Named Insured Must Be Liable for Additional Insured to Get Coverage
The purpose of additional insured coverage is to apportion risks. By hiring a subcontractor, a general contractor exposes itself to liability risks, including vicarious responsibility for its subcontractor’s negligence and additional insured endorsements represent a way to apportion contractually these risks. The rationale is to make the party with the most control over the risk responsible for suffering the financial loss should it fail to prevent the loss. Regardless of the intent facts control and not every additional insured endorsement provides coverage for the additional insured.
In The Burlington Insurance Company v. NYC Transit Authority, et al., Court of Appeals of New York, 2017 NY Slip Op 04384 (June 6, 2017) the Burlington Insurance Company (Burlington), issued an insurance policy to non-party Breaking Solutions, Inc. (BSI) listing as additional insureds defendants, the New York City Transit Authority (NYCTA) and MTA New York City Transit (MTA).
Burlington denied coverage to NYCTA and MTA on the grounds that defendants were not additional insureds within the meaning of the policy because NYCTA was solely responsible for the accident that caused the injury.
The Court of Appeal (the highest New York court) was asked to determine whether its interpretation of the policy requires that the additional insured language of the policy provides coverage where the named insured is not negligent.
NYCTA contracted with BSI to provide equipment and personnel and for BSI to perform tunnel excavation work on a New York City subway construction project. To comply with NYCTA’s insurance requirements, BSI purchased commercial general liability insurance from Burlington with an endorsement that listed NYCTA, MTA, and New York City (City) as “additional insureds.” As specified by NYCTA, BSI agreed to use language in the endorsement adopted from the latest form issued by a trade organization known as the Insurance Services Office (ISO), and which provides, in relevant part, that NYCTA, MTA, and the City are additional insureds “only with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by: ¶ 1. Your acts or omissions; or ¶ 2. The acts or omissions of those acting on your behalf.”
During the coverage period, an NYCTA employee fell off an elevated platform as he tried to avoid an explosion after a BSI machine touched a live electrical cable buried in concrete at the excavation site. The employee and his spouse brought an action against the City and BSI in federal court, asserting Labor Law claims, negligence, and loss of consortium (Kenny v City of N.Y., 2011 WL 4460598 [ED NY, Sept. 26, 2011]).
Pursuant to BSI’s policy, the City tendered its defense in the federal action to Burlington, which Burlington accepted subject to a reservation of rights based on the City’s qualification as an additional insured. Burlington withdrew its reservation, however, after receiving NYCTA’s letter to BSI that it would not make payments under the contract unless Burlington agreed to provide coverage for the City’s defense and indemnification without reservation.
NYCTA tendered its defense of the claims to Burlington, also as an additional insured under the BSI policy. Burlington accepted the defense, subject to the same reservation that NYCTA qualify as an additional insured under the policy endorsement. NYCTA did not demand, and Burlington did not submit, a withdrawal of this reservation.
Discovery in the employee’s federal lawsuit revealed that NYCTA failed to identify, mark, or protect the electric cable, and that it also failed to turn off the cable power. Documents further established that the BSI machine operator could not have known about the location of the cable or the fact that it was electrified. For example, in two internal memoranda, “NYCTA acknowledged its sole responsibility for the accident.”(emphasis added)
The district court dismissed the employee’s claims against BSI with prejudice, and the City’s third-party claims against NYCTA without prejudice. Burlington thereafter settled the lawsuit for $950,000 and paid the City’s defense costs.
Burlington then sued in state court after disclaiming coverage for NYCTA and MTA. Initially, Burlington sought a declaratory judgment that it did not owe NYCTA and MTA coverage as additional insureds under BSI’s policy. After settling the employee’s action against the City, Burlington moved to amend its complaint to add a claim for contractual indemnification as the City’s subrogee under the lease with NYCTA.
The trial court granted Burlington’s motion for summary judgment, concluding that NYCTA and MTA were not additional insureds because the policy limited liability to instances where BSI, as the named insured, was negligent. The court also granted Burlington’s motion to amend the complaint, finding that the anti-subrogation rule did not bar Burlington’s claim as the City’s subrogee. Burlington then moved for partial summary judgment on its contractual indemnification claim against NYCTA, which the court granted and subsequently entered judgment for Burlington for the $950,000 settlement amount, along with prejudgment interest, fees, and costs.
The Appellate Division reversed, denying plaintiff’s motions for summary judgment and to amend the complaint, and granting defendants’ cross motion for summary judgment on the first cause of action to the extent of declaring that defendants were entitled to coverage as additional insureds under the Burlington policy.
The policy states, in relevant part, that an entity is “an additional insured only with respect to liability for ‘bodily injury’ caused, in whole or in part, by [BSI’s] acts or omissions.” It is well established in New York law that “but for” causation, or causation in fact, is the cause without which the event could not have occurred”.
The term refers to a link in the chain leading to an outcome, and in the abstract does no more than state the obvious. However, not all “but for” causes result in liability and most causes can be ignored in tort litigation. In contrast, “proximate cause” refers to a “legal cause” to which the Court has assigned liability
The Burlington policy endorsement states that the injury must be “caused, in whole or in part” by BSI. These words require proximate causation since “but for” causation cannot be partial.
NYCTA and MTA argue that the language “in whole or in part” was necessary in order to make clear that the parties did not mean “solely caused by.” Without the additional language, they contend, the endorsement would provide NYCTA and MTA coverage only if BSI’s acts or omissions were solely responsible for the loss. The Court of Appeal found the argument unpersuasive because the phrases “caused, in whole or in part, by” and “solely caused by” are not synonymous, either by their plain meaning or legal meaning.
It is enough that the parties used words that convey the legal doctrine of proximate causation. The fact that the parties could have used different language to communicate that legal concept is not fatal to Burlington’s argument. Giving the words chosen by the parties their plain and ordinary meaning, the endorsement describes proximate cause.
The language: “caused, in whole or in part” as used in the endorsement, requires the insured to be the proximate cause of the injury giving rise to liability, not merely the “but for” cause.
The policy language compelled the court to interpret “caused, in whole or in part” to mean more than “but for” causation. That interpretation, coupled with the endorsement’s application to acts or omissions that result in liability, supports the conclusion that proximate cause is required here.
To extend coverage to the additional insureds under the circumstances of this case may frustrate the clear risk allocation purpose of obtaining additional insured insurance in the first place but coverage for an additional insured is typically limited to liability arising out of the named insured’s work or operations and additional insured status does not provide coverage to an additional insured for the additional insured’s own work or operations. To do so would allow NYCTA to compel a subcontractor to pay for injuries to its employee which NYCTA proximately caused — an outcome not intended by the parties and contrary to the plain language of the endorsement.
The Court of Appeal concluded that the Appellate Division erroneously interpreted this policy language as extending coverage broadly to any injury causally linked to named insured, and wrongly concluded that an additional insured may collect for an injury caused solely by its own negligence, even where the named insured bears no legal fault for the underlying harm.
Insurance is a risk transfer device. Construction contracts contain various risk transfer devices like indemnity agreements and requirements that a subcontractor make the general contractor or owner as an “additional insured” on the subcontractor’s policy. This is not a perfect risk transfer since the ISO additional insured endorsement makes it clear that the named insured must be a cause of the injury. When the additional insured is solely responsible for an injury it cannot obtain defense or indemnity from the insurer that made it an additional insured and needs, for such a situation, to buy its own insurance to transfer the risk for its sole negligence to its insurer.
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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