Many insurance policies contain provisions known as "separation of insureds" or "severability of interests" clauses. These clauses generally provide that coverage applies separately to each insured against whom a claim is made. Separation of insureds clauses can be construed to contradict exclusions that apply to "any insured," as opposed to "the insured."
In this context, the term "any insured" has become a lightning rod for litigation, with claimants arguing that the phrase is ambiguous when read in conjunction with separation of insureds clauses. Federal courts considering the issue are divided into two camps. The majority opinion holds that when "any insured" is found in an exclusion, the exclusion "expresses a contractual intent to create joint obligations and preclude coverage to innocent co-insureds, despite the presence of a severability clause." See Allstate Ins. Co. v. Kim, 121 F. Supp. 1301, 1308 (D. Haw. 2000) (summarizing cases in which the majority view prevailed). In contrast, the minority opinion rules in favor of coverage, finding that separation of insureds clauses supersede exclusionary language. See Shelby Realty LLC v. Nat'l Surety Corp., 2007 WL 1180651, at *3 (S.D.N.Y. Apr. 11, 2007).
Ruling on Ambiguous Exclusions in the Eleventh Circuit
A recent Eleventh Circuit decision demonstrates the hazards of using such divisive policy language. In James River Insurance Company v. Ultratec Special Effects Inc., the Eleventh Circuit Court of Appeals found ambiguous an exclusion's use of "any insured" when read in conjunction with the separation of insureds clause and imposed upon an insurer the duty to defend. 22 F.4th 1246 (11th Cir. 2022).
James River stems from a pyrotechnic explosion at a factory outside of Huntsville, Alabama, which killed two employees and severely injured another. Id. at 1249. The employees were employed by Ultratec Special Effects HSV, Inc. (Ultratec HSV), a subsidiary of Ultratec Special Effects, Inc. (Ultratec). Id. at 1250. The surviving employee, and representatives of the deceased employees, filed suit in state court against Ultratec HSV, Ultratec, Mike Thouin, an Ultratec employee, and an associated business called MST Properties, LLC (collectively referred to as "Ultratec entities"), alleging claims of negligence and wantonness. Id. The Ultratec entities tendered the claim to their insurer, James River Insurance Company. Id.
After assuming the defense of the Ultratec entities under a reservation of rights, James River filed a declaratory judgment action in the U.S. District Court for the Northern District of Alabama, asking the District Court to determine whether coverage was precluded by the employer's liability exclusion, which stated: "[t]his insurance does not apply to any claim, suit, cost or expense arising out of the 'bodily injury' to . . . [a]ny employee of any insured." Id. at 1250.
Importantly, the James River policy also included a separation of insureds provision, which provided: "this insurance applies . . . [a]s if each Named Insured were the only Named Insured; and . . . [s]eparately to each insured against whom claim is made or `suit' is brought." Id. The District Court found the exclusion was ambiguous and held James River had a duty to defend Ultratec, Thouin and MST. Id. at 1251. James River appealed the district court's ruling to the Eleventh Circuit Court of Appeals.
The parties agreed the employer's liability exclusion barred coverage for Ultratec HSV as the employees' employer, but disagreed as to the coverage afforded to Ultratec, Thouin and MST. Id. James River argued the exclusion unambiguously applied equally to all the insureds. Id. at 1253. Thus, if the employees' claims arose out of injuries suffered while employed by any one of the insureds, coverage was barred for each of the insureds. According to James River, Ultratec HSV's status as an insured and the employees' employer barred coverage for all Ultratec entities. Id.
The Ultratec entities disagreed, arguing the phrase "any insured" was ambiguous and susceptible to two meanings. Id. The Ultratec entities argued "any insured" could be interpreted as James River would like, or "any insured" could be read to preclude only the claims brought by the employees against their employer, Ultratec HSV, leaving coverage for the other Ultratec entities intact. Id. Under this interpretation, James River would have a duty to defend the non-employer Ultratec entities: Ultratec, Thouin and MST. Id.
In interpreting the phrase "any insured," the Eleventh Circuit turned to Alabama case law. The Alabama Supreme Court previously considered the phrase "any insured" and deemed it ambiguous in two different cases. See Transp. Indem. Co. v. Wyatt, 417 So. 2d 568, 571 (Ala. 1982); Wilson v. State Farm Mut. Auto. Ins. Co., 540 So. 2d 749, 752 (Ala. 1989).
