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THE CHALLENGES OF NAVIGATING ADDITIONAL INSURED COVERAGE AND CONTRACTUAL INDEMNITY CLAIMS 350 Mount Kemble Avenue Wall Street Plaza P.O. Box 1917 88 Pine Street, 28th Floor Morristown, New Jersey 07962-1917 New York, New York 10005 (973) 267-0058 (212) 483-0105 WWW.COUGHLINDUFFY.COM OVERVIEW Mechanisms utilized by contracting parties for shifting the risk of loss: 1. Additional Insured Coverage Does your insured have “additional insured” status from another party’s insurer? Additional insured status on a liability policy is an important bargained-for asset in many types of transactions in the construction, oil, gas and energy sectors 2. Contractual Indemnity Found in the written contract between the parties Two different ways to transfer the risk of loss. Although the additional insured requirement is usually coupled in a contract with contractual indemnity language, the two mechanisms are separate, independent methods of risk transfer Additional insurance becomes a financial “back-up” to the contractual indemnity provisions 2 OVERVIEW Both issues often arise in a variety of cases, including premises liability and construction site accidents. Found very often in contracts addressing the relationships between: Owners – General Contractors; General Contractors – Subcontractors; Landlords – Tenants. 3 OVERVIEW The key is to recognize that: These issues are separate and require a separate analysis in each case. Each issue needs to be analyzed from an “offensive” and “defensive” perspective. Not doing so can lead to the failure to appreciate a significant source of defense and/or indemnity. 4 Example of Transfer of Risk in the Construction Context GC’s Corporate Sub’s Excess Excess Insurance Insurance (GC’s AI Excess Insurance) GC’s Corporate Sub’s Primary Primary Insurance Insurance (GC’s AI Carrier) General Contractor Promise to Indemnify Sub-Contractor (“GC”) (“Sub”) Promise to Procure Insurance What Is An Additional Insured? One who enjoys the status of an insured, under the named insured’s policy. Has the benefit of enjoying protection under a policy while having no responsibility to pay premiums. 6 Examples Property owner on general contractor’s policy General contractor on subcontractor’s policy Landlord-Tenant 7 Reasons Additional Insured Status Is Sought • An additional insured is often entitled to direct rights under the named insured’s policy, which may include: – immediate coverage for defense costs; – prevention of subrogation claims; – standing to sue the insurer for breach of contract; – prevention of his own insurance carrier from being brought into the suit; – prevention of depletion of his own liability insurance to defend claims; and – prevention of increased premiums on future policies. 8 Key Issues to Focus on When Evaluating a Claim On what basis is the party claiming additional insured coverage? Has the party been added specifically to the policy? or Is the person or entity claiming to be an insured by virtue of a contract with the named insured or because of its status, e.g. an owner or lessor of the property? 9 AI Coverage Issues New York Law Contract Language Prerequisite Many blanket endorsements provide additional insured coverage to those “whom you have agreed, by written contract prior to an ‘occurrence’ or offense to include as additional insureds” or to “all persons or organizations as required by written contract”. A provision in a contract should not be interpreted as requiring the procurement of additional insured coverage unless such a requirement is expressly and specifically stated. Contract language that merely requires the insured to purchase/maintain insurance will not be read as also requiring that a contracting party be named as an additional insured. 10 ISO ISO has developed over Insurance Services Office 30 standard form endorsements for Two types of additional insured additional insured endorsements: coverage, each tailored 1. “Standard Form”: Drafted by ISO to a different risk transfer 2. “Manuscript Form”: Individually form drafted by insurers These endorsements have significantly evolved over the past 30 years 11 CG 20 10 (11/85) “ARISING OUT OF” “Additional Insured – Owners, Lessees or Contractors – Scheduled Person or Organization” WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your work for that insured by or for you. 12 (emphasis added) CG 20 10 (11/85) Scope of “Arising Out of” and “York Work” The phrase “arising out of” broadly construed so to provide the additional insured with broad coverage for both direct and vicarious liability in connection with the named insured’s work, including liability arising out of the additional insured's sole negligence Negates any fault requirement on behalf of the named insured in order for the additional insured to obtain coverage The phrase “your work” broadly construed so as to provide the additional insured with coverage for liability arising during the named insured’s ongoing operations, and for “completed operations”, i.e., coverage for claims that arise during the policy period but also after the named insured’s work has been completed. 