Skip Navigation Links.
Collapse IRMI OnlineIRMI Online
Expand How To Use IRMI OnlineHow To Use IRMI Online
My Paid Publications
Expand What's NewWhat's New
Expand DashboardsDashboards
Collapse Commercial Liability InformationCommercial Liability Information
Collapse Free Commercial Liability CommentaryFree Commercial Liability Commentary
Expand Additional Insured IssuesAdditional Insured Issues
Expand EnvironmentalEnvironmental
Collapse Liability InsuranceLiability Insurance
The Duty To Defend—Groundless, False, or Fraudulent (December 2014)
The Montrose Endorsement—15 Years Later (September 2014)
The "Your Work Exclusion"—A Curious View (June 2014)
The CGL and the Professional Liability Exclusion (April 2014)
Subrogation and the CGL Policy (December 2013)
Broad Form Property Damage (September 2013)
Does CGL Coverage Apply after the Sale? (June 2013)
2013 Edition of the CGL (March 2013)
The Claims-Made CGL Policy (November 2012)
Contractual Liability Exclusion—The Ball Is in Your Court (June 2012)
Punitive Damages—Setting an Example (June 2012)
"Primary and Noncontributory" (March 2012)
Changing Definition of "Occurrence" in CGL Cases (January 2012)
Is an Occurrence the Bodily Injury or Property Damage? (December 2011)
Additional Insured Status—Automatic or Wet Blanket? (October 2011)
Legal Separation—The Severability Test in the CGL (June 2011)
Do CGL Policies Cover "Rip and Tear" Expenses? (March 2011)
The Increasingly Complex CGL Policy (January 2011)
Pay Me Back! Reimbursement of Defense Costs in the CGL (October 2010)
"Arising Out of": How Strong Is the Connection? (August 2010)
The Recall Expense Exclusion—When Your Ship Does Not Come In (July 2010)
Invisible Ink: The Duty To Defend When There Is No Duty To Defend (May 2010)
The Impaired Property Exclusion (April 2010)
Top 10 Problems with Follow-Form Coverage (March 2010)
Lowered Expectation: How Courts Treat Expected Injury Exclusions (February 2010)
A High-Level View of the CGL Policy (January 2010)
The Duty To Defend: The Four(ish) Corners Rule (November 2009)
OCP Liability versus Additional Insured Coverage (October 2009)
What Satisfies the Self-Insured Retention? (August 2009)
Contractual Confusion—Assuming the Liability of Others (July 2009)
The Persistence of Indemnity (May 2009)
Other Insurance and the CGL Policy (April 2009)
CGL Insurance and the Question of Intent (February 2009)
Trigger Theories and the CGL (December 2008)
Care, Custody, or Control Exclusion in the CGL (October 2008)
Coverage Trigger: Getting It Right for the Right Reason (October 2008)
The Future Is Now: When Eventual Indemnity Obligations become Present Defense Obligations (August 2008)
CGL Insurance 2007 Edition—A Summary of Changes (June 2008)
Variations on a Theme: When the Cause Theory Determines the Number of Occurrences (May 2008)
CGL Exclusion for Expected or Intended Injury (March 2008)
The Burden To Allocate: Mine, Yours, or Ours? (February 2008)
Liquor Liability Exclusion in the CGL (January 2008)
Insurance Law and Exclusion (m) (November 2007)
Allocating Losses under a 1973 CGL (September 2007)
When Workers Aren't Employees (September 2007)
In Defense of Insured Contracts (July 2007)
More Allocation Theories: Exhaustion (July 2007)
No Harm, No Coverage—Personal and Advertising Injury Liability Coverage in the CGL (Part 1) (January 2007)
No Harm, No Coverage—Personal and Advertising Injury Liability Coverage in the CGL (Part 2) (April 2007)
Cover Me: The Subcontractor Exception to the Your [Completed] Work Exclusion (April 2007)
The Scope of "Ongoing Operations" Additional Insured Endorsements: Broader than Expected (February 2007)
When Does Liability Coverage Exist for Mental Anguish without Bodily Injury? (November 2006)
The Hazards of Products and Completed Operations (October 2006)
Pre-Tender Defense Costs: Who Pays? (July 2006)
Are Products Advertisements That Give Rise to Advertising Injury Coverage? (April 2006)
Additional Insured Endorsements—A Potential Minefield (Part 1) (January 2006)
Additional Insured Endorsements—A Potential Minefield (Part 2) (February 2006)
Additional Insured Endorsements—A Potential Minefield (Part 3) (March 2006)
Allocation of Damages for Ongoing Losses over Multiple Policies (January 2006)
Auto versus Mobile Equipment in the 2004 CGL—An Update (October 2005)
The Scope of the Prior Publication Exclusion: Now You See It, Now You Don't (October 2005)
Faulty Work and the CGL (July 2005)
Insurers: Can You Get Your Defense Dollars Back? (July 2005)
CGL—Fire Legal (April 2005)
CGL—Covered Locations (December 2004)
A Summary of December 2004 ISO CGL Policy Changes (October 2004)
How the Limits Apply in the CGL (July 2004)
Additional Insured Changes in the CGL (May 2004)
The 2004 ISO CGL Policy (April 2004)
Some Common Coverage Misconceptions of the CGL Policy (January 2004)
Known Injury or Damage (October 2003)
When Is an Insured Not an Insured? (June 2003)
The CGL Pollution Exclusion (March 2003)
Auto versus Mobile Equipment in the CGL (December 2002)
Duty to Defend in the CGL Policy (August 2002)
Contractual Liability and the CGL Policy (May 2002)
Insurance Litigation Review: 2001 (April 2002)
The 2001 ISO CGL Revision (January 2002)
What Does "Separation of Insureds" Mean (Part 1) (June 2001)
What Does "Separation of Insureds" Mean (Part 2) (August 2002)
Insurance Coverage Disputes and Society's Problems (May 2001)
Coordinating Persons Insured in Primary and Excess Liability Policies (February 2001)
Gun Violence and the CGL Policy (February 2001)
Spoliation of Evidence: The Next Frontier for Insurance Coverage Battles (January 2001)
Who Wants To Be an Insured? (December 2000)
When a Breach of Contract Constitutes an Accident (July 2000)
When Negligent Conduct Does Not Constitute an Accident (March 2000)
The 1999 CGL Insuring Agreement: ISO's "Montrose Endorsement" (March 2000)
Additionally Insured or Held Harmful? (March 2000)
Expand Commercial Property InformationCommercial Property Information
Expand Commercial Auto InformationCommercial Auto Information
Expand D&O, PL, E&O, EPLI InformationD&O, PL, E&O, EPLI Information
Expand Workers Compensation InformationWorkers Compensation Information
Classifications and Cross-References
Expand Risk Mgt. and Multiline InformationRisk Mgt. and Multiline Information
Expand Risk Finance InformationRisk Finance Information
Expand Construction InformationConstruction Information
Expand Personal Lines InformationPersonal Lines Information
Expand Claims, Caselaw, LegalClaims, Caselaw, Legal
Expand Insurance IndustryInsurance Industry
Expand Glossary of Insurance & Risk Management TermsGlossary of Insurance & