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
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.2
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.3
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
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.
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
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.
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.