What Does an Additional Insured Endorsement Cover?
Joseph Postel | July 1, 2000
Learn how recent California and Texas court decisions have clarified the broad scope of coverage under standard AI endorsements.
One of the oldest and most confounding debates in the insurance world is over the question of what an additional insured (AI) endorsement to a CGL policy covers. Some say that an AI endorsement covers the additional insured as though he had been provided his own separate CGL policy. Another common view is that an AI endorsement covers the additional insured only for his vicarious liability for the acts and omissions of the named insured, but not for his own negligence. There is one very good reason that neither of these views is correct: They are both gross overgeneralizations.
The only correct answer to the question is, "It depends on the language of the endorsement." This would seem obvious, but the law reports contain too many cases deciding what the AI endorsement covered, without paying enough attention to the language of the endorsement. I have seen cases that don't even reproduce the language in the opinion, let alone analyze it. Fortunately, these cases are the exception, not the rule.
AI endorsements can, for the most part, be divided into two categories: ISO and manuscript. Generally, ISO endorsements furnish coverage to the additional insured for liability "arising out of" the named insured's work, operations, or premises (or some variation on that theme). For example, the March 1997 version (the version currently in use) of the ISO CG 20 10 AI endorsement provides as follows.
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. 1
I will focus in this article on the ISO endorsements, and perhaps on manuscript endorsements in a future article. An article of this length could not hope to give a thorough history of the development of case law interpreting additional insured endorsements. Suffice it to say, however, that the case law has continued to develop, as courts sharpen their analyses and have an ever-increasing body of case law upon which to draw.
For reasons that are neither important nor clear, two of the three largest states—California and Texas—had made relatively few contributions to this body of case law until recently. In 1999 and 2000, however, some important and well-reasoned decisions have come from both state and federal courts in California and Texas, and I will try to summarize and analyze them here. Unfortunately, the courts also have had to decide cases involving narrow manuscript endorsements as well, and thus, clarity and uniformity in this area remains elusive. Those cases will be dealt with in a future article.
Texas before 1999
Until 1999, the law in Texas on the scope of coverage under a standard AI endorsement was based upon Granite Constr. Co. v Bituminous Ins. Co., 832 SW2d 427 (Tex App—Amarillo 1992, no writ). Granite hired a trucking company (Brown) to haul asphalt from its construction site. Brown had its liability policy endorsed with the ISO CG 20 10 AI endorsement, or at least virtually identical language, naming Granite an additional insured. Loaded with Granite's asphalt, one of Brown's trucks overturned, injuring the driver, who was an employee of Brown. The driver sued Granite, alleging Granite improperly loaded his truck. Granite tendered its defense to Brown's insurer, Bituminous. Bituminous refused to defend or indemnify.
Granite filed a declaratory judgment action, contending that since the driver was injured while performing the work to be done under Granite's contract with Brown, Granite's liability to the driver necessarily arose out of Brown's operations, and thus, Granite was entitled to AI coverage. Bituminous responded that the endorsement restricted coverage to Granite's liability for Brown's acts, but not for Granite's own acts. Since the suit alleged Granite negligently loaded the truck, it was not covered, Bituminous argued. With little discussion, the court decided that since the loading of the truck was the sole obligation of Granite, and Brown was not responsible for that operation, Granite's liability did not arise out of Brown's operation. Accordingly, the court held Granite was not entitled to AI coverage.
The Granite court seems to have believed that the additional insured's liability must arise either out of its own acts or out of the named insured's, but not out of both. But these are not mutually exclusive propositions. Under the Granite view of standard AI coverage, the additional insured is covered for nothing but its vicarious liability for the acts and omissions of the named insured, even though the language of the AI endorsement does not compel or even permit such a result.
