change in form

was to eliminate additional insured coverage of the completed operations hazard,

and to apply additional insured coverage to a contractor’s work in progress only.

The court noted that the revised language, i.e., the inclusion of the phrase “your

ongoing operations,” albeit without further definition, “effectively precludes

application of the endorsement’s coverage to completed operations losses.”8

A subsequent California case addressing this question was St. Paul Fire and

Marine Insurance Company v. American Dynasty Surplus Lines Insurance

Company.9 This was an action brought by a general contractor and its insurer

against a subcontractor and its insurer to recover amounts paid to defend and settle

litigation brought by an employee of the subcontractor who suffered injuries as a

result of a pipe explosion occurring during pressure testing conducted by the

general contractor.10 The appellate court determined that the injury to the

electrical subcontractor’s employee resulted entirely from the activities of the

general contractor that were unrelated to the work called for in the subcontract and

that the mere presence of the employee on the jobsite was not sufficient to

constitute an act or omission on the electrical subcontractor’s part.11 Accordingly,

the electrical subcontractor’s promise of contractual indemnity did not embrace

the liability claim for which the general contractor and its insurer sought

indemnity, nor did the additional insured endorsement covering liability arising

out of the subcontractor’s ongoing operations performed for the general contractor

provide coverage.12

The appellate court concluded that the “ongoing operations” additional insured

endorsement was subject to two or more reasonable interpretations as to the scope

of coverage provided to the general contractor.13 According to the court, the

“arising out of [Subcontractor’s] ongoing operations” language could be inter-

preted by a reasonable layperson to embrace “either (1) any liability arising while

the [Subcontractor] was on the. . . premises doing work under the Subcontract or

(2) liability restricted to that arising, at least in part, from [Subcontractor’s] actual

7 Id. at 1344-1345, 1356-1358.8 Id. at 1358-1359.9 101 Cal. App. 4th 1038 (2002).10 Id. at 1045-1046.11 Id. at 1042.12 Id.

13 Id. at 1049.

§ II[A] CURRENT CRITICAL ISSUES 6












































performance of such work.”14 To resolve any ambiguity, the court held that it was

necessary to read the provisions of the additional insured endorsement together

with, and in the context of, the operative Subcontract, which provided that only

liability arising out of the electrical subcontractor’s ongoing operations performed

for the general contractor would be covered.15 Further, the indemnity provision in

the subcontract limited protection to all “claims arising out of or resulting from

the performance of the work.” The appellate court held that the insurance

provision “provides the means of doing so, that is, by purchasing insurance for

that purpose.” Thus, the insurance provision necessarily encompasses the more

specific and narrower language of the indemnity provision and cannot reasonably

be read as broader.16 The court, therefore, concluded that the additional insured

endorsement must be interpreted to only provide coverage for liability arising, at

least in part, from the electrical subcontractor’s acts or omissions in its

performance of the subcontract.17 .

In Weitz Company, LLC v. Mid-Century Insurance Company,18 the Colorado

Court of Appeals applied the dictionary definitions of “ongoing” to interpret the

undefined phrase “ongoing operations” as used in the insurance policy at issue.19

The court concluded that that the insurance policy is unambiguous—“under the

plain and ordinary meaning of ‘arising out of your ongoing operations,’ the

endorsement does not cover ‘completed operations,’ and the subcontractor’s

insurer had no duty to defend or indemnify the general contractor. . .”20

In American International Specialty Lines Insurance Company v. Kindercare

Learning Centers, Inc.,21 the U.S. District Court in Oregon, in granting the

defendant insurance companies’ motion for summary judgment, also applied

dictionary definitions to interpret an insurance policy containing the undefined

phrase “ongoing operations.” The court determined that “ongoing” means

“continuing without termination or interruption” and “operations” means “a

course or procedure of productive or industrial activity.”22 The court concluded

that the underlying injury sustained by a child who fell at a daycare facility

occurred outside the time that the named insured supplied products to the facility

and that the additional insured endorsement providing coverage for liability

arising out of the named insured’s “ongoing operations” did not extend to liability

14 Id. at 1056.15 Id.

16 Id. at 1057, 1059.17 Id. at 106018 181 P.3d 309 (Colo. Ct. App. 2007).19 Id. at 313.20 Id. at 313, 315.21 Nos. 07–642–KI, 07–978–KI, 2010 U.S. Dist. LEXIS 78374 (D. Or. Aug. 2, 2010).22 Id. at *9-10.
































arising from a product sold to the additional insured.23

A similar result was recently reached in Washington in Absher Construction

Company v. North Pacific Insurance Company.24 In ruling on a motion for

summary judgment, the Absher court interpreted insurance policies issued by an

insurer with the following slightly different language than the ISO additional

insured 1993 form:

1. WHO IS AN INSURED (Section II) is amended to include as an insured

the person or organization (called Additional Insured) shown in the

Schedule, but only with respect to:

(a) Vicarious liability arising out of your ongoing operations per-

formed for the additional insured; or

(b) Liability arising out of any act or omission of the additional

insured for which you have entered into an enforceable “insured

contract” which obligates you to indemnify the additional insured,

or to furnish insurance coverage for the additional insured, arising

out of your ongoing operations for that additional insured.25

But again, the policies at issue did not define the term “ongoing operations.”26

Citing Hartford Insurance Co. v. Ohio Casualty Insurance Co.,27 which in turn

quoted and relied on the California Pardee case discussed above, the court noted

that Washington courts have interpreted similar “ongoing operations” clauses to

evince an intent to provide coverage to the additional insured only for liability that

arises while the work is still in progress.28 The court therefore rejected an

interpretation of the “ongoing operations” language that would trigger a defense

simply because the underlying complaint included allegations of property damage

“which may have begun as soon as its installation,” finding that such a broad

construction would effectively write the word “ongoing” out of the policy and

make it equivalent to the phrase “arising out of your operations.”29

In the cases discussed above, despite the fact that the ISO policy forms do not

define the term “ongoing operations”, the courts have relied on the dictionary

definition of the term “ongoing” to distinguish it from the term “completed

operations,” which is a defined term. Accordingly, a majority of the courts in the

Western states that have addressed the issue (e.g., California, Washington,

Oregon, and Colorado) have concluded that the term “ongoing operations” as used

in the ISO CG 2010 93 form means only those operations of the insured that are

23 Id.

24 2012 U.S. Dist. LEXIS 38555 (W.D. Wash. Mar. 20, 2012).25 Id. at *16-17.26 Id. at *17.27 145 Wash. App. 765 (2008).28 2012 U.S. Dist. LEXIS 38555, at *18 (W.D. Wash. Mar. 20, 2012).29 Id. at *21.

§ II[A] CURRENT CRITICAL ISSUES 8















































in progress, and that additional insured status under a subcontractor’s policy will

exist only for damages or claims arising during those operations, and not for

damages or claims arising from or after those operations are completed.

The Ninth Circuit has come to a different conclusion in an unpublished case

arising under Arizona law, Tri-Star Theme Builders, Inc. v. OneBeacon Insurance

Co.30 There, a general contractor brought an action against its subcontractor’s

insurer, as an additional insured, for failure to defend and indemnify it against

claims arising from the construction of a resort and casino project. The policy at

issue defined “Who Is An Insured” to include the general contractor “but only

with respect to liability arising out of. . . [the subcontractor’s] ongoing opera-

tions performed for. . . [the general contractor] on the [Project]. . ., and only to

the extent of liability resulting from occurrences arising out of. . . [the subcon-

tractor’s] negligence.” The District Court granted summary judgment in favor of

the insurer, and the Court of Appeals reversed and remanded the case.31 Unlike in

the other cases discussed above, the court in Tri-Star held that the undefined key

phrase—“arising out of the Named Insured’s ongoing operations” addressed only

the type of activity (ongoing operations) from which the [additional insured’s]

liability must arise in order to be covered, not when the injury or damage must

occur. According to the court, this language does not state that injury must occur,

or liability must arise, during the Named Insured’s ongoing operations, but rather

requires only that the liability arise “out of” the ongoing operations, which may

require only a minimal causal connection between the liability and the “ongoing

operations.” In the court’s view, at the very least, there is an argument that the

endorsement’s undefined language is ambiguous and should be construed against

the drafter.32

In that regard, the court went on to suggest its own language for an “ongoing

operations” additional insured endorsement. According to the court, if the intent

was to end the general contractor’s coverage as an additional insured for damages

as soon as the subcontractor’s work was complete, this could have been

accomplished by including language providing coverage for property damage

“arising from and occurring during” the subcontractor’s ongoing operations. In

this court’s view, such language in the additional insured endorsement would

more clearly and distinctly communicate to the insured the nature of the limitation

of additional insured status.33

With one notable exception, while courts in the Western States have been

troubled by the absence of a definition of “ongoing operations” in the ISO forms,

most courts have followed the insurance commentators and ISO comments, and

30 426 Fed. Appx. 506 (9th Cir. 2011) (applying Arizona law). This case was not selected for

publication in the Federal Reporter and is not precedent except as provided by 9th Cir. R. 36-3.31 Id. at 508.32 Id. at 510.33 Id. at 512-513.












































have been willing to use the dictionary definition of “ongoing” to interpret the CG

2010 93 additional insured endorsement as applying only to the work of a

subcontractor in progress, and not providing additional insured status to a general

contractor for completed operations. Some courts have also looked to the

language of the operative subcontract to determine the scope of the additional

insured obligation, and to limit that obligation to liability arising out of those

specific ongoing operations of the named insured. Obviously, if and when the ISO

or individual insurers specifically define the meaning of “ongoing operations” in

their policy forms, the extent of any confusion in this regard might be reduced.

III. NEW YORK AND THE NORTHEAST: PRIORITY OF EXCESS

“ADDITIONAL INSURED” COVERAGE

A. Background

Another hot topic in the field of Additional Insured coverage is the priority and

allocation of coverage between a subcontractor’s excess policy and the primary

coverage of its Additional Insured general contractor. This issue has been

especially relevant in New York. Until recently, New York law was clear that such

an allocation was determined without regard to the indemnification agreements in

trade contracts. Instead, the courts compared the terms and intended purposes of

each policy to ascertain the priority of coverage. Such priority of coverage

determinations almost always resulted in horizontal exhaustion of the parties’

primary commercial general liability (“CGL”) policies prior to the triggering of

excess or umbrella coverage. However, with the recent decision by the First

Appellate Department in Indemnity Insurance Company of North America v. St.

Paul Mercury Insurance Company,34 upstream insurers can argue that, under

certain circumstances, courts should bypass such a priority determination and

require the vertical exhaustion of the downstream party’s primary CGL and excess

insurance prior to triggering the upstream primary CGL coverage. In view of the

substantial number of insurance-related cases in New York courts, this section of

the article discusses the current state of New York law on horizontal and vertical

exhaustion and provides insurers for owners, general contractors, and trade

subcontractors with the tools needed to understand and navigate the new legal

landscape.

B. Horizontal Exhaustion Is Generally the Law in New York

1. Disputes Arise When Limits of Subcontractor’s Primary CGL

Policy Are Insufficient to Cover the Loss

It is well settled under New York law that, when a trade subcontractor’s work

on a construction site results in injury or property damage, the trade subcontrac-

tor’s primary CGL insurer will defend and indemnify those upstream parties

added as an additional insured for liability arising out of the subcontractor’s

34 74 A.D.3d 21 (N.Y. App. Div. 2010).

§ III[A] CURRENT CRITICAL ISSUES 10







































work.35 Often, however, the limits of the subcontractor’s primary CGL policy are

insufficient to cover the loss to the injured party. It is in these instances when

disputes arise as to who pays when.

2. The Upstream Parties’ Point of View: Vertical Exhaustion

In such disputes, the owner’s and/or general contractor’s insurer generally takes

the position that, once the subcontractor’s primary policy limits have been

exhausted, it is the responsibility of the subcontractor’s excess carrier to defend

and indemnify the upstream parties despite the presence of other primary

insurance maintained by those upstream parties. This concept is known as vertical

exhaustion. There are two typical arguments made in support of vertical

exhaustion. First, upstream insurers argue that requiring the upstream primary

insurers to respond after the subcontractor’s primary insurer violates the trade

contract, which usually requires that all insurance procured on behalf of the

upstream parties respond on a primary basis. Second, upstream insurers generally

argue against “circuity of litigation.” Essentially, circuity of litigation is the

concept that it is a waste of judicial resources to require the upstream insurers to

pay for their portion of the allocated loss and then separately seek to recoup, via

subrogation, that payment from the contractor, who will then be indemnified by

their excess carrier under insured contract coverage. Vertical exhaustion short

circuits this process by having the excess insurer directly pay the loss.

C. The Subcontractor’s Point of View: Horizontal Exhaustion

Trade subcontractors’ excess carriers generally take the position that a

subcontractor’s excess coverage is not triggered until all applicable underlying

insurance (i.e., primary CGL coverage) is exhausted. This concept is known as

horizontal exhaustion. Horizontal exhaustion results when the terms of the

insurance contracts and intended purposes of the contracts, without reference to

the underlying trade contracts, are deemed to dictate how the loss will be allocated

among policies covering the same risk.

D. New York Law Generally Requires Horizontal Exhaustion

In 1985, the Court of Appeals in State Farm Fire & Casualty Company v.

LiMauro,36 made clear that insurers have the right to rely upon the terms of their

contracts with their insureds, and, as such, the terms of the insurance contracts

dictate the priority of coverage.37 Since LiMauro, a number of Appellate

Department cases have held that the priority of insurance coverage in construction

cases is determined by the terms and conditions of the applicable insurance

35 Pecker Iron Works of New York, Inc. v. Traveler’s Ins. Co., 99 N.Y.2d 391, 393-394 (N.Y.

2003) (holding that when a subcontractor agrees to provide additional insured coverage, the

subcontractor’s policy is primary coverage for that additional insured).36 65 N.Y.2d 369 (1985).37 Id. at 373.

11 ISSUES AND REGIONAL PECULIARITIES § III[D]












































policies without reference to the underlying trade contracts.38 When such

determinations have involved primary and excess insurance, the result has been

horizontal exhaustion of primary policies prior to the triggering of excess policies.

For instance, in the 2008 case of Bovis Lend Lease LMB, Inc. v. Great American

Insurance Company,39 the First Appellate Department relied on the reasoning of

LiMauro to hold that the upstream owner’s and construction manager’s primary

policies were triggered prior to the subcontractor’s umbrella policy.40 The

coverage dispute arose out of losses sustained from a wrongful death action

resulting from a construction accident. The decedent was employed by a

subcontractor on the site and it was undisputed that the subcontractor’s primary

policy provided additional insured coverage to the owner and construction

manager up to the policy’s $1 million limits. At issue in the case was the priority

of coverage upon exhaustion of the subcontractor’s primary policy. The owner and

construction manager (the Bovis Plaintiffs) argued that the priority of coverage

should be determined by the terms of the underlying trade contracts, which

required the subcontractor to obtain $5 million of additional insured coverage that

would be primary to any other insurance maintained by the owner and construc-

tion manager.

The First Appellate Department disagreed with the Bovis Plaintiffs. Relying on

LiMauro for support, the court held that “[a]n insurance policy is a contract

between the insurer and the insured. Thus, the extent of coverage (including a

given policy’s priority vis-à-vis other policies) is controlled by the relevant policy

terms, not by the terms of the underlying trade contract that required the named

insured to purchase coverage.”41 Accordingly, the court reviewed and considered

all of the relevant policies at issue to determine the priority of coverage. The court

took into consideration the purpose each policy was intended to serve as

evidenced by both its stated coverage and the premium paid for it, as well as upon

the wording of the provisions concerning excess insurance. Because the subcon-

tractor’s umbrella policy contained language making it a “true excess” policy and

also contained a reduced premium, the court held that the umbrella policy was

intended to constitute a final tier of insurance over and above the Bovis Plaintiffs’

primary policies.42

38 See, e.g., Bovis Lend Lease LMB, Inc. v. Great Am. Ins. Co., 53 A.D.3d 140 (N.Y. App. Div.

2008); Tishman Constr. Corp. v. Great Am. Ins. Co., 53 A.D.3d 416 (N.Y. App. Div. 2008);

Harleysville Ins. Co. v. Travelers Ins. Co., 38 A.D.3d 1364 (N.Y. App. Div. 2007); U.S. Fidelity &

Guaranty Co. v. CNA Ins. Cos., 208 A.D.2d 1163 (N.Y. App. Div. 1994); United States Liab. Ins.

Co. v. Mt. Valley Indem. Co., 371 F. Supp. 2d 554, 558 (S.D.N.Y. 2005); Travelers Indem. Co. v.

Am. & Foreign Ins. Co., 286 A.D.2d 626 (N.Y. App. Div. 2001).39 53 A.D.3d 140 (N.Y. App. Div. 2008).40 Id. at 155.41 Id. at 145.42 Id. at 155. Also at issue was the Bovis Plaintiffs’ primary policies vis-à-vis the downstream

general contractor’s primary policy. Based upon the language contained in the general contractor’s

§ III[D] CURRENT CRITICAL ISSUES 12












































The court was not swayed by the Bovis Plaintiffs’ argument against circuity of

litigation—that, once the underlying action concludes, the subcontractor will

likely be required to indemnify the Bovis Plaintiffs based upon the requirements

of the indemnification provision in the trade contract; and once the subcontractor

indemnifies the Bovis Plaintiffs, the subcontractor will ultimately be entitled to

indemnification for its liability on that claim under the coverage for contractual

liability afforded by the umbrella policy. While the court noted that this scenario

might eventually play out, it held that such an eventuality at this stage does not

negate the priority of coverage among the applicable policies arising from the

terms of those policies.43

Soon after Bovis, the First Appellate Department addressed almost the same

issues in Tishman Construction Corp. v. Great American Insurance Company.44

Relying on its holding in Bovis, the Tishman court held that a subcontractor’s

umbrella policy could not be invoked prior to the exhaustion of the general

contractor’s primary CGL policy.45 The Second, Third, and Fourth Appellate

departments have similarly held that a priority of insurance coverage determina-

tion must be made based upon the terms and conditions of the applicable policies

without regard to the underlying trade contracts.46

E. The St Paul Mercury Decision, An Exception to Horizontal

Exhaustion

The First Appellate Department’s 2010 decision in Indemnity Insurance

Company of North America v. St. Paul Mercury Insurance Company47 seems to

provide a significant exception to New York’s established rule of horizontal

exhaustion. In St. Paul Mercury, the coverage dispute arose out of an injury

sustained by the general contractor’s employee caused by the subcontractor’s

failure to remove a cable from the work site. The injured employee sued both the

owner and the subcontractor for his injuries. The owner tendered defense to the

general contractor’s primary insurer who accepted defense of the owner. The

general contractor’s insurer then asked the subcontractor’s primary insurer to

assume the defense of the owner pursuant to the indemnification clause in the

subcontractor’s contract with the general contractor. The subcontractor’s primary

insurer agreed to defend and indemnify the owner without reservation or

qualification. Soon thereafter, the subcontractor’s primary insurer tendered

defense of the owner to the subcontractor’s excess carrier because it looked as

policy and the Bovis plaintiffs’ policies, the general contractor’s primary policy was required to

respond prior to the Bovis plaintiffs’ primary policies. Id.

43 Id. at 154.44 53 A.D.3d 416 (N.Y. App. Div. 2008).45 Id. at 421.46 See, e.g., Harleysville Ins. Co. v. Travelers Ins. Co., 38 A.D.3d 1364 (N.Y. App. Div. 2007);

U.S. Fid. & Guar. Co. v. CNA Ins. Cos., 208 A.D.2d 1163 (N.Y. App. Div. 1994); Stout v. 1 E. 66th

St. Corp., 90 A.D.3d 898, 904-905 (N.Y. App. Div. 2011).47 74 A.D.3d 21 (N.Y. App. Div. 2010).

13 ISSUES AND REGIONAL PECULIARITIES § III[E]















































though the claim would exceed the primary insurer’s policy limits. The excess

carrier accepted tender without reservation or qualification. A directed verdict was

thereafter entered against the owner as to liability on the “scaffold law” claim,

finding the owner vicariously liable as the owner of the construction site. The

subcontractor’s excess insurer then settled the remaining claims within policy

limits. The general release stated that the settlement was made with respect to the

claims against the owner and subcontractor. The general contractor’s insurer did

not participate in either the defense or settlement of the action, having determined

that the subcontractor was ultimately liable as a result of its agreement to

indemnify the owner, a position that the subcontractor had agreed with.

The subcontractor’s excess carrier subsequently commenced a coverage action

against the general contractor’s primary insurer seeking to recoup the amounts it

paid to settle the underlying action. In its first cause of action, the excess carrier

maintained that the general contractor’s primary policy was the primary insurance

covering the loss and sought a declaration that its policy was excess to the general

contractor’s primary policy. In its second cause of action sounding in subrogation,

the excess carrier argued that it was entitled to reimbursement from the general

contractor. The Supreme Court granted summary judgment to the general

contractor and its primary insurer. An appeal followed.

