In my last article, Part I, I talked about recent court decisions from California and Texas
that expand the already wide body of law across the nation giving a broad interpretation
to standard (i.e., Insurance Services Office, Inc.) additional insured (AI)
endorsements. In this article, I will discuss judicial treatment of manuscript
AI endorsements, which almost always are designed to provide narrower coverage
than the ISO endorsements. In fact, in many cases, they are designed to provide
only the illusion of coverage—they actually provide no coverage at all.
ISO AI Endorsements
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.2
Manuscript AI Endorsements
Type 1:3 Endorsements
that Condition Coverage on the AI's Liability Arising Out of the Named Insured's
Negligence. A typical manuscript AI endorsement can be seen in Maryland Cas. Co. v Nationwide Mut. Ins. Co.,
81 Cal App 4th 1082, 97 Cal Rptr 374 (4th Dist 2000). The AI endorsement in
that case provided, in pertinent part:
[B]ut this insurance with respect to [the additional insured] applies
only to the extent that [the additional insured] is held liable for your
acts or omissions arising out of and in the course of operations performed
for [the additional insured].
The ISO and manuscript endorsements may seem similar, but note the difference
between the underlined terms. This difference is crucial. When the AI is covered
for its liability arising out of the named insured's operations, it is covered
for its own negligence, so long as the loss was connected in some way with the
named insured's operations. The following cases have so held:
- Acceptance Ins. Co. v Syufy Enterprises,
81 Cal Rptr 2d 557 (Cal App 1999)
- Container Corp. of America v Maryland Cas. Co.,
707 S2d 733 (Fla 1998)
- Merchants Ins. Co. of New Hampshire v United
States Fidelity & Guaranty Co., 143 F2d 5 (1st Cir 1998)
- Township of Springfield v Ersek, 660
A2d 675 (Pa App 1995)
- Consolidated Edison of New York, Inc. v Hartford
Ins. Co., 610 NYS2d 219 (NY App 1994)
- Sportmart, Inc. v Daisy Mfg. Co., 645
NE2d 360 (Ill App 1994)
An example of how easily this condition can be satisfied is the line of cases
holding that where the injured person to whom the AI is liable worked for the
named insured, the AI's liability arises out of the named insured's operations
as a matter of law, i.e., automatically, by virtue of the employment. The following
cases have so held:
- Liberty Mutual Ins. Co. v Westfield Ins. Co.,
703 NE2d 439 (Ill App 1998)
- Township of Springfield v Ersek, 660
A2d 675 (Pa App 1995)
- Florida Power & Light Co. v Penn. America Ins.
Co., 654 S2d 276 (Fla App 1995)
But when the AI is covered only for its liability arising out of the named
insured's acts or omissions, it is generally not covered for its own negligence. Examples of this include the following cases.
- Harbor Ins. Co. v Lewis, 562 F Supp 800
(ED Pa 1983)
- Consolidation Coal Co. v Liberty Mutual Ins.
Co., 406 F Supp 1292 (WD Pa 1976)
Type 2: Endorsements that Exclude Coverage for the
AI's Own Negligence—"Vicarious Liability" Endorsements. Some insurers
have reinforced their intent to exclude coverage for the AI's own negligence
with language stating just that. One such insurer that has been using such language
for a long time is AIG. The typical AIG AI endorsement provides as follows.
It is agreed that additional insureds are covered under this policy as
required by written contract, but only with respect to liabilities arising
out of their operations performed by or for the named insured, but excluding any negligent acts committed
by such additional insured.
Note that the underlined language in both the ISO CG 20 10 and the AIG endorsements
is very similar, in that both condition coverage on the AI's liability arising
out of the named insured's operations. But
also note that the italicized language in the AIG endorsement adds a limitation
to AI coverage: the AI is not covered for its own negligent acts.
Illinois Courts Wrestle with the Question of Whether Vicarious Liability
Coverage Is Illusory
The exclusion for the AI's own negligence may appear to be innocuous, but
it is anything but. It eliminates coverage for just about any kind of liability
an AI might face, thus rendering the AI coverage illusory.
