What Does "Separation of Insureds" Mean—Part 2

In this second article on the meaning of separation of insureds in the CGL policy, court interpretations of "the insured," "an insured," and "any insured" and their ramifications are discussed.

In a previous IRMI Expert Commentary, we looked at the first subparagraph of the standard commercial general liability (CGL) insurance Separation of Insureds condition, which deals with the relationship among the policy's named insureds. The second subparagraph of the Separation of Insureds condition applies to all insureds under the policy. It does not set up, in effect, an individual policy for each insured as the first subparagraph does for each named insured. But it stipulates that the policy's insurance will apply "separately" to each insured seeking coverage under the policy.

The practical consequence of this language, as interpreted by a majority of the courts, is that CGL references to "the insured" are to be construed very differently from other references to "an insured" or "any insured." Specifically within the context of policy exclusions, for example, "the insured" means the insured who is looking for coverage—in the language of the Separation of Insureds condition, the insured "against whom claim is made or suit is brought." For example, an exclusion of damage to "property in the care, custody or control of the insured" [emphasis added] only limits coverage for the insured who actually has care, custody, or control of the damaged property. If another insured were to be held liable for the same damage, the exclusion would not apply to that other insured.

This reading of exclusionary references to "the insured" in light of the CGL Separation of Insureds condition has been upheld by a number of appellate courts. A recent example is Zaiontz v Trinity Universal Insurance Co., No. 04-01-00329-CV (Tex App Dist 4 2002). An employee of a company that remediates smoke damage was injured by a chemical he was spraying to eliminate odors in the interior of an airplane. Because the employer was exempt from the state workers compensation system, the injured employee brought suit against the company president, alleging that the latter was negligent in preparing the material safety data sheet required for use of the chemical. He also sued the company itself.

Among the questions before the Texas appellate court was the applicability of the employers liability exclusion in the CGL policy issued to the employer. The liability insurer had denied coverage to the company president on the basis of this exclusion, which reads:

This insurance does not apply to "bodily injury" to an employee of the insured arising out of and in the course of employment by the insured.

The injured employee (seeking payment directly from the CGL insurer) counter-argued that he was not an employee of the company president—the insured on whose behalf coverage was being sought—and that the exclusion therefore did not affect the president's coverage under the policy. The court agreed, specifically pointing to the CGL Separation of Insureds condition as the basis for its ruling. It cited an earlier decision—Commercial Standard Ins. Co. v American General Insurance Co., 455 SW2d 714 (Tex 1970)—which had reached a similar conclusion in connection with the "severability of interests" provision in a commercial auto policy. (Policy provisions equivalent to those of the current Separation of Insureds condition were termed "severability of interests" conditions in earlier policy forms.)

The term "the insured" as used in this policy must be examined by first applying the "severability of interests" test. "The insured" does not refer to all insureds; rather, the term is used to refer to each insured as a separate and distinct individual apart from any and every other person who may be entitled to coverage thereunder. When a claim is made against one who is an "insured" under the policy, the latter is "the insured," for the purpose of determining the company's obligations with respect to such claim.

The principle stated in Zaiontz operates specifically in connection with policy references to "the insured." Elsewhere in the CGL policy, exclusionary language may make mention of "an insured" or, more broadly still, "any insured." The Separation of Insureds condition does not necessarily require such phrases to be understood narrowly as references only to the insured seeking coverage.

An illustration of this point is the decision in Michael Carbone, Inc. v General Accident Insurance Co., 937 F Supp 413 (ED Pa 1996). An employee of Carbone, while driving his own car on company business, was involved in a collision causing injury to the other driver. Carbone was sued and sought coverage under its CGL policy. The CGL insurer denied the claim on the basis of the policy's auto exclusion, which applies to injury or damage "arising out of the ownership, maintenance, use or entrustment to others of any aircraft, auto or watercraft owned or operated by or rented or loaned to any insured." Since the vehicle in question was owned by the named insured's employee, and since employees are themselves insureds within the scope of their employment, the insurer maintained that the exclusionary language applied to the claim against Carbone.

Carbone cited the CGL Separation of Insureds condition, arguing that that condition imposes a reading of the auto exclusion that would make it inapplicable to the claim against Carbone. The court summarized this line of argument:

Carbone argues that the exclusion must be read in light of the separation of insureds clause. Essentially, this requires that the automobile exclusion must be applied to each insured separately. In particular, Carbone believes that when the automobile exclusion is read to determine how it applies to Carbone it reads as follows: "This insurance does not apply to bodily injury or property damage arising out of the ownership, maintenance, use or entrustment to others of any aircraft, auto or watercraft owned or operated by or rented or loaned to Carbone Inc." In short, Carbone thinks that the phrase "any insured" must be replaced by each insured individually when determining the scope of the exclusion. In essence, Carbone views "any insured" to be synonymous with "the insured."

Such an argument—interpreting the phrase "any insured" as if it were "the insured"—obviously would result in broader coverage (as suggested by the line of reasoning in Zaiontz) and would make the CGL auto exclusion applicable only when an insured was seeking coverage in connection with its own use of its own autos. The court in Carbone rejected this argument. It acknowledged the line of court cases that impose a limited scope of meaning on the exclusionary phrase "the insured," especially as it appears in the CGL employers liability exclusion, as in Zaiontz. But it viewed the wording of the employers liability exclusion and that of the auto exclusion very differently.

Note the exact language [of the CGL auto exclusion]. The provision excludes losses caused by an automobile operated by "any insured"; the clause does not say "the insured." The distinction is paramount. Had the auto exclusion used the phrase "the insured," the separation of insureds clause would have altered the meaning of the exclusion … The wording of the exclusion, however, does not except losses arising out of the use of an automobile owned or operated by "the insured"; it excludes losses from the use of an automobile owned or operated by "any insured." Therefore, Carbone's interpretation of the clause is unwarranted. Reading the policy very literally as demanded by the case law, the automobile exclusion reads as follows:

This insurance does not apply to bodily injury or property damage arising out of the ownership, maintenance, use or entrustment to others of any aircraft, auto or watercraft owned or operated by or rented or loaned to Carbone Inc., [the employee involved in the accident], any other employee, or any other insured.

The Carbone decision represents the majority view regarding coverage distinctions that can be read into policy exclusions on the basis of the Separation of Insureds condition. An exclusionary reference to "the insured" makes the exclusion applicable only to the status or activity of the insured who is seeking coverage under the policy (as in Zaiontz). An exclusionary reference to "any insured," on the other hand, applies the exclusion to the status or activity of any person or organization qualifying as an insured under the policy. That means that, despite the presence in the policy of a Separation of Insureds or other "severability of interests" provision, one insured may be penalized on account of another insured's act or omission.