Modern Additional Insured Endorsements DO NOT Require Vicarious Liability

Background of the Controversy

The Insurance Services Office, Inc. (ISO), standard form additional insured endorsement is widely utilized as a risk transfer vehicle throughout the commercial marketplace and, specifically, the construction industry. In its most recent iteration, published in the early 2000s, ISO replaced its longstanding "arising out of" trigger language with the phrase "caused, in whole or in part." While ISO explained this change was made in response to what many observers believed to be an overly broad application of the "arising out of" trigger in case law around the country, many insurance companies seized on the revision to advocate for a far narrower application of coverage to only those circumstances where the named insured was alleged to be vicariously liable for the additional insured.

As the revised amendment was tested, courts rejected the vicarious-liability-only argument in favor of a plain meaning interpretation that additional insured coverage is available as long as the named insured played some causative role—at least in part—in causing the harm. From this initial trend, the body of case law has more fully developed, with at least 16 jurisdictions weighing in on the issue. While a small minority of jurisdictions have sided with the vicarious-only interpretation, a true "majority" approach has emerged, adopting the position that additional insured coverage is not limited to vicarious liability and finding coverage where the named insured is alleged to be at least partially at fault for causing the harm.

The majority approach has recognized that vicarious liability is a very specific legal liability framework (with decades of developed case law) that concentrates only on the liability of one party (here, the additional insured) that exists solely by virtue of its relationship to another (here, the named insured) and thus is essentially coextensive with that party's (the named insured's) own liability. The "caused, in whole or in part" language reflects no such limited scope. If ISO had intended to use the more restricted vicarious liability standard, it need only have used the words "vicarious liability." Rather, the intent was to provide complete additional insured status (subject to all other terms and conditions) as long as the additional insured's liability was caused at least in part by the named insured's acts or omissions.

The Facts and Holding of Navigators v. Citizens

In Navigators, a liability insurer for a general contractor filed a declaratory judgment action against a subcontractor's insurer seeking defense and indemnity for its insured (as an additional insured) for an underlying injury lawsuit filed by an employee of the subcontractor. While the specifics of the contractual insurance and indemnity obligations between the general and subcontractors are not discussed, it was undisputed that the subcontract required the subcontractor to include the general contractor as an additional insured under its policy and that said policy included the standard form additional insured endorsement with a "caused, in whole or in part, by" trigger.

In the underlying suit, the worker alleged injury caused by the negligence of his employer (the subcontractor) and the general contractor. The worker did not allege that the general contractor was vicariously liable for the subcontractor; rather, theories of direct negligence were lodged against both.

After being sued by the worker, the general contractor sought coverage as an additional insured under the subcontractor's policy. The subcontractor's insurer, Citizens Insurance Company of America, denied the general contractor's tender, reasoning that because the worker had not alleged the general contractor to be vicariously liable for its named insured, it was not obligated to provide coverage to the general contractor as an additional insured. The general contractor's insurer, Navigators Specialty Insurance Company, maintained that additional insured coverage was available in direct liability situations so long as the "additional insured is allegedly liable at least in part based on what it itself did."

The New Jersey District Court framed the issue this way: "Does the duty to defend apply in both vicarious and direct liability contexts?" and endeavored to resolve the issue in the absence of any controlling decision from the New Jersey Supreme Court. As a federal court sitting in diversity jurisdiction, the court had to "predict" how the New Jersey Supreme Court would rule. It predicted that New Jersey's highest court would conclude that the duty to defend is triggered by allegations of vicarious liability or by allegations of direct liability.

In making its prediction (and corresponding ruling), the court relied on its collective reasoning derived from the following four sources.

• Lower court decisions in New Jersey
• A New Jersey federal decision
• Decisions from other federal courts throughout the United States
• The plain and ordinary meaning of the insurance policy

Considerations and Takeaways

The Navigators court's ruling and analysis are significant for several reasons. First, the court quite clearly announced that there is a national consensus that the "caused, in whole or in part, by" language does not require allegations of vicarious liability. While the court appropriately observed that such consensus has been reached by a majority of jurisdictions analyzing the issue, it is critical to remember that this issue has not reached all jurisdictions—particularly not at the appellate level. Nonetheless, this author agrees that, based on the body of case law now existing, it is fair to characterize the court's holding as the majority rule.

Second, and despite the momentum behind the "majority rule," it is critical to remember that a minority rule also exists. In those jurisdictions such as Florida, the vicarious-only rule has received the stamp of approval from the Eleventh Circuit Court of Appeals. Given that many jurisdictions have not decided the issue, and with at least one federal appellate court siding with the minority, there is still considerable uncertainty in how those now undecided jurisdictions will eventually rule. Thus, for insureds in the minority and undecided jurisdictions, careful consideration must be made when effectuating risk transfer and pause given before relying on standard form additional insured endorsements to accomplish intended goals.

Despite the remaining uncertainty and in this author's opinion, the Navigators court continued to pave the way for other courts to join the majority. While not a focal point of the court's analysis, a critical factor was identified: the importance of consensus in interpreting standard form insurance contracts. As the court aptly recognized, many insureds—and especially the more sophisticated insureds—depend on a predictable (and uniform) interpretation of the insurance products they purchase. With that in mind and in addition to the legal analysis employed to interpret "caused, in whole or in part," which this author agrees does not operate to limit coverage in vicarious liability situations, the importance of a predictable interpretative approach to standard insurance forms should also remain a key consideration for courts that have yet to address this issue.