The Glenview Park District Case. Probably the
best discussion of this topic is found in a dissenting opinion from Chief Justice
Michael Bilandic of the Illinois Supreme Court, who will retire at the end of
this year. In National Union Fire Ins. Co. of Pittsburgh,
Pa. v Glenview Park District, 158 Ill 2d 116, 632 NE2d 1039 (1994), the
Glenview Park District hired NDS to do some painting work on some of its buildings.
An employee of NDS sustained an injury in the course of this work and sued the
Glenview Park District, alleging both negligent acts and violations of the Scaffold
Law (now repealed).
The Glenview Park District, which was an AI on a commercial general liability
(CGL) insurance policy issued by AIG, using the Type 2 AI endorsement quoted
above, sought a defense from AIG. The Illinois Supreme Court decided that the
AI endorsement's exclusion for negligent acts of the AI did not negate AIG's
duty to defend the Glenview Park District, because it did not apply to the Scaffold
Law claim, and because of the rule that the insurer must defend the entire complaint
if any portion of it is potentially covered.
In reaching this decision, the court decided that it need not determine the
Glenview Park District's cross-appeal, which contended that the exclusion for
the negligence of the AI contained in the AIG AI endorsement rendered the AI
coverage illusory and therefore contrary to public policy as embodied in the
Illinois Insurance Code. Chief Justice Bilandic dissented from the decision
not to hear the cross-appeal. It is important to understand that the majority
did not express an opinion on the merits of the cross-appeal, and thus, the
fact that Chief Justice Bilandic's views are contained in a dissenting opinion
does not indicate that the full court rejected those views. The Chief Justice
The Glenview Park District contends that this endorsement violates public
policy and is, therefore, void. The Glenview Park District argues that the
"coverage" provided under National Union's endorsement is illusory, in that
it grants broad coverage to an additional insured under a comprehensive
liability policy in one breath, while deceptively sweeping that coverage
away in the next via its exclusion of coverage for damages resulting from
the additional insured's negligence. The Glenview Park District points out
that claims alleging its negligence in relation to the NDS painting contract
are the most likely to be brought against it and the type for which it sought
coverage initially. The Glenview Park District contends that if the additional
insured endorsement does not provide coverage for claims due to its negligence,
it provides no coverage at all. The Illinois Director of Insurance has submitted
an amicus brief in support of the Glenview Park District's argument.
National Union, on the other hand, argues that its endorsement provides
coverage to the Glenview Park District for claims resulting from the negligence
of NDS for which the Glenview Park District may be vicariously liable. Additionally,
National Union argues that its negligence exclusion is clear and unambiguous.
* * *
Clearly, National Union's additional insured endorsement to its CGL policy
undercuts the entire coverage that CGL policies purport to assume, i.e.,
coverage for the insured's negligence. Moreover, National Union's endorsement
purports to insure the Glenview Park District, as an additional insured
under a comprehensive liability policy, not, as National Union contends,
under a policy for vicarious liability. The Glenview Park District does
not need, nor did it seek, coverage for vicarious liability in connection
with the NDS painting contract. NDS is an independent contractor and the
Glenview Park District cannot be held vicariously liable for its acts except
under a narrow exception. Even if it was to be held vicariously liable for
the acts of NDS, the Glenview Park District would have an action for indemnity
against NDS and, therefore, would have no need for vicarious liability coverage
on the painting contract. The endorsement is illusory and provides no coverage
at all. Since the negligence exclusion deceptively affects the general liability
risks that the endorsement purports to assume, the endorsement's exclusion
violates public policy and should not be enforced.
Subsequent Illinois Appellate Court Cases. I had expected the Illinois Appellate or Supreme Courts to adopt the Chief Justice's
views some day in a case that presented the issue more squarely, but alas, so
far, no such case has been accepted by the supreme court, and the appellate
court has twice taken the opposite point of view. In American Country Ins. Co. v Kraemer Bros., Inc., 298 Ill App 3d 805,
699 NE2d 1056 (1st Dist 1998), the court construed an AI endorsement that not
only excluded coverage for the AI's own negligent acts, but also limited the
coverage to "liability specifically resulting from the conduct of the named
insured which may be imputed to the Additional Insured."
