There has been an increasingly popular insurance coverage debate—particularly in construction circles— over the extent of coverage afforded under an additional insured endorsement.  At issue is whether coverage for an additional insured is limited to its vicarious liability for the named insured's negligence or broader and extending to the additional insured for its own negligence—sole or otherwise.  The issue has produced a slew of reported decisions from courts around the country.  And like most coverage issues that have been the subject of extensive litigation, the results depend upon the facts, policy language and area code of the courthouse.

Not long ago, Insurance Services Office, Inc. announced that it had injected a shot of Botox into its additional insured endorsements in an effort to eliminate the lines that have been drawn over this issue.  Stating that it has seen enough of what it views as courts interpreting additional insured endorsements more broadly than their original intent, ISO introduced revisions to a number of its endorsements in this area.  Then, even more recently, ISO apparently concluded that an additional nip and tuck was necessary and withdrew its first set of additional insured endorsements and filed a new set.  ISO's effort at attempting to solve such a well-documented problem is a testament to the complexity of the issue.  In both filings, the revisions are intended to limit coverage to an additional insured for its vicarious or contributory negligence only.

Anytime ISO revises a policy form, the eyebrows of those insurance professionals affected by it go north.  Since additional insured endorsements are used frequently in a variety of risk scenarios, ISO's revisions in this area can be expected to cause a lot of forehead creasing. Moreover, one commentator predicts that ISO's new endorsements will hit the ground running:  "When ISO makes form changes, it often takes carriers months, if not years, to implement the changes.  Expect these [additional insured] changes to be introduced into the marketplace FAST". i

The Additional Insured Problem: "Arising Out Of"

It is often said—and for good reason—that the analysis of any insurance coverage issue must begin with the policy language itself.  While ISO has introduced revisions to several of its additional insured endorsements, it is likely that form CG 20 10 (Additional Insured – Owners, Lessees or Contractors – Scheduled Person or Organization) will be the most affected. The current version of this endorsement – CG 20 10 —provides, in pertinent part, as follows:

A significant amount of litigation has arisen concerning the scope of coverage afforded to an additional insured under the aforementioned or similar endorsements. Many of these cases involve complicated underlying actions. What's more, the issue frequently arises in the context of a construction dispute, which is itself an area of coverage law known for policyholders and insurers not seeing eye to eye even on fundamental points. Despite all this, the additional insured issue making all the noise is relatively straightforward. ISO describes the problem as follows in the Background section of the filing memorandum accompanying its recent additional insured endorsement revisions:

     ISO's additional insured endorsements typically respond to the additional insured's liability arising out of operations performed for the additional insured by the named insured. ISO has monitored various court decisions and found that courts in many disputes between insurers and insureds have construed broadly the phrase "rising out of." The central issue in much of the litigation is whether the endorsements provided coverage only for the additional insured's vicarious liability arising out of the named insured's negligent acts, or did coverage extend to the additional insured's sole negligence. Some courts have ruled that, in the absence of specific language limiting coverage, the current additional insured endorsements do respond to injury or damage arising from the additional insured's sole negligence. This is contrary to the original intent of the additional insured endorsements.ii

Ironically, while ISO laments a broad construction of the phrase "arising out of" in its additional insured endorsements, insurers have benefited from the broad construction that courts have given to the phrase "arising out of" when it appears in a policy exclusion.  Many courts have held that, when used in a policy exclusion, the phrase "arising out of" means "but for."  As a result, policyholders have sometimes been left to believe that coverage has been improperly denied because of exclusions that have painted with too broad a brush.  It seems that what the phrase "arising out of" giveth to insurers in exclusions, it taketh away in additional insured endorsements.

ISO's filing memorandum does not mention by name any of the cases that have construed the phrase "arising out of" broadly.  However, it is not difficult to guess some of the cases that ISO likely had in mind. Since a better appreciation can usually be had for a solution when one fully appreciates the problem, consider a few of the additional insured cases decided recently that surely left ISO shaking its head.

