7 Years Later, ISO Additional Insured Language Gets First Decision

Charter Oak Fire Insurance Company v. Zurich American

In Charter Oak, the Southern District of New York was asked to analyze whether a contractor's commercial general liability (CGL) insurer owed a duty to defend the building owner, an additional insured, for a bodily injury claim based on the AI requirements in the contract. The dispute, and the court's analysis, centered in part on whether the owner's potential liability needed only to be "caused, in whole or in part" by the contractor's "acts or omissions" (per the AI endorsement) or "negligent acts or omissions" (per the trade contract AI requirements).

Based on the "will not be broader" language, the court found that the contract terms were to be incorporated into the contractor's insurance policy and the negligence standard controlled. The court also determined that certain other elements of the contract AI requirements—those reinforcing a broad duty to defend—governed the policy and went on to hold that Zurich owed a defense.

Background

In February 2016, the owner of an apartment building, ASB L3 ("Owner"), entered into a contract with Slade Industries ("Contractor") to modernize one of its elevators. The contract required the Contractor to purchase insurance coverage for the Owner. Specifically, the contract stated the following.

The Contractor shall cause the commercial liability coverage required by the Contract Documents to include: (1) the Owner … as [an] additional insured for claims caused in whole or in part by the Contractor's negligent acts or omissions during the Contractor's operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor's negligent acts or omissions during the Contractor's completed operations. [Emphasis added.]

The Contractor obtained a CGL policy with Zurich American Insurance Company, which contained an additional insured endorsement that named as additional insureds "only those persons or organizations where required by written contract." Under the endorsement, the additional insured coverage applies "only with respect to liability for [injury] caused in whole or in part by [the Owner's] acts or omissions or the acts or omissions of those acting on [the Owner's] behalf." Critically for this discussion—there was no negligence requirement.

The additional insured endorsement further provided the following.

If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which [the Owner is] required by contract or agreement to provide for such additional insured.

Later that year, an employee of the Contractor, Josue Bulnes, slipped and injured himself while working on the elevator project. Mr. Bulnes filed a lawsuit ("Underlying Action") against the Owner in New York State court, where he alleged that the Owner's negligence had caused him to fall and sustain injuries. The Owner's CGL insurer, Charter Oak, timely notified the Contractor's insurer, Zurich, of the Underlying Action and demanded that Zurich defend the Owner as an additional insured. Zurich disclaimed coverage and refused to defend the Owner in the Underlying lawsuit. Charter Oak subsequently filed a declaratory judgment action against Zurich.

Testing the Implications of 2013 ISO Language

Zurich's denial, and argument to the court, was based on its view that its AI obligations and duty to defend were limited to the contract's terms: covering claims caused, in whole or in part, by the Contractor's negligent acts or omissions. Zurich argued that the Underlying Action's claims did not meet that threshold. Charter Oak disagreed and said the nonnegligence standard of Zurich's AI endorsement should control.

Why does that difference matter? As a general proposition, "negligence" can be interpreted in this context to require a higher burden of proof than "acts or omissions." That is, it may require a showing that one party violated a duty of care, as opposed to merely having undertaken some type of affirmative activity (whether negligent or not).

The court held that negligence was the standard. In reaching that conclusion, it focused narrowly on the "will not be broader than" language in the AI endorsement—scrutinizing the term "broader," in particular—and held that it functioned to incorporate the contract into the Zurich policy. Per the court, the concept of breadth "relates to the scope of coverage … an all-encompassing description of the type of covered claims." [Emphasis added.] As a result, the court concluded, the Owner's rights under the Zurich policy were "derivative of its rights under the Contract," and the Owner could not enjoy greater insurance than what was agreed in the contract.

