Stupid to Give Away Underwriting Duty to Insured
Underwriting is the process by which an insurer evaluates the risks presented to it and decides whether it is willing to take a risk that will make insurance a profitable business. Commercial General Liability insurers have adopted a form of additional insured agreement that makes anyone that the named insured – by contract – agrees to make another an additional insured if the action seeking a defense meets certain requirements. By so doing the insurer transfers the obligation to underwrite the exposure to liability to the named insured and away from the insurer. As a result, until there is a loss, the insurer does not even know who it is insuring and whether it is a good risk or a risk no insurer would be willing to take.
In Old Republic General Insurance Corporation v. Scottsdale Insurance Company, United States District Court, W.D. Pennsylvania, Defendant, Civil Action No. 15-31 (03/30/2016) the USDC for the Western District of Pennsylvania was asked to deal with a dispute over which insurer was required to defend an entity made an additional insured by the named insured without input from the insurer..
The issue was first presented to a magistrate judge who then presented to the District Court judge a Report and Recommendation (“R&R”) that recommended that the court grant Plaintiff Old Republic General Insurance Corporation’s (“Old Republic”) motion for summary judgment and hold that Scottsdale has a duty to defend a third-party — E.E. Austin & Son, Inc. — for whom Old Republic is currently paying defense costs.
Erie Water Works — a public utility company — hired E.E. Austin to serve as its general contractor for a construction and renovation project. In order to complete this project, E.E. Austin hired DH Steel to serve as its subcontractor for all metal installation. While E.E. Austin already had a general insurance policy with Plaintiff Old Republic, the E.E. Austin-DH Steel agreement required DH Steel to obtain insurance coverage that would indemnify E.E. Austin for any harms stemming from DH Steel’s actions during the project.
DH Steel obtained a comprehensive general liability insurance policy from Scottsdale. The policy provides that the following are covered “Additional Insured” parties: “Who is An Insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability for ‘bodily injury’…caused in whole or in part, by: ¶ Your acts or omission; or The acts or omissions of those acting on your behalf.”
During the policy period, one of DH Steel’s employees filed a negligence action in state court, naming E.E. Austin as the sole defendant. The employee’s underlying complaint alleged that he was injured while working for DH Steel on the Erie Water Works project. According to the complaint, the employee was injured as a result of E.E. Austin’s failure: to implement an effective daily inspection plan with its subcontractor’s employees; to provide an on-site supervisor; to train and supervise its DH Steel’s employees; and to designate a competent supervisor to review DH Steel’s safety program.
As E.E. Austin’s general insurance company, Old Republic submitted a request for coverage to Scottsdale. Scottsdale denied the claim on the grounds that the employee’s underlying complaint did not expressly state that DH Steel engaged in any acts of negligence and, therefore, did not implicate the Additional Insured Parties provision and was not covered by Scottsdale’s policy. Old Republic then filed the present declaratory action in federal court.
LEGAL STANDARD FOR A DUTY TO DEFEND
Generally, a court examining questions of insurance coverage shall grant summary judgment only if the movant shows that there is no genuine dispute as to any material fact. However, it is well-settled law in Pennsylvania and probably every other state that the duty to defend is broader than the duty to indemnify. In Pennsylvania, the duty to defend arises if there are any facts in the complaint that could “potentially” impose liability upon the insured within the policy’s coverage.
The R&R concludes that Scottsdale has a duty to defend E.E. Austin because the employee’s underlying complaint alleges facts that, if true, would potentially impose liability that falls within the scope of the Scottsdale insurance policy.
According to the employee’s complaint, the injuries were caused — at least in part — by the actions of DH Steel’s employees. The complaint seeks to hold E.E. Austin for negligently supervising DH Steel. That is, by implication, it alleges that E.E. Austin should have prevented DH Steel’s employees from engaging in negligent acts which caused the employee’s injury.
The court agreed with Magistrate Judge’s reasoning and entered judgment requiring Scottsdale to defend its additional insured.
Underwriting is an important part of any insurance business. Proper evaluation of the risk of third party liability takes a professional who can evaluate the persons seeking insurance based upon facts determined by an application and independent investigation by the underwriter. When that obligation is transferred to the named insured it can make an entity with a record of causing damage to be an insured and place its insurer in a situation defending a person or entity it would never have insured directly.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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