With regard to the excess carrier’s first claim concerning the priority of

coverage, the First Appellate Department held the priority of coverage to be

irrelevant under the circumstances.48 The court’s determination relied upon the

fact that the court in the underlying action had determined that the owner’s

liability was strictly vicarious of the subcontractor’s liability. Thus, the subcon-

tractor was required to indemnify the owner under the trade contract.49 In

addition, the court stated, the fact that the subcontractor’s insurers, including the

excess insurer, agreed to defend and indemnify the owner without any qualifica-

tions or reservations further supported its decision.50 Moreover, the court pointed

out, the excess insurer settled the action without the general contractor’s

participation or consent. According to the court, where an insurer rightfully does

not take part in settlement negotiations or agree to the settlement of an underlying

personal injury action, it is not required to contribute to that settlement.51

On the excess insurer’s second claim sounding in subrogation, the court held,

the excess carrier could not seek reimbursement from the general contractor due

to the principles of antisubrogation. Because the general contractor was an

additional insured under the excess policy, the court stated, antisubrogation

prohibits the excess carrier from seeking subrogation from the general contrac-

48 Id. at 26.49 Id. at 25–26.50 Id. at 26.51 Id. at 25.

§ III[E] CURRENT CRITICAL ISSUES 14



































tor.52

F. St. Paul Mercury’s Ramifications: Tools for the Insurance Industry

1. Strict Vicarious Liability Can Alter the Results

The decision in St. Paul Mercury has important ramifications for insurers

insuring owners, general contractors, and subcontractors in New York because it

seems to provide an exception in certain limited circumstances to the general rule

of horizontal exhaustion. According to St. Paul Mercury, a priority determination

in a construction case will be irrelevant if (1) a court has found that the upstream

additional insured’s, i.e, the owner’s or general contractor’s, liability is strictly

vicarious to that of the named insured subcontractor and (2) the subcontractor’s

insurers agreed to defend and indemnify the upstream party without reservation or

qualification. In light of this decision, insurers when faced with a construction

case where the liability may exceed the primary policy’s limits should consider

taking the measures discussed in this section.

2. Insurers for Subcontractors

In cases where the priority of coverage is determined prior to any liability

determination in the underlying case, St. Paul Mercury should not apply because

the additional insured’s right to indemnification from the named insured has not

been established. Insurers should rely on LiMauro and its progeny, including

Bovis and Tishman, to argue that the policy terms control coverage priority and

that those terms establish horizontal exhaustion. Insurers for subcontractors

should file a declaratory action promptly upon the filing of the underlying action

in order to increase the chances of obtaining a decision on the priority of coverage

prior to a finding of liability in the underlying action.

But, because a priority of coverage determination may not always be possible

prior to a liability determination, it is also important for insurers to reserve their

rights to a priority of coverage determination when agreeing to defend and

indemnify upstream insureds. As the court noted in St. Paul Mercury, an

important factor in determining that a priority of coverage determination was

irrelevant was the fact that that subcontractor’s insurers had “accepted tender of

the [owner’s] defense and unconditionally and without reservation agreed to

defend and indemnify the [owner].”53 Moreover, if the upstream insurers are

aware, via a reservation of rights, that they may be called upon to contribute to

payment of the loss, such insurers should participate in any settlement negotia-

tions, negating another basis for the decision to apply vertical exhaustion in St.

Paul Mercury.54

3. General Contractors and Owners and Their Insurers

In light of St. Paul Mercury, general contractors and owners with contractual

52 Id. at 26-27.53 Id. at 26.54 Id.

15 ISSUES AND REGIONAL PECULIARITIES § III[F][3]
















































indemnity rights against the trade subcontractors will want to establish as quickly

as possible their right to contractual indemnity from a trade subcontractor in the

event of injuries or property damage from an accident. This may be accomplished

via a third party claim in the underlying action. The feasibility of establishing the

right to indemnity will depend, however, on the claims in the underlying action.

If the owner’s and/or general contractor’s liability is premised solely on the strict

liability afforded by New York’s “scaffold laws,” establishing the right to

contractual indemnity by summary judgment will be easier than if the injured

party also alleges active negligence against these parties. If a right to contractual

indemnity is established prior to a determination regarding the priority of

coverage, the upstream insurers should argue that, pursuant to St Paul Mercury,

the upstream parties’ liability passes to the subcontractors and its insurer, and thus

the priority of coverage is irrelevant. Whether a New York court will extend the

St Paul Mercury reasoning beyond the specific circumstances in that case,

however, is yet untested.

Upstream insurers should also be aware that St Paul Mercury is only binding

precedent in the First Appellate Department in New York. It may be more difficult

to make a vertical exhaustion argument in the other three New York appellate

departments, which have consistently applied horizontal exhaustion. Moreover,

even in cases in the First Appellate Department, Bovis is still good law, which

counsels that the courts may be unwilling to extend St. Paul Mercury beyond its

specific circumstances.

G. Conclusion

Although horizontal exhaustion remains generally the law in New York, the

First Appellate Department’s recent decision in St. Paul Mercury shows that

insurance coverage law is ever changing and provides insurers with the ammu-

nition to argue for greater use of vertical exhaustion in certain circumstances.

IV. FLORIDA AND THE SOUTHEAST: INCONSISTENT

JURISDICTIONAL RULINGS ON “ADDITIONAL INSURED”

COVERAGE

A. The Florida-Georgia “Border War”

A review of recent rulings on Additional Insured coverage by the courts in

Florida and Georgia shows that the two states conflict more often than their annual

football matchup in Jacksonville. On at least three issues, Georgia courts have

found coverage where Florida courts have not. Although the facts of each case (in

particular, the policy language at issue) may explain part of the divergence, a

degree of disparity is clear regardless of the circumstances. The conflict is most

notable because Florida law usually (at least, until recently) has provided broader

coverage than its northern neighbor.55 Recent decisions on critical issues of

55 Three prominent examples are:

(1) the notice condition (compare Travelers Indem. Co. of Conn. v. Douglasville Dev., LLC, No.

§ III[G] CURRENT CRITICAL ISSUES 16

































Additional Insured coverage are discussed below.

B. Certificates of Insurance

Several recent decisions have rejected the use of a Certificate of Insurance

(“COI”) to establish coverage for a non-party to the contract on an Additional

Insured basis. For example, an opinion written by Florida’s First District Court of

Appeals is indicative of Florida law, in Interstate Fire & Casualty Co. v.

Abernathy.56 A girl was injured at a “Jelly Fish Festival” while using an

“inflatable bungee run.” The festival was held at the Choctaw Touchdown Club

(the “Club”) and equipment was supplied by Emerald Coast Entertainment, LLC

(“Emerald”). Emerald had a liability policy with an Additional Insured endorse-

ment entitled “ADDITIONAL INSURED-OWNERS, LESSEES, OR

CONTRACTORS-SCHEDULED PERSON OR ORGANIZATION” accompa-

nied by a schedule that named only “AS REQUIRED BY WRITTEN CON-

TRACT.” However, Emerald had no written contract with the club.

Two days after the incident, a representative of the Club contacted the owner of

Emerald to request a certificate of insurance (“COI”) backdated to the date of the

accident. Emerald’s owner requested the same from its broker, which provided a

COI two days later. The COI included a standard language “CONFERS NO

RIGHTS UPON THE CERTIFICATE HOLDER” but also stated that the Club “is

named as additional insured” for “operations at Jelly Fish Festival on 4/13/07 to

4/14/07.” The insurer denied coverage for the Club, which then entered into a

Coblentz agreement with the plaintiff (consenting to a judgment and assigning

rights under the policy).

