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Triggering the Duty to Defend Additional Insureds: Looking Beyond the Complaint?

June 7, 2012

It commonly is held that an insurer's duty to defend is broader than its duty to indemnify and that, where the policy provides for such a duty, it is triggered by allegations suggesting a reasonable possibility of coverage, even if those allegations are ultimately groundless.  See, e.g., BP Air Condition Corp. v. One Beacon Ins. Group, 871 N.E.2d 1128 (N.Y. 2007).  Thus, courts will typically find that the duty "is triggered whenever the four corners of the complaint, liberally construed, suggest a reasonable possibility of coverage."  Conrad R. Sump & Co. v. Home Ins. Co., 701 N.Y.S.2d 103, 105 (N.Y. App. Div. 1999).  Other jurisdictions have formulated this as the "eight corners rule," referring to the four corners of both the complaint and the policy.  See, e.g., Gilbane Building Co. v. Admiral Ins. Co., 664 F.3d 589, 594 (5th Cir. 2011) (Texas law).  A minority of jurisdictions have explicitly stated that "facts outside the complaint may trigger the duty to defend."  SL Industries, Inc. v. Am. Motorists Ins. Co., 607 A.2d 1266, 1272 (N.J. 1992). 

Despite the protestation that these standards apply "equally to additional insureds and named insureds," Worth Construction Co., Inc. v. Admiral Insurance Co., 888 N.E.2d 1043 (N.Y. 2008), assessing an insurer's duty to defend an additional insured (or purported additional insured) raises unique questions that may lead courts to undertake a more expansive examination, even in jurisdictions that generally look only to the complaint and policy, e.g., QBE Ins. Corp. v. Adjo Contracting Corp., 2011 WL 3505475 (N.Y. Sup. Ct. 2011).  As a threshold matter, the court must determine whether the policy grants the party seeking coverage additional insured status at all.  Though this will be quite clear in many instances, in other cases-particularly where the policy contains a blanket additional insured provision-examination of additional evidence will be necessary.  Further, even where a policy provides an individual or entity with additional insured status more generally, it must be determined if there are any limitations to this status or to the duty to defend.  As recent cases demonstrate, while not uniform in their approach to answering these questions, courts in a number of jurisdictions will look beyond the boundaries of the complaint and policy under the appropriate circumstances.

Because "a party that is not named an insured or an additional insured on the face of the policy is not entitled to coverage," Tribeca Broadway Associates, LLC v. Mount Vernon Fire Insurance Co., 774 N.Y.S.2d 11, 13 (N.Y. App. Div. 2004), an initial examination of the policy terms will be required in order to determine an insurer's defense duties.  Generally, additional insured status is granted in one of two ways:  First, an additional insured endorsement may specifically name the entity or individual as an additional insured.  In this case, while the policy may place limits on this grant of coverage, one would expect the duty to defend analysis to proceed much the same as it would with respect to the named insured.  Second, a so called "blanket" additional insured endorsement may provide additional insured status to unidentified entities or individuals that meet certain conditions of the policy.  In this latter case, establishing whether a party is an additional insured likely will require more than an examination of the policy.

Agreements to Name as an Additional Insured

One common form of blanket additional insured endorsements provides additional insured status to individuals and entities that the named insured is required by written contract to name as an additional insured.  See, e.g., Kassis v. Ohio Casualty Insurance Co., 913 N.E.2d 933, 934 (N.Y. 2009) (blanket endorsement providing coverage to "any person or organization whom [the named insured is] required to name as an additional insured on this policy under a written contract or agreement").  A party's status as an additional insured under a provision of this type will thus depend on its agreement with the named insured.

In Kassis, for example, the New York Court of Appeals addressed the application of such a provision in connection with a lease agreement that required the insured lessee to "maintain a general liability policy" providing specified coverage "at its sole cost and expense and for the mutual benefit of the Landlord and Tenant."  Id. at 934.  An employee of the insured subsequently was injured and brought suit against the landlord.  After the insurer disclaimed coverage, the insured and the landlord brought an action against the insurer seeking declaratory judgment that the insurer was required to defend and indemnify the landlord.  The court of appeals interpreted the term "mutual benefit" as intending that the landlord "enjoy the same level of coverage" as the named insured and held that the insurer was obligated to defend the landlord in the action.  Id.935.

In Suffolk Construction Co. v. Illinois Union Ins. Co., a Massachusetts court considered whether an alleged oral agreement between a subcontractor and a sub-subcontractor could satisfy an additional insured endorsement which included an individual or entity as an additional insured where "required by contract, provided the contract is executed prior to loss."  951 N.E.2d 944, 947 (Mass. App. Ct. 2011).  After discovery, the trial court granted the insurer's motion for summary judgment and the appellate court affirmed.  Though the contractors asserted that documents evidencing an oral agreement established the subcontractors status as an additional insured, the court held that an oral agreement could not satisfy the requirements of the endorsement.  The endorsement required that the contract be executed prior to loss, and an oral agreement could not be executed.

Considering that a secondary agreement is required to confer additional insured status under these types of endorsements, it is not particularly shocking that courts would look beyond the complaint in making this initial determination.  But beyond the initial requirement that a party demonstrate its status as either a named additional insured or as an additional insured by virtue of an agreement with the insured (or other relevant requirement), the additional insured endorsement may further limit the circumstances under which this grant of additional insured status will operate to impose duties on the insurer.  See, e.g., Gilbane Building Co., 664 F.3d 589.  In particular, the policy may limit coverage to circumstances involving liability related to the conduct of the named insured or to conduct occurring during a relevant period of time.