In a sparsely reasoned opinion, the court rejected the contention that the
AI coverage was illusory, stating that it would provide coverage in the rare
situations where the AI faced strict liability for duties it could not delegate,
such as demolition work. But what the court overlooked was the fact that none
of the examples it cited of strict liability for nondelegable duties applied
to the case before it. The AI in the case—the general contractor—was sued for
ordinary negligence, not for strict liability. More importantly, the named insured—the
subcontractor—was not engaged in any of the limited types of business activities
that could subject a general contractor to vicarious, or strict, liability (e.g.,
demolition work). Rather, the named insured was a painting contractor.
Since the insurer obviously knew what kind of business its named insured
was in, it knew that the conduct of that business carried no risk of subjecting
its general contractor customers to strict, or vicarious, liability. Parties
to contracts are presumed to have knowledge of existing law at the time they
enter into the contract. It therefore also knew that writing an AI endorsement
that furnished coverage to additional insureds/general contractors only for
liability they could never face amounted to illusory coverage.
In American Country Ins. Co. v Cline, 309
Ill App 3d 501, 722 NE2d 755 (1st Dist 1999), the court was faced with the same
endorsement as in Kraemer Bros. The AI urged the court to adopt the dissenting
opinion in the Glenview Park District case, and further, urged the court not
to adopt the reasoning of the Kraemer Bros. court, arguing that since Kraemer
Bros. was decided on other grounds, that court's discussion of the illusory
coverage issue was superfluous and need not be followed. The Cline court, however,
with even less analysis than the Kraemer Bros. court provided, held that the
AI coverage was not illusory.
Neither of these cases was appealed to the Illinois Supreme Court. The supreme
court may take this issue up again some day, but for now, Kraemer Bros. and Cline stand as the law in Illinois: AI endorsements that do not cover the AI's own
negligence are not against public policy. A comment from the Cline court serves as a stark warning to owners
and general contractors:
Therefore, since both [the owner] and [the general contractor] were sophisticated
businesses that often executed subcontracts, it is reasonable for us to
assume that any questions as to coverage could have been negotiated prior
to execution of the subcontract.
Owners and general contractors that fail to tailor their insurance requirements
carefully do so at their peril.
Recent Manuscript Case under Texas Law
That brings us to BP Chemicals, Inc. v First State
Ins. Co., 2000 WL 1219148 (6th Cir 2000), a case decided by the federal
appeals court in Cincinnati, which, although it hears cases only from Tennessee,
Kentucky, Ohio and Michigan, was required to decide this case under Texas law.
This case returns us to the AIG Type 2 manuscript AI endorsement. Interestingly,
AIG in this case defended the AI and paid its policy limits to settle the case,
despite its exclusion for the AI's negligence. Nonetheless, the court had to
decide whether the AIG endorsement covered the AI for its own negligence, because
the following form excess insurer's coverage was limited to the scope of underlying
primary insurance—in this case, AIG's endorsement.
The court concluded that the endorsement did not cover the underlying bodily
injury claim, and so the excess insurer was off the hook. The reasoning is a
bit hard to follow, and therefore probably not worth detailing, but it serves
as yet another example of the fact that with a manuscript endorsement, the AI
usually ends up with nothing.
One interesting point, moreover, is that the Sixth Circuit's opinion was
careful to note the difference between the manuscript language in the case before
the court and the ISO language in the three Texas cases discussed in my last
article. The court noted that those three ISO cases were therefore not valid
precedent for the manuscript case. This serves again as a warning to additional
insureds: do not rely on the fact that you are in a jurisdiction like Texas,
Illinois, New York or California that gives a broad interpretation to ISO AI
endorsements. If your coverage is written on a manuscript endorsement, a whole
separate line of legal reasoning applies, and you are more likely than not going
to end up without coverage.
An insurance clause in a contract that does not specify what type of AI coverage
is to be provided leaves open the option of providing manuscript coverage. If
the party for whom the AI coverage is to be provided wants something more—ISO
standard AI coverage, for example —it better be specified in the contract. Otherwise,
it's like playing a game of Russian roulette with an insurance program.