Surprisingly (but not unusually for Florida) the trial court denied the insurer’s

motion for summary judgment and granted the plaintiff’s motion for summary

judgment, enforcing the Coblentz agreement against the insurer. The Court of

Appeals reversed, applying the plain language of the COI stating that it confers no

rights upon the certificate holder: “it could not then have conferred new coverage

on the Club.”57 The remainder of the decision consisted of a discussion and

adoption of the “known loss” doctrine. While the case was correctly decided, it

CIVA 1:07-CV-0410JOF, 2008 U.S. Dist. LEXIS 71956 (N.D. Ga. Sept. 19, 2008) (notice not

required for insurer to raise notice condition to defeat coverage) with Bankers Ins. Co. v. Macias,

475 So. 2d 1216 (Fla. 1985) (insurer must show prejudice to raise notice condition));

(2) coverage for construction defects (compare Custom Planning & Dev., Inc. v. Am. Nat’l Fire

Ins. Co., 270 Ga. App. 8, 10, 606 S.E.2d 39 (2004) (faulty workmanship not an “occurrence”) with

United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) (faulty workmanship was

an occurrence)); and

(3) whether standard CGL policies are ambiguous as to the number of “occurrences” involved

when multiple claimants are injured (compare State Auto Prop. & Cas. Co. v. Matty, 286 Ga. 611,

690 S.E.2d 614 (2010) (policy not ambiguous); with Koikos v. Travelers Ins. Co., 849 So. 2d 263

(Fla. 2003) (policy was ambiguous, compelling a ruling against insurer)).56 No. 1D11-1905, 2012 Fla. App. LEXIS 8278 (Fla. 1st Dist. Ct. App. May 24, 2012).57 Id. at 13.

17 ISSUES AND REGIONAL PECULIARITIES § IV[B]















































stands as a warning with regard to how trial courts can grant coverage (even

retroactive coverage) based solely on a COI.

Another recent decision, Centimark Corporation v. Gonzales,58 shows that the

same Court of Appeals considered the ability of a COI to extend Additional

Insured coverage. In Centimark, a subcontractor to a roofing company had the

roofing company added as an Additional Insured to its workers compensation

policy; in addition to the standard language, the COI stated it applied “only to

those employees leased, not to subcontractors.” Afterward, an employee of the

subcontractor was injured on the construction site, and made a claim against the

roofing company. Remarkably, the claimant argued (and the court considered)

coverage under a theory of promissory estoppel. Specifically, the court noted that

a “promise which should reasonably be expected to induce action” could be cited

establish coverage—even by third parties to the contract.59 The Court of Appeals

ultimately rejected the promissory estoppel argument, citing the plain language of

the COI.60

Georgia courts, however, have rendered different results. For example, in

Sumitomo Marine & Fire Ins. Co. of America v. Southern Guar. Ins. Co. of

Georgia,61 a developer’s insurer sought a declaration that a general contractor’s

insurers had a duty to indemnify and defend the developer in an underlying

lawsuit. The latter insurers argued that the developer was not an “additional

insured” under their policies because the agent who issued a COI naming it such

was an “independent agent” representing policyholders rather than the insurers.

However, the District Court disagreed and found coverage, ruling that under

Georgia law, the agent had actual authority to issue the COI to the contractor’s

existing insurance policies. This is because the agent’s agreements with the

contractor’s insurers were drafted and signed by those insurers, and allowed the

agent to bind coverage, countersign contracts on behalf of insurers, sign and issue

certificates of insurance, collect premiums, and change existing policies. Critical

to the court’s ruling (and perhaps explaining the distinction from Florida law) was

the court’s finding that “Georgia law also recognizes the concept of dual agency,

whereby an agent can act on behalf of both the insured and the insurer.”62

Another recent trend has been the use of a COI to change the choice-of-law

analysis applicable to a liability policy. Florida and Georgia are both lex loci

contractus states, which interpret contracts according to the law of the state in

which a contract was finalized. Insureds have cited the location to which their COI

was delivered as the determining factor under this analysis, but so far no published

decision in either state has adopted it.

58 10 So. 3d 644 (Fla. 1st Dist. Ct. App. 2009).59 Id. at 645.60 Id.61 337 F. Supp. 2d 1339 (N.D. Ga. 2004).62 Id. at 1352. See also Grange Mut. Cas. Co. v. Snipes, 298 Ga. App. 405, 680 S.E.2d 438

(2009) (citing ambiguity in COI to find Additional Insured coverage for third party).

§ IV[B] CURRENT CRITICAL ISSUES 18













































One example is Bailey v. Netherlands Ins. Co.63 The named insured was a gold

cart lessor whose liability policy named as Additional Insured any person driving

a covered auto leased by the insured. During an event at the Daytona International

Speedway, the driver of a golf cart leased by the insured injured another person

while performing tasks in the infield of the track. The policy had been delivered

to the insured in North Carolina, but a subsequent COI had been delivered in

Florida. Cleverly, the insured filed in Florida, and cited its lex loci contractus rule

to argue that Florida law should apply to coverage issues affecting it as the

Additional Insured. The court disagreed, ruling that the sole inquiry should be

where the contract between the insurer and the Named Insured was finalized.

Georgia courts appear to agree on this point.64

C. Pleading Additional Insured Status and the Duty to Defend

A second issue of Additional Insured coverage, in which Florida law differs

from its northern neighbor, is whether a putative insured can cite allegations in a

complaint in order to trigger its status as an insured. Generally, courts of all

jurisdictions rule that the duty to defend is “broad.” The basis for this is the broad

language of the defense obligation in standard liability policies. But, if a party

cannot establish that it is a party (or third-party beneficiary) to the contract

containing that broad language, then it is not always given the same deference.

In Florida, “the duty to indemnify is determined by the underlying facts of the

case, whereas the duty to defend is controlled by the allegations in the complaint

against the insured.”65 This is sometimes called the “eight corners” rule because

coverage is determined by comparing the four corners of the insurance policy with

the four corners of the complaint against the insured. The same is true in

Georgia.66

However, both states have exceptions to the “eight corners” rule with regard to

“true facts” not plead in the complaint, with divergent implications. Georgia law

provides an exception benefiting the insured: even if the pleadings do not trigger

coverage, if the insured notifies the insurer of “true facts” indicating coverage, the

insurer is bound to investigate those facts before it can safely deny coverage.67

However, Florida law provides an exception benefiting the insurer: if its

investigation uncovers “true facts” disproving coverage, then it can safely deny

63 615 F. Supp. 2d 1332 (M.D. Fla. 2009).64 See Ryder Truck Rental, Inc. v. St. Paul Fire & Marine Ins. Co., 540 F. Supp. 66 (N.D. Ga.

1982) (applying Georgia law to policy delivered to named insured in Georgia, where COI granting

“additional insured” status was delivered in Tennessee).65 State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1077 n.3 (Fla. 1988).66 Fireman’s Fund Ins. Co. v. University of Georgia Athletic Ass’n, Inc., 288 Ga. App. 355, 654

S.E.2d 207 (2007).67 Anderson v. S. Guar. Ins. Co. of Ga., 235 Ga. App. 306, 508 S.E.2d 726 (1998) (where insured

was convicted of aggravated battery but reported to the insurer that the resulting injuries were

unexpected, insurer breached duty to defend by not investigating insured’s report).