In McCarthy Brothers Company v. Continental Lloyds Insurance Company, et al., 7 S.W.3d 725 (Tex. App. 1999), the Court of Appeals of Texas addressed potential coverage for McCarthy Brothers, a general contractor that had been named as a defendant in a suit brought by an employee of Crouch, an electrical subcontractor.  The Crouch employee alleged that he was injured when he fell on a muddy surface at a job site – on account of McCarthy's breach of its duty of care owed to him. McCarthy, named as an additional insured under Crouch's liability policy, was an insured only with respect to liability arising out of Crouch's work for McCarthy.  McCarthy sought but was denied coverage from Crouch's insurer.

The McCarthy Brothers court described the competing coverage arguments as follows:

     The insurance companies assert that McCarthy is not covered under the endorsements because the allegations in the [underlying] suit allege negligence only on the part of McCarthy and not on the part of Crouch, and thus the liability in this case did not arise out of Crouch's work for McCarthy.  McCarthy, on the other hand, urges that it is covered by the policies.  McCarthy reasons that because [the employee's] injuries were sustained while working on the Motorola construction site for Crouch, which was performing work on behalf of McCarthy, the underlying liability arose from work or operations of Crouch by or for McCarthy.

     McCarthy Brothers at 727 728 (italics in original).

The court sided with McCarthy Brothers, reasoning that, because the injury occurred while the Crouch employee was walking down an incline to retrieve tools, which was an integral part of Crouch's work for McCarthy, "[T]here is a causal connection between [the employee's] injury and Crouch's performance of its work for McCarthy and the liability "arose out of" Crouch's work for McCarthy."  Id. at 730.  The court rejected the insurer's argument that "arising out of" means "directly from" and for liability to arise out of Crouch's work for McCarthy, the liability must stem directly from Crouch's negligence and cannot extend to negligence caused solely by McCarthy.

Another recent additional insured decision that likely caught ISO's attention is Acceptance Insurance Company v. Syufy Enterprises, et al., 69 Cal. App. 4th 321 (1999).  In Syufy, the Court of Appeal of California examined the availability of coverage for Syufy Enterprises, the owner of a theater that had been named as an "additional insured" under C&C Building Automation's commercial general liability policy.  C&C was an electrical contractor that had been hired by Syufy to upgrade the theater's lighting and temperature controls.  A C&C employee was working on the roof of the theater.  He took a break to take his wife to the airport.  As he was climbing down through a roof hatch – the only access to and from the roof – it fell and severed one of his fingers. The employee sued Syufy, alleging that his injury was the result of Syufy's failure to provide and maintain a safe closing mechanism on the hatch and its failure to warn him about the hatch's defective condition.

Syufy sought coverage as an additional insured under C&C's policy. The C&C policy provided that Syufy was an insured, but only with respect to liability arising out of C&C's work for Syufy.  The insurer argued that coverage was not available to Syufy because the C&C employee's presence on the roof to do his job was not sufficiently causally connected with his injury, which was attributable solely to Syufy's negligent maintenance of the roof hatch.

The Syufy court was not persuaded.  After noting that California courts interpret "arising out of" to connote only a minimal causal connection or incidental relationship, the Syufy court held that the employee's injury clearly "arose out of" the work he was performing on the roof of Syufy's building.  The court stated, "The fact that the defect was attributable to Syufy's negligence is irrelevant, since the policy language does not purport to allocate coverage according to fault."  Syufy at 328 329. What's more, the Syufy court had the following advice for insurers that provide additional insured coverage:

     Insurance companies are free to, and commonly have, issued additional insured endorsements that specifically limit coverage to situations in which the additional insured is faced with vicarious liability for negligent conduct by the named insured. *** We believe the better view is that when an insurer chooses not to use such clearly limited language in an additional insured clause, but instead grants coverage for liability "arising out of" the named insured's work, the additional insured is covered without regard to whether injury was caused by the named insured or the additional insured.

     Syufyy at 330.