California Points the Way for Texas
As 1999 dawned, the Granite case still held sway in Texas. Only one other state court had even interpreted an AI endorsement since Granite, and it, too, found no coverage. 2
Then, in January 1999, the California Court of Appeal, in Acceptance Ins. Co. v Syufy Enterprises, 81 Cal Rptr 2d 557 (Cal App 1999), took direct aim at Granite:
We disagree with the Texas approach. It is inconsistent with the ordinary broad meaning of "arising out of," which as noted above has been regularly applied by California courts in insurance cases. This inconsistency leads to tortured results. In Granite Construction, the negligent loading of the named insured's truck caused no injury (and no liability) until the named insured's employee began hauling the load, in the course of which the truck overturned. It is difficult to understand how the driver's claim did not arise out of the hauling operation in the most direct way, unless one assumes that fault is a predicate for coverage. We do not believe such an assumption is justified by the policy term "liability arising out of operations." [81 Cal Rptr 2d at 562]
It seems the state and federal courts in Texas took California's criticisms to heart, because a mere 2 months later, they issued the first in a string of decisions abandoning Granite and adopting the California—and majority—view, beginning with Admiral Ins. Co. v Trident NGL, Inc., 988 SW2d 451 (Tex App—Houston 1999, writ den).
Admiral involved an injured employee of the named insured suing the additional insured, which had hired the named insured to work on its oil and gas facilities. The AI endorsement contained the CG 20 10-type "arising out of your operations" language. The parties agreed that the named insured was free from fault and did nothing to cause the explosion that injured the underlying plaintiff. The insurer argued that under Granite, the additional insured's liability could not be said to arise out of the named insured's operations-hence, no AI coverage. However, the additional insured contended that its AI coverage was not limited to those losses caused by the named insured's negligence; rather, "arising out of" requires only a loose causal connection between the loss and the named insured's activities.
The court surveyed various out-of-state decisions and concluded that these decisions were more persuasive than Granite:
The majority view of these cases is that for liability to "arise out of operations" of a named insured it is not necessary for the named insured's acts to have "caused" the accident; rather, it is sufficient that the named insured's employee was injured while present at the scene in connection with performing the named insured's business, even if the cause of the injury was the negligence of the additional insured.
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We hold that, because the accident in this case occurred to a KD employee while the employee was on the premises for the purpose of performing preventive maintenance on the compressor that exploded, the alleged liability for the employee's injuries "arose out of KD's operations," and, therefore, was covered by the "additional insured" provision. [988 SW2d at 453, 455]
Just 8 months later, the Austin branch of the same court handed down a decision following Admiral. In McCarthy Bros. Co. v Continental Lloyds Ins. Co., 7 SW3d 725 (Tex App—Austin 1999, no writ), a case again involving a standard AI endorsement—in this case the 11 85 version of CG 20 10—a subcontractor's employee was injured in a fall at a construction site. He sued the general contractor for negligently allowing a dangerous condition to exist on the site.
The general contractor tendered its defense to Continental Lloyd's, which had added the general contractor as an additional insured, but Lloyd's refused to defend on the grounds that the suit sought damages for the general contractor's own negligence, and that the suit did not allege that the subcontractor (the named insured) was negligent. The general contractor argued that because the injured plaintiff was injured while in the course and scope of his employment with the named insured, the general contractor's liability "arose out of" the named insured's work. Following Admiral, the court reiterated the majority view and held that there was AI coverage for the claim by the named insured's employee against the additional insured.
The Federal Courts Follow Suit
The United States Court of Appeals for the Fifth Circuit, sitting in New Orleans, decided two cases under Texas law in 2000 and had to struggle to reach the same results as the Texas state courts did last year, but they got there. See Mid-Continent Casualty Co. v Chevron Pipe Line Co., 205 F3d 222 (5th Cir 2000), and Mid-Continent Casualty Co. v Swift Energy Co., 206 F3d 487 (5th Cir 2000). As in Admiral and McCarthy Bros., these cases involved the CG 20 10 AI endorsement, and in each case the court found that the employment relationship between the named insured and the injured plaintiff suing the additional insured satisfied the condition for AI coverage.
The two panels of the court managed to engage in lengthy detours, however, on the way to the right conclusion. The first panel perceived a significant distinction between the November 1985 edition of CG 20 10's use of the term "your work" and the later versions' (October 1993 and March 1997) use of "your ongoing operations." The court therefore hesitated to apply the precedent interpreting the more recent versions of CG 20 10 (Granite and Admiral) to the case before it, which involved the November 1985 version. However, noting that McCarthy Bros. involved the November 1985 version of CG 20 10, the court overcame its hesitancy and ruled in favor of AI coverage.
