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What Does an Additional Insured Endorsement Cover? (Part II Manuscript Endorsements1

October 2000

If your contract doesn't specify what type of additional insured (AI) coverage is required, it is quite possible that a very restrictive manuscript endorsement will be used. If ISO standard (or broader) AI coverage is desired, it should be specified in the contract. Learn about manuscript AI endorsements, their pitfalls, and how courts have interpreted —and refused to interpret—them.

by Joseph P. Postel
Liberty Mutual Insurance Group

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 wrote:

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.

Conclusion

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.


1This article is intended solely for informational and educational purposes and does not constitute legal advice. The views contained in this article are solely those of the author and should not be attributed to the Liberty Mutual Group or its policyholders.

2The terms "you" and "your" are defined in the CGL policy's preamble as referring to the named insured shown in the declarations and any other person qualifying as a named insured.

3The terms "Type 1" and "Type 2" are purely my own nomenclature for purposes of this article, and should not be confused with the California courts' use of the terms "Type 1," "Type 2," and "Type 3" to distinguish among various types of indemnity agreements.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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