Federal courts have also weighed-in on the additional insured issue. In Merchants Insurance Company of New Hampshire, Inc. v. United States Fidelity and Guaranty Company, 143 F.3d 5 (1st Cir. 1998), the United States Court of Appeals for the First Circuit addressed coverage for a suit brought by an employee of Great Eastern Marine Services against D'Agostino Associates. D'Agostino was the general contractor on a bridge replacement project and Great Eastern had been hired as a subcontractor. The Great Eastern employee sustained serious injuries when a D'Agostino employee accidentally caused his arm to become pinned between two pieces of demolition equipment.

D'Agostino sought coverage as an additional insured under Great Eastern's commercial general liability policy.  The policy afforded coverage to D'Agostino, but only with respect to liability arising out of Great Eastern's work for D'Agostino. The insurer argued that no coverage was owed to D'Agostino because Great Eastern did not cause the employee's injury.

After concluding that, under Massachusetts law, the phrase "arising out of" denotes a level of causation that lies between proximate and actual, the Merchants Insurance court held that coverage was owed to D'Agostino as an additional insured:

     It is undisputed, as the Complaint alleged, that at the time of his accident [the injured employee] was working within the scope of his employment for Great Eastern. And it is equally beyond cavil that Great Eastern was in turn working for DAgostino pursuant to its subcontract.  [The employee's] injury "arose out of" Great Eastern's work in the sense that the harm occurred while he was cutting and removing a section of the bridge, a task that was assigned to Great Eastern in the Sherman 's Bridge project. Under an intermediate causation test, that causal relationship justifies the conclusion that D'Agostino's liability for the harm to [the employee] "arose out of" Great Eastern's work for D'Agostino.  More than "but for" causation existed.  It was not simply because the two companies happened to be working in the same location that [the employee] was injured by a D'Agostino employee; rather, the injury was a consequence of the work that Great Eastern was performing.

     Merchants Insurance at 9-10.

The Merchants Insurance court concluded that the additional insured endorsement covers D'Agostino both for its own negligence and to the extent that it might be deemed vicariously liable for Great Eastern's negligence.

Not all courts have been hostile to an insurer's attempts to limit coverage for additional insureds. But even when the insurer wins, it is not always for the reason that ISO is advocating. In Pro Con Construction, Inc. v. Acadia Insurance Company, 794 A.2d 108 (N.H. 2002), the New Hampshire Supreme Court addressed coverage for Pro Con, a construction manager that hired several subcontractors for a project, including Decorative Concepts, an interior painting company.  Pro Con was an additional insured under the commercial general liability policy issued to Decorative Concepts, but "only with respect to liability arising out of your [Decorative Concepts] ongoing operations performed for that insured [Pro Con]."

A Decorative Concepts employee was allegedly injured when he slipped and fell on an icy sidewalk while walking from his work area to a coffee truck parked on the work site's lot.  The employee brought suit against Pro Con for negligently failing to keep the sidewalk clear of snow and ice. Pro Con sought coverage under the CGL policy issued to Decorative Concepts. The insurer denied coverage on the basis that the circumstances did not trigger coverage under the additional insured endorsement. The insurer argued that the only connection between the injuries and Decorative Concepts" ongoing operations was the fact that the injured person was a Decorative Concepts employee. The New Hampshire Supreme Court agreed, holding as follows:

     Decorative Concepts" ongoing operations consisted of interior painting. The injuries did not occur while the employee was engaged in any task related to Decorative Concepts" painting operations," or near Decorative Concepts painting operations. Therefore, no nexus exists between the painting operations and the injuries, and thus the required causal connection between the injuries and Decorative Concepts" painting operations does not exist.

     Pro Con at 110.

While the insurer in Pro Con can claim victory, it was not without a vigorous dissent, which included a citation to, among other cases, McCarthy Brothers.  Moreover, an examination of the Pro Con court's rationale, and not simply its conclusion, reveals that while the insurer won the battle, it lost the war. The Pro Con court noted that some causal nexus must link Decorative Concepts" ongoing operations and the injuries before coverage under the additional insured endorsement is triggered. Thus, it is not unreasonable to interpret Pro Con to mean that the New Hampshire Supreme Court may have granted coverage to Pro Con as an additional insured under Decorative Concepts" policy, if the employee had been injured while retrieving a paint brush instead of a cup of coffee.  Indeed, in McCarthy Brothers, the court concluded that injury to a named insured's employee, caused while the employee was in the process of retrieving tools and supplies, satisfied the requisite causal connection necessary to establish that liability arose out of the named insured's work for the additional insured.