The court need not have been detained by this distinction, however, because the CGL coverage form's definition of "your work" renders the two terms synonymous. The coverage form defines "your work" as "work or operations performed by you or on your behalf." The court did not discuss this definition (apparently, counsel failed to cite it to the court). The only purpose in changing the "your work" language of the November 1985 version of CG 20 10 to "your ongoing operations" in the later versions is that ISO intended to clarify that AI coverage does not extend to completed operations losses. But that distinction was irrelevant to the Chevron Pipe Line Co. case.
The second panel, in the Swift Energy Co. case, struggled with the issue of whether the named insured's operations were performed for the additional insured (that is a condition of CG 20 10 AI coverage), when the additional insured did not hire the named insured; rather, the additional insured hired a contractor that in turn hired the named insured. The court provided an interesting discussion of this issue that highlights some basic differences between the way courts treat indemnity agreements and AI coverage.
The first portion of the opinion analyzes whether Swift had any rights under its indemnity agreement with the named insured, Air Equipment. The lower court, in deciding this question, had given a narrow interpretation to the indemnity agreement's requirement that Swift directly hire Air Equipment before any indemnity obligation could arise, and had applied the same narrow interpretation to the question of whether the named insured's work was performed for the additional insured (Swift), thus satisfying a condition for AI coverage. Without disagreeing with the lower court's conclusion on the first point, the Court of Appeals nonetheless pointed out that, in contrast to an indemnity agreement, a broad interpretation must be given to AI endorsements, as follows.
We therefore reject the district court's conclusion. We find that Swift should not be denied coverage as an additional insured under the Policy because the liability to Lozano did not arise from [Air Equipment's—the named insured's] operations "performed for" Swift. Clearly, Air Equipment's services were ultimately performed to benefit Swift. Air Equipment may have contracted directly with Flournoy, but Flournoy was merely Swift's subcontractor, such that all of Flournoy's operations were performed on Swift's premises for Swift's benefit. Given the absence of other applicable limiting language in the Policy (in contrast to the [indemnity agreement]), this fact alone likely is sufficient to find that Air Equipment's operations were "performed for" Swift.
California Decides There Is Completed Operations AI Coverage under the November 1985 Version of CG 20 10
In Pardee Constr. Co. v Insurance Company of the West, 92 Cal Rptr 2d 443 (Cal App 2000), the Court of Appeal provided a thorough analysis of completed operations coverage under the November 1985 version of the CG 20 10 AI endorsement. A general contractor was sued for construction defects caused by subcontractors on a condo project called Heritage II. The general contractor sought AI coverage for these claims under the subcontractors' policies. The subcontractors' insurers issued various types of AI endorsements naming the general contractor an additional insured.
Of particular interest with respect to the completed operations issue were CG 20 10 (11 85) AI endorsements issued by U.S. Fire Ins. Co. for policy periods running from May 8, 1992, to May 8, 1997. Recall that the November 1985 version of CG 20 10 conditions AI coverage on the additional insured's liability "arising out of your [the named insured's] work," and that "your work" was changed in 1993 to "your ongoing operations." U.S. Fire's AI coverage for the general contractor did not even come into existence until 4 years after the completion of Heritage II. Yet because the November 1985 version of CG 20 10 did not limit AI coverage to ongoing operations, as later versions do, and because the CGL coverage form explicitly grants completed operations coverage, the court concluded that the general contractor was entitled to AI coverage under the U.S. Fire policy. In reaching this conclusion, the court cited at length numerous IRMI publications, including Contractual Risk Transfer, The Additional Insured Book, and Construction Risk Management.
Conclusion
Texas and California recently added some very important cases to the body of law interpreting AI coverage. Although there are no Supreme Court decisions from either state, the intermediate appellate courts, as well as the federal courts of appeal applying Texas and California law, give a fairly cohesive and broad interpretation of AI coverage under standard ISO endorsements. Some confusion persists, however, in the area of manuscript endorsements, and California has decided a number of recent cases interpreting these endorsements. I will analyze those cases in a future article. 3
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