19 ISSUES AND REGIONAL PECULIARITIES § IV[C]














































despite allegations indicating (if true) the existence of coverage.68

As a result, Florida courts have ruled differently than Georgia courts in the

scenario where a complaint filed against a purported Additional Insured attempts

to invoke the Additional Insured coverage through allegations that are not in fact

true.

The seminal case in Florida is Nateman v. Hartford Cas. Ins. Co.69 In Nateman,

one doctor (Valdez) sued another doctor (Nateman) for defamation. Nateman

sought coverage as an Additional Insured from his hospital’s liability insurer

(Hartford). Hartford denied coverage. Nateman contended there was arguable

coverage, triggering a duty to defend, because “Valdez’s complaint alleged that

Nateman as Director of Emergency Services at Baptist Hospital was acting in his

capacity as a representative, agent or employee of the hospital.”70 The court found

no coverage, pointing to Nateman’s contract with the hospital: “Under their

contractual arrangement, Nateman, on behalf of his professional association, had

disclaimed that he or any of his associate physicians or employees would be

considered agents or employees of Baptist Hospital. That contract in plain and

unambiguous terminology established Nateman’s association as an independent

contractor for the rendition of medical services at the hospital.”71

The following is a helpful discussion from Nateman:

While, as a general rule, the obligation to defend an insured against an action,

whether groundless or not, must be measured and determined by the allegations

of the petition rather than the outcome of the litigation, an obvious exception

must be made in those instances where, notwithstanding allegations in the

petition to the contrary, the insurer successfully urges the alleged insured is not

in fact an insured under the policy. . . .

The insurer is not obligated to provide a defense for a stranger merely because

the plaintiff alleges that the defendant is an insured or alleges facts which, if true,

would make the defendant an insured. The mere allegations of the plaintiff’s

petition may not create an obligation on the part of the insurer to defend where

no such obligation previously existed. Michaels v. U.S. Fid. & Guar. Co., 129 So.

2d 427 (Fla. 2d DCA 1961) (where contractor’s policy afforded no coverage to

crane operator, contractor’s insurer was under no duty to defend).

At the outset, we observe that in cases where one is alleged to be an additional

insured, it is much more feasible to ascertain initially the question of who is

covered as opposed to the issue of what the coverage is. While we acknowledge

the viability of the general rule that the allegations of the complaint determine an

insurer’s duty to defend, it would be imprudent and illogical to confer such a duty

68 Nationwide Mut. Fire Ins. Co. v. Keen, 658 So. 2d 1101 (Fla. 4th Dist. Ct. App. 1995)

(plaintiff’s statement that he was operating a boat with a 40-horsepower engine relieved the insurer

of the duty to defend because the boat was more powerful than coverage allowed).69 544 So. 2d 1026 (Fla. 3d Dist. Ct. App. 1989).70 Id. at 1027.71 Id.

§ IV[C] CURRENT CRITICAL ISSUES 20






















xpath-> core:blockquote-para, Default, blockquote, style_03
























upon an insurer as to a party who is not an insured. We agree with the courts cited

above that the creation of the basic insurer-insured relationship and the ensuing

duty to defend cannot be left to the imagination of the drafter of a complaint

. . . .72

The Northern District of Florida relied on Nateman in Scottsdale Ins. Co. v. Big

Bend Timber Services, Inc.,73 where a realtor sought coverage as an Additional

Insured under a timber dealer’s policy. The court began by recognizing that

“Florida courts sometimes have described the eight corners rule in terms

suggesting it is universal and inflexible.”74 However, the court continued:

Nonetheless, there are and most assuredly should be exceptions to the eight

corners rule. . . . Courts in various jurisdictions have articulated the exceptions

in different ways. Thus, for example, it has been said that facts alleged in an

underlying complaint that are not material to the claim need not be taken as true

for purposes of determining the insurer’s duty to defend. Or it has been said (as

in Nateman) that the true facts may be considered in determining who is an

insured.75

The Big Bend court distinguished Nateman, finding that its exception to the

“eight corners rule” did not apply to incorrect allegations as to the insured’s

liability to a claimant:

In this respect, the case at bar is different from Nateman. There the plaintiff

alleged that the defendant physician was an employee of the named insured

hospital. In fact, the physician was an independent contractor. Hospital employ-

ees were insureds under the hospital’s liability policy; independent contractors

were not. . . . The same is not true, however, in the case at bar. To the contrary,

the Realtor had a duty to its client, the Seller, but was alleged to have acted in

violation of that duty and in league with the Timber Dealer. The Realtor was

alleged to have violated its duty to the Seller by failing to disclose to the Seller

the true nature of its relationship with the Timber Dealer. The Realtor’s

relationship with the Timber Dealer thus was important to the Seller’s claim on

the merits. This is the kind of allegation that must be taken as true for purposes

of determining the Insurer’s duty to defend; that the allegation is unfounded does

not matter.76

The court ultimate found no Additional Insured coverage for the realtor under the

eight corners rule itself, rather than any exception.

More recently, courts have followed Nateman in HC Waterford Properties, LLC

72 Id.73 No. 4:02cv279, 2004 U.S. Dist. LEXIS 29149 (N.D. Fla. Jan. 5, 2004).74 Citing Reliance Ins. Co. v. Royal Motorcar, 534 So. 2d 922, 923 (Fla. 4th Dist. Ct. App. 1988)

(“The duty of an insurer to defend is determined solely by the allegations of the complaint against

the insured, not by the actual facts, nor the insured’s version of the facts or the insured’s defenses.”).75 Id. at *27.76 Id. at *30-31.

21 ISSUES AND REGIONAL PECULIARITIES § IV[C]










































v. Mt. Hawley Ins. Co.,77 and Wilson ex rel. Estate of Wilson v. General Tavern

Corp.78 In Wilson, a claimant attempting to “plead into coverage” filed a

complaint against the insured that was silent as to whether the insured was acting

in the course and scope of employment at the time of an automobile accident

(because being in the “course and scope” would have triggered the Additional

Insured coverage). The insured claimed to be acting in the “course and scope” in

order to trigger coverage, but the court disagreed, stating: “the insurer is not

obligated to provide a defense for a stranger merely because the plaintiff alleges

that the defendant is an insured or alleges facts which, if true, would make the

defendant an insured. The mere allegations of the plaintiff’s petition may not

create an obligation on the part of the insurer to defend where no such obligation

previously existed.”79

Georgia courts have held otherwise, allowing much more leeway with regard to

the ability of a third party’s complaint to determine Additional Insured coverage.