Like so many others examining coverage for an additional insured, the Pro Con court reached its decision based on the nature of the job-site relationship between the named insured and additional insured and not on account of the party responsible for the injury.  However, it seems unlikely that the difference between coverage and no coverage for an additional insured was meant to turn on the distinction between retrieving coffee or a paint brush.

The theme of McCarthy Brothers, Syufy and Merchants Insurance and scores more decisions, including even Pro Con, where the insurer won is that courts determine additional insured coverage by examining whether liability arose out of the named insured's operations performed for the additional insured, without requiring some act of negligence on the part of the named insured. Instead, courts tend to focus their inquiry on the nature of the relationship between the named insured and additional insured with respect to the project or job site at which the underlying injury took place.  The Court of Appeals of Texas, in Admiral Insurance Company v. Trident NGL, Inc., 988 S.W.2d 451, 454 (Tex. App. 1999), put it this way:

     The majority view of these [additional insured] cases is that for liability to arise out of operations of a named insured, it is not necessary for the named insured's acts to have caused the accident; rather, it is sufficient that the named insured's employee was injured while present at the scene in connection with performing the named insured's business, even if the cause of the injury was the negligence of the additional insured.

When it comes to searching for an explanation for the conclusions of those courts that have interpreted additional insured endorsements broadly, the Trident NGL court put it well.  However, the Syufy court may have said it best, noting that the fact that a defect was attributable to the additional insured's negligence, and not the named insured's, is irrelevant, since "the policy language does not purport to allocate coverage according to fault."  Syufy at 328 329.  ISO heard the Syufy court's message loud and clear.

ISO's Solution:  Granting Additional Insured Coverage Based on Fault

The problem that ISO perceives with courts" interpretations of its additional insured endorsements is not complicated. Appropriately, ISO responds to this straightforward problem with a straightforward solution.  ISO's solution to the additional insured problem is described as follows in the Explanation of Changes section of the filing memorandum accompanying its recent additional insured endorsement revisions:

     Because the phrase "arising out of" has been interpreted broadly by some courts, we are revising several of the additional insured endorsements to add specific language to provide an additional insured with coverage for their vicarious or contributory negligence only. The additional insured will only have coverage for bodily injury, property damage or personal and advertising injury that is caused in whole or in part by the acts or omissions of either the named insured or those acting on behalf of the named insured. A major effect of that wording will be to prevent any alleged coverage for the additional insured's sole negligence.  These revisions will better reflect the intent of these endorsements.iii

ISO's revisions of its additional insured endorsements take direct aim at those courts that have interpreted such endorsements based on the nature of the relationship between the named insured and additional insured—without consideration of the named insured's fault.  Now the additional insured will only have coverage for injury or damage that is caused in whole or in part by the acts or omissions of the named insured or those acting on its behalf.

In terms of policy language, ISO sets out to achieve a fault-based additional insured coverage grant by revising several of its additional insured endorsements. By way of example, form CG 20 10 10 01 has been revised to become form CG 20 10 07 04 and provides as follows (underlined text has been added and bracketed text has been deleted):

ISO's latest version of form CG 20 10 attempts to achieve a "fault based" coverage grant by eliminating the phrase "arising out of your [named insured's] ongoing operations performed for that [additional] insured" and instead linking potential coverage for the additional insured directly to the acts or omissions of the named insured. More specifically, ISO seeks to limit coverage for an additional insured to its vicarious or contributory negligence and negate any coverage for the additional insured's sole negligence. Putting aside certain distinctions in filing technicalities that exist among states, form CG 20 10 07 04 will become effective on July 1, 2004.iv