Liability Related to the Named Insured

Blanket additional insured endorsements often limit-or attempt to limit-an insurer's obligations to an additional insured to circumstances where the acts or conduct of the named insured are implicated in some fashion or another.  For example, the 1985 ISO additional insured forms provided coverage "only with respect to liability arising out of: (A) 'your work' for the additional insured; or (B) for acts or omissions of the additional insured in connection with their general supervision of 'your work' . . . ."  The more recent 2004 ISO forms provide coverage only with respect to liability "caused in whole or in part by:  1. your acts or omissions; or 2. the acts or omissions of those acting on your behalf . . . ."  As relevant here, because the underlying complaint will not always allege facts related to the named insured, the extent to which a court considers additional evidence may determine whether the duty to defend has been triggered.

In Gilbane Building Co., for example, the Fifth Circuit found that a general contractor was an additional insured, but that the insurer owed no duty to defend where the complaint did not allege negligence on the part of the named insured.  664 F.3d at 594.  An employee of the insured subcontractor was injured while climbing down a ladder and sued the general contractor operating the construction site alleging that it was negligent in keeping the site clean.  The court first held that the general contractor was an additional insured under the subcontractors policy by virtue of an agreement whereby the subcontractor agreed to assume the tort liability of the general contractor, even assuming the agreement was unenforceable.  Id. at 596.  The policy, however, provided coverage for additional insureds "only with respect to liability for [injuries or damage] caused, in whole or in part, by [the subcontractor's] acts or omissions; or . . . [t]he acts or omissions of those acting on [the subcontractor's] behalf."  Id. at 597.  Holding that "caused, in whole or in part by" required proximate causation, the court turned to the allegations in the complaint.  Id. at 598.  Applying the "eight corners rule" under Texas law and finding that the complaint alleged only the general contractors negligence as the cause of the employee's injuries, the court held that the duty to defend was not triggered.  Id. at 598-99. 

Other courts have not placed such limits on their inquiry into these matters, looking beyond the complaint and policy in determining whether the named insured's negligence was a contributing factor so as to trigger a duty to defend.  In American Economy Insurance Co. v. Holabird & Root, for example, an Illinois appellate court considered not only the underlying complaint but also a third-party complaint filed against the insured subcontractor in determining that the insurer had a duty to defend a general contractor.  886 N.E.2d 1166 (Ill. App. Ct. 2008).  The additional insured endorsement of the policy provided coverage to additional insureds, "but only with respect to liability arising out of 'your work' for that insured by or for you."  Id. at 1170.  Relying on this provision, the insurer denied coverage to the general contractor and filed a declaratory judgment action.  The insurer argued that it had no duty to defend because the underlying complaint did not allege any negligence on the part of the subcontractor or name the subcontractor as a party.  In affirming the trial court's grant of summary judgment to the general contractor, the court of appeals held that it was not limited to the allegation in the complaint.  The court thus looked to the allegations in a third-party complaint filed against the subcontractor which, taken together with the allegations in the original complaint, created "the potential for coverage due to [the subcontractor]'s negligence."  Id. at 1179.  See also Pekin Ins. Co. v. Pulte Home Corp., 935 N.E.2d 1058, 1065 (Ill. App. Ct. 2010) (considering, among other things, the contract between general contractor and named insured and holding that insurer had a duty to defend the general contractor where policy language provided that it was an additional insured "only with respect to liability incurred solely as a result of some act or omission of the named insured . . . "). But see National Fire Insurance of Hartford v. Walsh Construction Co., 909 N.E.2d 285, 291-92 (Ill. App. Ct. 2009) (holding that the court could not consider a general contractor's third-party complaint against the insured subcontractor).

Completed and Ongoing Operations

Similar questions may arise where the additional insured endorsement provides coverage only with respect to "ongoing operations" or "completed operations."  The ongoing operations language has typically been interpreted as limiting coverage to work in progress, see, e.g., New York City Housing Authority v. Merchants Mut. Ins. Co., 844 N.Y.S.2d 223 (N.Y. App. Div. 2007), whereas completed operations generally means work that is no longer in progress, see, e.g., Pardee Constr. Co. v. Ins. Co. of the West, 92 Cal. Rptr. 2d 443 (Cal. Ct. App. 2000).  Again, requirements such as these will play an important roll in determining whether the duty to defend is triggered.  And again, these provisions may implicate questions not readily ascertainable from a complaint filed against an additional insured.

In East Coast Residential Associates, LLC v. Builders Firstsource-Northeast Group, LLC, 2012 WL 75146 (N.J. App. Div. Jan. 11, 2012), a general contractor had hired an insured subcontractor to install decking.  Pursuant to a requirement of its contract with the general contractor, the general contractor was named as an additional insured under an endorsement to the policy, "but only with respect to liabilities arising out of [the subcontractor's] ongoing operations performed for [the general contractor]."  Further, the insurance did not apply to "'property damage' occurring after [] all work . . . to be performed by or on behalf of the additional insured(s) at the site of the covered operations [had] been completed" or that portion of the subcontractor's work had "been put to its intended use."  The court stated that it was not limited to the allegations in the complaint and could also consider "facts disclosed before the court decides the issue."  Finding no allegations or evidence of damage prior to the completion of work, the court held that the general contractor was not entitled to coverage as an additional insured.

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Whether an insurer's duty to defend an individual or entity as an additional insured has been triggered may well depend on more than a comparison of the allegations in the complaint to the language of the policy.  Though some jurisdictions apply a more focused analysis than others, courts appear increasingly likely to look beyond the traditional four (or eight) corners when determining issues related to additional insured coverage.  The practical implications of this are yet to be seen, but it should at the least cause both insurers and policyholders to carefully consider the language they use in their additional insured endorsements.