The Eleventh Circuit found these decisions instructive, holding "any insured" was ambiguous under the terms of the James River employer's liability exclusion. James River, 22 F.4th at 1255. Thus, the Eleventh Circuit upheld the district court's holding and determined James River had a duty to defend Ultratec, Thouin and MST. Id. at 1257.
Other Court Interpretations
The Eleventh Circuit's ruling represents the minority view on how policies containing both the "any insured" language in exclusions and a separation of insureds clause are interpreted. This view holds that a separation of insureds clause requires that a policy, including any exclusions, be read as if each person/entity seeking coverage is the only insured covered. See e.g., Shelby Realty LLC v. Nat'l Surety Corp., 2007 WL 1180651, at *3 (S.D.N.Y. Apr. 11, 2007); Everest Indemnity Ins. Co. v. Jake's Fireworks, Inc., 501 F. Supp. 3d 1158 (D. Kan. 2020). Under the minority interpretation, when a separation of insureds clause exists, an exclusion barring coverage to an employee of "any insured" applies individually to each insured. Thus, the separation of insureds clause supersedes the "any insured" exclusion clause in favor of coverage.
In contrast, the majority of courts have determined this interpretation impermissibly contradicts the plain language of certain exclusionary clauses. See Nautilus Ins. Co. v. K. Smith Builders, Ltd., 725 F. Supp. 2d 1219 (D. Haw. 2010); Evanston Ins. Co. v. OEA, Inc., 2005 WL 1828796, at *8 (E.D. Cal. 2005) (discussing cases applying the majority view); Michael Carbone, Inc. v. Gen. Accident Ins. Co., 937 F.Supp. 413, 419 (E.D. Pa. 1996) (finding "any insured" language in automobile exclusion not altered or limited by the separation of insureds clause). The majority view holds that a separation of insureds clause does not prevent an exclusion from precluding coverage to "any insured."
For example, in K. Smith Builders, the court found that, in order to give full effect to policy terms, "exclusions barring coverage to 'any insured'" must be interpreted "differently from an exclusion barring coverage to 'the insured.'" K. Smith Builders, 725 F. Supp. at 1229. There, Gabriel Campbell, an employee of a construction subcontractor, sued K. Smith Builders, the project's general contractor, and Kyle Smith ("Smith"), one of K. Smith Builders' officers, after sustaining injuries in a fall from a second-floor deck. Id. at 1221.
K. Smith Builders and Smith's policy excluded coverage for injuries to employees, including leased or loaned workers hired by a subcontractor. Id. at 1222-23. The court found this exclusion clearly barred coverage for Campell's claims against K. Smith Builders, as the general contractor, but examined whether coverage was available to Smith, as an officer, in greater detail. Id. at 1225-28.
In determining the coverage issue, the court concentrated on the policy's employee exclusion which eliminated coverage for "bodily injury to an employee of any insured" and the effect, if any, on this exclusion from the policy's separation of insureds clause. Id. at 1229. The separation of insureds clause stated the policy "applies … separately as to each insured against whom claim is made or 'suit' is brought." Id. Smith argued that, because he did not employ Campbell, the separation of insureds clause afforded a defense and coverage to him. Id. at 1230. The insurer countered, arguing that the plain language of the employee exclusion barred coverage for "any insured" and Smith was therefore entitled to no policy benefits. Id.
The court found the insurer's argument most persuasive. The court found this interpretation gave full effect to all policy terms and differentiated between the phrases "the insured" and "any insured." Id. at 1229. Further, the court found the history of the separation of insureds clause supported its ruling, as this clause was adopted in 1955 by the National Bureau of Casualty Underwriters to clarify that the phrase "the insured" in exclusions refers only to the insured claiming coverage. Id. at 1230.
Conclusion
The contradictory results in James River and K. Smith Builders emphasize the importance of revising policy language, particularly exclusionary language, to ensure it reflects a jurisdiction's case law. Failure to do so can result in an expansion of coverage far beyond that initially contemplated by policy drafters.
The key takeaways from these cases are: (1) that an exclusion that bars coverage for "any insured" may be interpreted far more broadly than an exclusion that bars coverage for "the insured;" (2) some courts find the phrase "any insured" ambiguous, either by itself or when read together with a separation of insureds clause, and will refuse to narrow or bar coverage; and (3) "separation of insureds" or "severability of interests" clauses can accidentally work to expand coverage, if not properly drafted.
Blakely L. Lloyd, associate with Swift, Currie, McGhee & Hiers, LLP, is a civil defense attorney in Swift Currie's Birmingham office. She focuses her practice on arson and fraud, automobile litigation, commercial litigation, insurance coverage and property insur