A review of form CG 20 10 07 04 reveals that, on its face, it appears to achieve ISO's objectives.  Form CG 20 10 07 04 provides that coverage for the additional insured is limited to liability caused, in whole or in part, by the named insured's acts or omissions.  Thus, if the additional insured is liable because of acts or omissions caused wholly by the named insured, then the basis for the additional insured's liability is presumably vicarious. (Vicarious liability is defined as follows in Scull v. New Mexico , 236 F.3d 588, 599-600 [10th Cir. 2000]: The definition of vicarious liability is indirect legal responsibility. . . . Vicarious liability is based on a relationship between the parties, irrespective of participation, either by act or omission, of the one vicariously liable, under which it has been determined as a matter of policy that one person should be liable for the act of the other.  Its true basis is largely one of public or social policy under which it has been determined that, irrespective of fault, a party should be held to respond for the acts of another.)

As for the intent of form CG 20 10 07 04 to provide coverage for an additional insured for its contributory negligence, this too appears to be achieved—so long as one of the other contributorily negligent parties is the named insured (or one acting on its behalf). In other words, if an additional insured is contributorily negligent in conjunction with certain parties, but none of which are the named insured, then the policy provision requiring that injury or damage be caused in part by the named insured (or one acting on its behalf) would not appear to be satisfied. Thus, while it is accurate to say in general terms that form CG 20 10 07 04 provides coverage for an additional insured for its contributory negligence, a review of the policy language reveals that there is an important qualification to this intended grant of coverage.

An interesting footnote to form CG 20 10 07 04 is what it does not state. Form CG 20 10 06 04, a predecessor to form CG 20 10 07 04, was filed by ISO and then quickly withdrawn.  The 06 04 version of form CG 20 10 included the following additional language: "There is no coverage for the additional insured for "bodily injury," "property damage" or "personal and advertising injury" arising out of the sole negligence of the additional insured or by those acting on behalf of the additional insured." Thus, for coverage geneticists, the 06 04 thousand dollar question is what gave ISO a problem with including this language in its final revision to form CG 20 10 10 01.  This writer has a few ideas.  However, there is enough to be said about the policy language that was ultimately adopted without spending time discussing the contents of ISO's cutting room floor.

Will Form CG 20 10 07 04 Succeed in Achieving ISO's Objectives?

It appears that by tying the additional insured grant of coverage to the named insured's fault, the language of form CG 20 10 07 04 will achieve ISO's stated objective of limiting coverage for an additional insured to its vicarious or contributory negligence and negating any coverage for its sole negligence. This, however, is not surprising. Insurers are good at drafting policy language to say what they mean. The real test, of course, is not whether insurers can convince themselves that their policy language achieves their drafting intent, but courts.  After all, insurers were no doubt certain that the predecessors to form CG 20 10 07 04 were perfectly suited to achieve the intended result concerning the extent of coverage available for additional insureds. And then the black robes had their say. The critical question for ISO and its subscribers is whether courts will interpret form CG 20 10 07 04 in the manner intended or find ways to grant more, or perhaps even less, coverage to additional insureds than ISO had in mind.

There are times when ISO introduces policy provisions that are truly unique. When this occurs, those examining the new language have little guidance as to how it may be interpreted by reviewing courts. At best, a prediction can be made based on general principles of insurance policy construction, analogous claims and policy language and how courts may interpret reasonable expectations of coverage. Coverage afforded to additional insureds under form CG 20 10 07 04 is not one of those situations. While the precise language of form CG 20 10 07 04 may be new, similar additional insured provisions have been used by insurers in the past and even been the subject of litigation. Thus, those examining form CG 20 10 07 04 need not rely as heavily on a wet finger in the wind to predict how this new language may ultimately be interpreted by courts. A recent decision from the Appellate Court of Illinois is a good place to start in the search for guidance on how form CG 20 10 07 04 may be received.

In American County Insurance Company v. James McHugh Construction Company, et al., 801 N.E.2d 1031 (Ill. App. 2003), the court addressed coverage for McHugh, the general contractor on a construction project, for a lawsuit brought by an employee of Spectrum Stone, one of McHugh's subcontractors.  The Spectrum employee's suit alleged that he sustained injuries when he fell from a scaffolding that had been constructed by McHugh.  No act or omission on the part of Spectrum, the underlying plaintiff's employer, was alleged to have caused the injuries.