For example, in Atlanta Postal Credit Union v. International Indem. Co.,80 a

credit union argued that it was an insured under the relevant policy; the court

noted that “in order for the Credit Union to establish that it too was entitled to a

defense by International Indemnity, the Credit Union must show, as required by

the policy, that it was ‘liable for the conduct’ of National Vehicle.” The court

found coverage because “plaintiffs alleged in their complaint that the Credit

Union is liable for the acts of the other defendants ‘under the Doctrine of

Respondeat Superior.’ ”81 That court relied on the decision in Aetna Cas., etc., Co.

v. Empire Fire, etc., Co.82 In Aetna, a lumber company was sued because of the

negligence of a trucker carrying its lumber. The court found the lumber company

was an “insured” under the trucker’s policy because the policy defined “insured”

as “anyone liable for the conduct of an insured” and the underlying complaint

alleged the lumber company was liable for the trucker’s conduct. A similar ruling

was issued in BBL-McCarthy, LLC v. Baldwin Paving Co.,83 where BBL was a

general contractor and selected Baldwin as its subcontractor to perform road work

requiring Baldwin to name BBL an “additional insured.” When both parties were

sued for negligent construction, Baldwin’s insurer defended Baldwin but not

77 No. 08-22158-CIV-MORENO/TORRES, 2009 U.S. Dist. LEXIS 81355 (S.D. Fla. Aug. 21,

2009) (“creation of the basic insurer-insured relationship and the ensuing duty to defend cannot be

left to the imagination of the drafter of a complaint”).78 469 F. Supp. 2d 1214 (S.D. Fla. 2006).79 Id. at 1221. But see Continental Cas. Co. v. Charleston, 704 So. 2d 137 (Fla. 1st Dist. Ct. App.

1997) (finding a duty to defend where the complaint against the putative Additional Insured alleged

both that the putative Additional Insured was the passively negligent party, and that there was a high

degree of control of the putative Additional Insured by the Named Insured which was the actively

negligent party).80 228 Ga. App. 887, 494 S.E.2d 348 (Ga. Ct. App. 1997).81 Id. at 350.82 212 Ga. App. 642, 442 S.E.2d 778 (1994).83 285 Ga. App. 494, 646 S.E.2d 682 (2007).

§ IV[C] CURRENT CRITICAL ISSUES 22




































BBL. The insurer argued that BBL did not qualify under the Additional Insured

provision (essentially similar to that in the Zurich policies) because the plaintiff’s

claims were attributable to BBL rather than Baldwin. The Georgia Court of

Appeals disagreed because the additional insured provision applied if the liability

“arose out of” “your work” and that phrase should be broadly applied. Each of

these cases are similar to the fact pattern in Charleston because, in each (1) it was

uncontested that the named insured agreed to provide Additional Insured coverage

for the putative insured; and (2) it was alleged that the putative insured was liable

for the obvious insured’s conduct.

Indeed, this divergence in these and other states’ positions was noted in Allan

D. Windt, 1 Insurance Claims and Disputes 5th:

Several courts, therefore, have held that the insurer is not obligated to provide a

defense for a stranger merely because the plaintiff alleges facts that, if true,

would make the stranger an additional insured as defined in the policy. They

have, instead, allowed the insurer to avoid providing a defense if extrinsic

evidence demonstrates that the plaintiff’s allegations are untrue, and that the

defendant is not an insured.84

D. Coverage for the Additional Insured’s Sole Negligence

A third frequently litigated issue of Additional Insured coverage involves

attempts made by general contractors to seek coverage under their subcontractors’

policies for claims resulting from the general contractors’ sole negligence. As

explained in the introduction above, this was an issue that the ISO attempted to

address through modified language over the years; however courts have not

always followed ISO’s intentions.

One recent decision that does enforce the ISO expectations is United Rentals,

Inc. v. Mid-Continent Cas. Co.85 In United Rentals, the court ruled that an

employer’s policies did not afford Additional Insured coverage to the lessor of a

scissors lift for claims arising from an employee’s fatal accident. Specifically, the

federal court ruled that under the plain language of the ISO 2010 10 93 form,

coverage was extended by an “insured contract” or written agreement only for

vicarious liability on behalf of the employer, while the claims at issue were

premised solely on the lessor’s own acts or omissions. Critical to the court’s ruling

was the fact that Florida law holds a contractual clause void to the extent it

required the employer to indemnify the lessor for its own acts, with no monetary

limitation on the extent of indemnification, and thus, there was no legally valid

insured contract or written agreement pursuant to which the lessor could be

considered an additional insured. As the court wrote:

[T]he Estate’s State Court Complaint alleges claims against United Rentals

premised solely on theories of strict liability and negligence arising from United

84 Allan D. Windt, 1 Insurance Claims and Disputes 5th § 4.5, citing Nateman and courts of eight

other states for the proposition that Florida’s rule is the nationwide majority rule.85 No. 11–61586–CIV, 2012 U.S. Dist. LEXIS 25065 (S.D. Fla. Feb. 16, 2012).

23 ISSUES AND REGIONAL PECULIARITIES § IV[D]






































Rentals’s own acts or omissions. . . . Therefore, because the indemnification

clause of the Rental Agreement is void as to United Rentals’s own “acts,

omissions, or defaults” per Florida Statute section 725.06(1), there is no legally

valid insured contract or written agreement pursuant to which United Rentals can

be considered an additional insured under either of the insurance policies with

respect to the Estate’s claims. Additionally, given that the indemnification clause

of the Rental Agreement is void as to United Rentals’s own acts or omissions, it

necessarily follows that United Rentals is also not an Additional Insured under

clause “e” of the Excess Policy because it is not an insured under the Primary

Policy as to its own acts or omissions.86

The United Rentals case follows the Florida Supreme Court’s decision in

Garcia v. Federal Ins. Co.87 In Garcia, the claimant (Garcia) worked as a

caregiver for the named insured, and sought coverage as an additional insured

under her homeowner’s insurance policy.88 While using the named insured’s

vehicle as part of her caregiver duties, Garcia was involved in an accident and

seriously injured a pedestrian. The victim sued the insured and Garcia, alleging

that each was independently negligent. The relevant homeowners policy extended

coverage to “any other person or organization with respect to liability because of

acts or omissions of you or a family member. . ..” Garcia alleged that she met the

definition of insured because she qualified as “any other person or organization

with respect to liability because of acts or omissions” of the named insured.

Federal denied coverage and argued that the clause only covered individuals who

become vicariously liable for the acts or omissions of the named insured. Federal

argued that because the victim had sued Garcia for her own negligent acts, she did

not qualify as an additional insured.

Noting that the particular language at issue had not been interpreted by any

Florida court, the Supreme Court of Florida cited Container Corp. of America v.

Maryland Cas. Co.89 holding that an endorsement naming the owner as Additional

Insured “only with respect to operations by or on behalf of the Named Insured”

did not limit coverage to vicarious liability. In Container Corp., the court held that

coverage would not be limited to a claim of vicarious liability unless so specified.

With respect to the language at issue in Garcia, the court noted that two phrases

were particularly relevant: “with respect to” and “because of.” The court

determined that, based on dictionary definitions, the phrase “with respect to”

meant “concerning” and the phrase “because of” meant “by reason of.” When

considered in that context, the court held that an additional insured is only entitled

to coverage “concerning” liability that is “caused by” or occurs “by reason of”

86 Id. at *19.87 969 So. 2d 288 (Fla. 2007).88 Although Garcia involved a homeowners policy, the court cited cases involving Additional

Insured endorsements in CGL policies. Further, the Southern District of Florida relied on Garcia in

analyzing Additional Insured coverage under a CGL policy. See Monticello Ins. Co. v. City of Miami

Beach, No. 06-20459-CIV-GOLD, 2009 U.S. Dist. LEXIS 19181 (S.D. Fla. Mar. 11, 2009).89 707 So. 2d 733 (Fla. 1998).

§ IV[D] CURRENT CRITICAL ISSUES 24






































acts or omissions of the named insured. Thus, the court held that a clause covering

“any other person with respect to liability because of acts or omissions” of the

named insured covers only vicarious liability for the negligence of the named

insured. The court reasoned that the policy language was clear and unambiguous

in its intent to limit coverage to the vicarious liability of the named insured.