13 Interpretation of “Arising out of”: New York New York courts broadly interpret the “arising out of” language and have held that when used “in an additional insured clause, it means ‘originating from, incident to, or having connection with.’" Admiral Ins. Co. v. Am. Empire Surplus Lines Ins. Co., 96 A.D.3d 585 (1st Dep’t 2012) (citing Regal Constr. Corp v. Nat’l Union Fire Ins. Co. of Pittsburgh, P.A., 15 N.Y.3d 34, 38 (2010) (internal citations omitted)). The focus of the inquiry “is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained.” Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Greenwich Ins. Co., 103 A.D.3d 473, 474 (1st Dep’t 2013) (citing Regal Constr. Corp. 15 N.Y.3d at 38);Tishman Construction Corp. v. CNA Ins. Co., 652 N.Y.S.2d 742 (1st Dep’t 1997). All that is required is “that there be some causal relationship between the injury and the risk for which coverage is provided.” Regal Constr. Corp. 15 N.Y.3d at 38; see also QBE Ins. Co., 934 N.Y.S.3d at 39 (the Court will “infer a causal nexus whenever it finds a reasonable possibility that liability arose out of, or was caused in whole or in part by operations of a named insured….”) 14 Interpretation of “Arising out of”: New York In the construction arena, when an employee of a named insured or a subcontractor is injured while performing work for the additional insured, the “arising out of” language is satisfied regardless of fault. Hunter Roberts Constr. Group, LLC v. Arch Ins. Co., 904 N.Y.S.2d 52 (1st Dep’t 2010). 15 Interpretation of “Arising out of”: New Jersey New Jersey courts broadly interpret the “arising out of” language and have construed the words “‘arising out of’ in accordance with this common and ordinary meaning as referring to a claim ‘growing out of’ or having its ‘origin in’ the subject matter….”Agostinho v. Damon G. Douglas Co., 301 N.J. Super. 187, 193 (App. Div. 1997) New Jersey courts also broadly define “arising out of” as having a ‘substantial nexus’”. Memorial Properties, LLC v. Zurich Am. Ins. Co., 210 N.J. 512 535 (2012). While each of these definitions implies a causal link between the act and the injury, none requires proximate cause. See Flomerfelt v. Cardiello, 202 N.J. 432, 454 (2010). “Whether the requisite connection or degree of relationship exists depends upon the circumstances of the particular case.” Westchester Fire Ins. Co. v. Cont’l Ins. Co., 126 N.J. Super. 29 (App. Div. 1973). 16 Substantial Nexus: “Arising out of”: New Jersey Must show substantial nexus between the accident and use of leased premises or work for coverage to attach. The inquiry is whether the accident: – Was in contemplation of parties to insurance contract; – Natural and reasonable incident or consequent of use of leased premises; – A risk for which an additional insured may reasonably expect those insured under a policy would be protected. 17 Substantial Nexus: “Arising out of”: New Jersey The substantial nexus need not be based on the negligence of the named insured. Nor is it destroyed by additional insured’s negligence. There is no requirement of physical proximity. “Work” is not limited to actual physical work, but includes operations and administrative duties related to the performance of contracted work. 18 Form CG 20 10 (10/93) “ONGOING OPERATIONS” WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured. (emphasis added) 19 Form CG 20 10 (10/93) “ONGOING OPERATIONS” The revision narrowed the scope of coverage to liability arising during a named insured’s “ongoing operations”. The revision continues to utilize the broad “arising out of” language; coverage remains available for claims arising out of the named insured’s work regardless of cause, and, arguably, for an additional insured’s sole negligence. 20 Scope of “Ongoing Operations” with Form CG 20 10 (10/93) Courts in different jurisdictions interpret the phrase “ongoing operations” differently. Some courts have broadly construed an operation as on-going as long as the obligations under the contract still exist. Other courts narrowly construe the phrase as providing coverage only for liability that arises while the work is in progress. Hartford Ins. Co. v. Ohio Cas. Ins. Co., 145 Wn. App. 765 (2008). At least one court has held that the phrase is ambiguous as to whether there is a temporal limitation on coverage.

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