McHugh sought coverage as an additional insured under Spectrum's liability policy issued by American County Insurance Company. The policy contained the following language on an endorsement pertaining to additional insured coverage: "the insurance provided to additional insureds is limited as follows. The person or organization is an additional insured but only with respect to your [Spectrum's] acts or omissions in connection with "your work" for that additional insured by you or on your behalf at the location designated in the agreement and designated in a Certificate of Insurance issued by our authorized producer." The policy also contained an exclusion providing that the insurance does not apply to bodily injury or property damage arising out of any act or omission of the additional insured(s) or any of their employees.

On one hand, the additional insured endorsement in McHugh Construction is fault-based.  Similar to form CG 20 10 07 04, it eschews the use of an "arising out of" trigger in favor of affording coverage to the additional insured for the named insured's acts or omissions in connection with its work for the additional insured. On the other hand, by excluding coverage for injury or damage arising out of any act or omission of the additional insured, the coverage afforded by the endorsement in McHugh Construction is extremely limited. While ISO's form  affords coverage to an additional insured for its contributory negligence, the endorsement in McHugh Construction does not go this far.

The McHugh Construction court interpreted the additional insured provisions to provide as follows: "[W]e find that the endorsement requires, as a prerequisite to coverage for an additional insured, that the underlying complaint at least leaves open the possibility that the injuries at issue could have arisen out of the acts or omissions of Spectrum [the named insured], provided that McHugh [the additional insured] is not itself negligent by an act or omission." McHugh Construction at 1040-1041. The court held that McHugh was not entitled to a defense as an additional insured because the underlying complaint only alleged negligence on the part of McHugh.

While form CG 20 10 07 04 is broader than the additional insured provision at issue in McHugh Construction, the case still illustrates a problem that some additional insureds are likely to encounter when seeking coverage under ISO's new additional insured endorsement.  The plaintiff in an underlying tort case giving rise to potential additional insured coverage is often an employee of the named insured.  However, because of the workmen's compensation bar, the plaintiff's complaint may not allege any negligence on the part of his employer (named insured), even if it in fact existed.  In this situation, because the duty to defend is typically determined based solely on the allegations contained in the underlying complaint, the additional insured may be denied a defense because the underlying complaint is devoid of any allegations that the plaintiff's injury was caused "in whole or in part by your [named insured's] acts or omissions; or the acts or omissions of those acting on your behalf," as required by form CG 20 10 07 04.

The court in McHugh Construction was mindful of this problem, but offered no solution. The McHugh Construction court declined to follow Illinois Emasco Insurance Company v. Northwestern National Casualty Company, 785 N.E.2d 905 (Ill. App. 2003), another case, as the McHugh Construction court put it, "to grapple with this issue." The McHugh Construction court concluded that Illinois Emasco was factually inapposite because there, the underlying plaintiff did name his employer—the named insured—as a defendant. While the McHugh Construction court found it curious that the plaintiff in Illinois Emasco named his employer as a defendant, despite the workmen's compensation bar, this was nonetheless a sufficient reason for McHugh Construction to decline to follow Illinois Emasco. Thus, McHugh Construction illustrates a problem that some policyholders may encounter when seeking additional insured coverage, notwithstanding ISO's stated intent that such coverage be tied to the acts or omissions of the named insured.

Additional insureds may not be the only ones disappointed with the operation of ISO's new additional insured endorsements.  Insurers may also be left scratching their heads and asking what happened to the promise of form CG 20 10 07 04. There is little doubt that the new version of form CG 20 10 is designed to preclude coverage to an additional insured for its sole negligence or its contributory negligence—when the named insured is not also negligent.  Yet, insurers may find themselves in situations where they incur significant losses, despite having no doubt that the underlying claim involves an additional insured's sole negligence or no negligence on the part of the named insured. Once again, blame the duty to defend for the potential of the additional insured endorsements not operating as intended.