A federal court applied the rationale of Garcia to an Additional Insured

endorsement in a CGL policy in Monticello Ins. Co. v. City of Miami Beach.90 In

Monticello, the City of Miami Beach sought coverage as an additional insured

under an insurance policy issued to Hurricane Beach Rentals, a beach conces-

sionaire, for two drownings that occurred in the Atlantic Ocean. The policy issued

to Hurricane Beach Rentals contained an additional insured endorsement which

stated that the City of Miami Beach was an insured “but only with respect to

liability arising out of the operations performed for [the City of Miami Beach] by

or on behalf of [Hurricane Beach Rentals]”. The court noted in its findings of fact

that the policy issued did not contain specific language stating that coverage for

the city was limited to its vicarious liability for the negligence of Hurricane Beach

Rentals or that there was no coverage for the city’s own negligence. Notably, the

court held that while the term “arising out of” was not ambiguous, there was still

a question regarding whether the remaining language in the additional insured

endorsement is ambiguous to the extent it is unclear whether the endorsement

covers the additional insured for its own negligence or only for the vicarious

liability for the negligence of the named insured. Relying on the Florida Supreme

Court decisions in the Container Corp. and Garcia, the court held that the policy

endorsement at issue in the Monticello case was ambiguous as to the scope of

coverage. Specifically, the court noted that under one interpretation, the endorse-

ment could be viewed to limit coverage to circumstances in which the named

insured’s negligent acts or operations directly caused the plaintiff’s injury, that is,

circumstances in which the additional insured is held vicariously liable for the

named insured’s negligence. But, under another interpretation, the endorsement

could likewise be read to cover the additional insured’s direct negligence, as long

as the plaintiff’s injury has some connection to the operations that the named

insured performed for the additional insured.

In a recent decision contrary to the Florida decisions mentioned above,

Georgia’s Court of Appeals found coverage for a general contractor named as an

additional insured under its subcontractor’s liability policy in JNJ Foundation

Specialists, Inc. v. D.R. Horton.91 The subcontractor’s policy provided that one

added to the named insured’s policy as an Additional Insured is an insured “only

with respect to liability for [injury] caused, in whole or part, by [the subcontrac-

tor’s] acts or omissions.”92 After a traffic accident on the construction property,

the general contractor was sued in part for “failing to properly train and supervise

90 No. 06-20459-CIV-GOLD, 2009 U.S. Dist. LEXIS 19181 (S.D. Fla. Mar. 11, 2009).91 311 Ga. App. 269, 717 S.E.2d 219 (2011).92 Id. at 276.

25 ISSUES AND REGIONAL PECULIARITIES § IV[D]










































John Doe” [an unknown and unnamed defendant].93 Based on this record, the

Court of Appeals upheld a trial court’s ruling that the general contractor was

entitled to Additional Insured coverage.

It is noteworthy that the JNJ Foundation Specialists decision does not stand

alone in Georgia Jurisprudence. In Service Merchandise Co. v. Hunter Fan Co.,94

the Georgia Court of Appeals addressed the issue of the enforceability of an

additional insured clause. Service Merchandise had entered into agreements with

Hunter Fan Company for the purchase of air purifiers. The contract obligated

Hunter Fan Company to indemnify Service Merchandise for lawsuits and

liabilities arising out of death or injury allegedly caused by a defective Hunter Fan

Company product. The contract also required Hunter Fan Company to obtain

liability insurance with Service Merchandise listed as an additional insured on the

policy. A customer filed a wrongful death suit against Service Merchandise

alleging that Service Merchandise failed to provide necessary information during

a recall of a defective Hunter Fan Company fan product. Service Merchandise

sought indemnity from Hunter Fan Company. The Georgia Court of Appeals

found that the indemnity provision was inapplicable because it failed to expressly,

plainly, clearly and unequivocally state that the Hunter Fan Company agreed to

indemnify Service Merchandise for Service Merchandise’s own negligence. The

Court of Appeals further found that the insurance clause did not independently

require Hunter Fan Company to defend and indemnify Service Merchandise as a

matter of law for the customer’s claims. The court concluded that nothing in the

contract obligated Hunter to insure against Service Merchandise’s negligence.

The court explained:

The requirement that Hunter name SM as an additional insured did not create an

independent basis that would require Hunter to defend and indemnify SM for

SM’s own negligence or gross negligence. To find otherwise would effectively

negate the public policy that one cannot be indemnified for one’s own negligence

unless the contracting parties expressly and explicitly agree to such indemnifi-

cation in writing.95

Likewise, in Ryder Integrated Logistics, Inc. v. BellSouth Telecommunications,

Inc.,96 the Georgia Court of Appeals interpreted the phrase “only with respect to

liability arising out of your operations” in an AI endorsement. The court

concluded this language does not limit AI coverage to the additional insured’s

vicarious liability for the named insured’s negligence. The court gave the phrase

“arising out of your operations” a “transactional” definition: “we construe the

phrase ‘arising out of your operations’ to mean arising out of ‘a business

93 Id.94 274 Ga. App. 290, 617 S.E.2d 235 (2005).95 617 S.E.2d at 241.96 277 Ga. App. 679, 627 S.E.2d 358 (2006), rev’d on other grounds, 281 Ga. 736, 642 S.E.2d

695 (2007).

§ IV[D] CURRENT CRITICAL ISSUES 26











































transaction’ or work performed by” the named insured.97 The court rejected the

carrier’s argument that “operations” referred to the negligence that was the cause

of the underlying plaintiff’s injury. The Court of Appeals went on to hold the

named insured liable for breach of contract for failing to procure insurance, a

holding later reversed by the Supreme Court, as it operated as an indemnification

agreement for the indemnitee’s own negligence.

Further, in BBL-McCarthy, LLC v. Baldwin Paving Co.,98 a general contractor

and its liability insurer brought an action against subcontractors and their liability

insurers to recover for breach of duties to defend and indemnify the general

contractor in underlying tort suits. The subcontractor was hired to construct a

deceleration lane going into an office complex. An accident occurred in the

deceleration lane whereby several motorists were killed, and their estates sued the

general contractor. The general contractor tendered the defense of the suit to the

subcontractor’s carrier as an additional insured under the policy, but the tender

was denied. In holding that the general contractor was an AI under the

subcontractor’s policy, the Georgia Court of Appeals held that the “arising out of”

language in an AI endorsement means “[a]lmost any causal connection or

relationship. . .” and grants coverage “without regard to whether the injury was

attributable to the named insured or the additional insured.”

V. CONCLUSION

Clearly, both litigants and courts continue to disagree over numerous issues of

Additional Insured coverage. This requires agents, attorneys, and adjusters who

make coverage determinations to always monitor both the specific form involved

and all possible jurisdictional law that might apply.

97 277 Ga. App. at 684, 627 S.E.2d at 363.98 285 Ga. App. 494, 646 S.E.2d 682 (2007).

27 ISSUES AND REGIONAL PECULIARITIES § V



























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Construction Defect Claims: Horizontal vs. Vertical of ...media.straffordpub.com/products/construction... · 9/24/2013 · endorsements in subcontractor’s excess policies, vis-à-vis