The court's analysis did not end there, however. The court looked at the AI promises in the Contract in their broader context, not just as isolated terms, as including "claims caused in whole or in part by [Contractor's] negligent acts or omissions." This requirement—incorporated as part of the Policy—informed Zurich's defense obligation. The court emphasized that "claim" is a broad concept, denoting a "cause of action" or legal claim, and Zurich's duty to defend is triggered when Contractor's negligent acts or omissions either "bring about or effect" a lawsuit against an additional insured—"even if those negligent acts are not specifically pled in the complaint (and, indeed, even if [Contractor] is not named in the complaint)." ²

From the court's perspective, this affirmed the principle that Owner had not only purchased litigation insurance through its AI status, but insurance against any claims brought about by Contractor's negligence—"regardless whether the underlying lawsuit named [Contractor] or alleged that [Contractor] was the proximate cause of the injury." The court further acknowledged that this rule made sense because, in most construction bodily injury claims, the direct employer is omitted from any suit because of workers compensation immunity. In the court's view, the Owner is entitled to a defense regardless, and to rule otherwise would render the promise of AI coverage to be illusory.

Notably, the court then carefully considered the facts of Contractor's involvement in bringing about the injuries, facts that supported its decision that a defense was owed.

Lessons Learned

There are several important takeaways from this decision. First and foremost, the "will not be broader than" language can invite a court to use general legal principles regarding incorporation by reference to interpret the AI policy. For contractors assessing strategies as they draft contracts, this reinforces the critical need for parties to a trade contract—both upstream and down—to carefully consider the contract requirements for additional insured coverage.

In Charter Oak, the litigants framed the issues narrowly. As a result, the court's discussion of relevant AI concepts was not required to stray into any truly unique territory. Consider the scenario, though, where a contract contains terms and conditions that may be construed as conditions precedent to AI coverage or broadly describes anticipated exclusions or other limitations about the coverage. Relying on Charter Oak, a court may be compelled to abide by those terms in construing the policy, raising difficult questions about how to resolve conflicts, and whether the standard rules regarding language clarity, ambiguity, and construing terms against the drafter (usually the insurance company) still apply.

Whatever the answer, today's lesson is straightforward: precision is paramount. Precision in word choice and formatting to ensure that no unintended parameters inadvertently apply to AI obligations and understand the intent of the parties so that language best matches intent. Lack of care in any respect is only likely to invite questions over the parties' true goals, debate over ambiguity, and potentially lead to uncertainty of result.

For claims or disputes involving existing contract language, the AI requirements must be considered holistically, with due consideration given not only to the relevant terms of the trade contract but also to the AI insurer's core obligations. Here, the court determined that the concept of "claim" informed the parties' expectations about, and ultimately confirmed, Zurich's broad duty to defend in this common "action over" scenario. Whatever the limiting implications may have been from the use of a "negligence" standard, Zurich's defense obligations—reinforced by the court's understanding of the parties' intent in the trade contract—took precedence.

Second, however it may have defined "negligence," the court was clear that no finding by a trier of fact was needed, and that evidence developed during discovery in the underlying case—even evidence extrinsic to the pleadings, as permitted by New York law in construing the duty to defend—could be used by the AI to support its claim for coverage. Moreover, such evidence need only, as is custom, identify a "reasonable possibility" that the insurer will eventually owe indemnity.

Finally, in that same vein, defense can be owed by an AI policy even where the complaint does not specifically discuss the named insured's role. This is often a source of dispute in New York and elsewhere, and the court's ruling reinforces a strong counterargument to AI denials on this basis. Consider also the more recent decision, from June 5, 2020, in Travelers Prop. Cas. Co. of Am. v. Harleysville Ins. Co. of N.Y., 2020 NY slip op. 50658(U), 67 Misc. 3d 1227(A) (Sup. Ct.). ("When an employee of the named insured is injured while in the employ of the named insured, the additional insured is entitled to defense because there is a reasonable possibility that the bodily injury is proximately caused by the named insured's acts or omissions.")

As the first bellwether on this critical concept of "breadth" under the commonly used ISO 2013 AI endorsements, Charter Oak has much to offer and consider and will undoubtedly be a focal point of AI disputes going forward.

Acknowledgment

Many thanks to Janie Eddy, coauthor of this article.