The problem is this. Thanks to the use of shotgun-style complaints, it is unlikely that an underlying plaintiff's counsel will limit the allegations in their complaint solely to the party that they believe is unilaterally negligent for their client's injuries.  Rather, plaintiffs" counsel seem to believe that it is safer (from a legal malpractice standpoint), more profitable (from an "at least give me cost of defense to get out of the case" standpoint) and more prudent (from a "who knows what discovery could uncover" standpoint) to name as defendants every entity that was even remotely involved at the job site where their client was injured.

As a result of a sue-first-and-gather-the-facts-later pleading strategy, the underlying plaintiff's suit is likely to name several potentially negligent parties, in addition to the actually negligent party (the additional insured). Thus, even if it is ultimately determined that the additional insured was solely responsible for the injuries, or contributorily negligent—but not in conjunction with the named insured, the additional insured will likely secure a defense. This will likely be accomplished by the additional insured citing the duty to defend standard and pointing to the allegations in the underlying complaint that the plaintiff's injury was caused in whole or in part by the named insured's acts or omissions, or of those acting on its behalf, as required by form CG 20 10 07 04.  And as insurers know all too well—especially those involved in construction losses—the duty to defend is frequently far more costly than the duty to indemnify.

As an example, consider the following.  In Tran Bernard Sawyer, et al. v. Westchester Fire Insurance Company, et al., 2002 Cal. App. Unpub. LEXIS 10613, the Court of Appeal of California wrestled with an additional insured issue that arose out of a serious automobile accident on the Long Beach Freeway. The accident occurred when a vehicle struck a stationary vehicle that had been disabled in an earlier accident. At the time of the accident, MCM Construction was performing work on the freeway under a contract with the State of California . It was alleged that the accident was caused by the absence of lighting on the freeway due to the construction work. MCM obtained summary judgment in the underlying litigation on the basis that it had no duty to provide lighting in the area where the accident occurred because MCM had performed its work in accordance with the plans and specifications provided by the State and the decision to remove the lighting was solely the State's.  Id. at 3-4.

California sought coverage as an additional insured under MCM's general liability policy issued by St. Paul . In general, under the endorsement, the State was covered for bodily injury only if it arises out of operations performed by MCM for the State or out of the State's acts or omissions in supervising MCM's operations. However, the additional insured endorsement excluded coverage for bodily injury arising out of the sole negligence of the State or any act or omission by the State other than its supervision of MCM's work.  Id. at 28.  Putting aside certain procedural complexities, the court held that, because of a separate finding that the State was solely negligent for the accident, coverage for any judgment against the State was barred by the sole negligence exclusion in the additional insured endorsement.

However, despite this conclusion, the Tran Bernard Sawyer court held that St. Paul still had a duty to defend the State in the underlying litigation. The court reviewed the allegations contained in the complaints in the underlying actions, took note of California 's broad duty to defend standard and concluded that the complaints implicated the State's negligent supervision with respect to the freeway lighting where MCM was working. The court also concluded that the underlying complaints, in conjunction with the tender letters from the State to MCM (which were forwarded to St. Paul ), made clear that MCM's operations were being implicated.  While the State was eventually found to be solely negligent for the injuries, such a determination could not be made at the outset of the litigation. Thus, a duty to defend was owed to a solely negligent additional insured, despite policy language to the contrary.

Shaffer v. Stewart Construction Company, et al., 2004 La. App. LEXIS 13 provides a similar lesson as Tran Bernard Sawyer. In Shaffer, additional insured issues arose out of Stewart Construction's contract to construct a mooring facility for a casino barge on the Red River.  In order to drive and extract pilings, Stewart rented a Vibro-hammer from International Construction Equipment, Inc. Gary Shaffer, Stewart's project superintendent, slipped and fell on hydraulic oil that had leaked from the Vibro-hammer while he was repairing it. Shaffer sued several parties, including International Construction. International Construction sought coverage as an additional insured under Stewart's CGL policy.

The additional insured endorsement contained an exclusion for bodily injury or property damage arising out of the sole negligence of a lessor of leased equipment.  However, the trial court held that the sole negligence exclusion did not apply because there was abundant evidence that at least some fault for the accident could be attributed to parties other than International Construction. The Court of Appeal of Louisiana affirmed, noting that the evidence clearly supported the finding of some fault on other parties, including other Stewart employees and/or the plaintiff himself.

Tran Bernard Sawyer and Shaffer (although less directly) demonstrate a situation that may arise under form CG 20 10 07 04: no duty to indemnify an additional insured is owed because it is ultimately determined that the additional insured was solely responsible for the underlying injuries. However, by pointing to certain allegations in the underlying complaint and citing the broad duty to defend standard, a solely negligent additional insured may at least be able to obtain coverage for its defense costs—which is often times nothing to sneeze at.

Conclusion

To the extent that ISO has been frustrated by "arising out of" decisions that have granted coverage to solely negligent additional insured-general contractors, form CG 20 10 07 04 should, at least in theory, achieve ISO's objectives in many cases. ISO's revisions of its additional insured endorsements take direct aim at those courts that have interpreted such endorsements without consideration of the named insured's fault. Gone should be the days of general contractors being afforded additional insured coverage based on the mere presence of the named insured at the scene of an injury, but with no negligence on its part. However, there are certain insurance coverage facts of life that cannot be ignored and that may make it easier said than done for ISO to achieve its additional insured objectives by adopting a fault-based standard.

First, most coverage claims are resolved without a declaratory judgment and involve determinations of coverage for underlying claims that were settled without the benefit of a trial or other fact finding mechanism. Thus, the question of just who was at fault for an injury may never have an opportunity to be determined by a neutral arbiter. Add to this that the duty to defend is unquestionably broad and oftentimes stubbornly tied to the allegations contained in the underlying complaint.

These insurance coverage realities may result in certain unintended consequences concerning the scope of coverage afforded under form CG 20 10 07 04.  Coverage may not be afforded to an additional insured because, while the named insured was at fault for its employee's injury, it is not named as a defendant in the underlying complaint on account of the workmen's compensation bar.  In addition, coverage, or at least a defense, may be afforded to an additional insured because, while solely negligent for an injury, it finds itself listed as a defendant along with several other potentially negligent parties.

Considering that underlying complaints are sometimes artfully drafted with insurance coverage fully in mind, these consequences of the revisions to ISO's additional insured endorsements may not be so unintentional after all, at least not from plaintiff's counsel's perspective. For these reasons, while ISO's newest version of form CG 20 10 is a nice effort, it may fall victim to circumstances beyond its control.

 

i Bill Wilson, "ISO's New Additional Insured Endorsements," The VUpoint Newsletter, Published by the Virtual University of the Independent Insurance Agents & Brokers of America, Inc., Vol. 5, No. 3, January 30, 2004, at 1 (emphasis in original).

ii "Revisions to Additional Insured Endorsements," ISO Commercial General Liability Forms Filing GL-2004-OFGLA, at 2 (emphasis in original).

iii Id. at 2-3.

iv "Multistate Revisions to Additional Insured Endorsements Filed," ISO Circular General Liability LI-GL-2004-147, March 12, 2004.

v In addition to revisions to its "additional insured" endorsements, ISO has also made an accompanying change in the area of contractual liability.  While a substantive discussion of this amendment is beyond the scope of this article, ISO's filing memorandum description of it is as follows:

Amendment of Insured Contract Definition Endorsement

Even though various additional insured endorsements will preclude coverage for an additional insured's sole negligence, this coverage may still be provided through contractual liability.  As a result, we are introducing a new optional endorsement, CG 24 26 – Amendment Of Insured Contract Definition, which will amend the definition of an insured contract in the CGL to remove coverage for an additional insured's sole negligence.  In those states that will allow for such a recovery under a hold harmless agreement, this will serve as an optional underwriting tool.

"Revisions to Additional Insured Endorsements," ISO Commercial General Liability Forms Filing GL-2004-OFGLA, at 3.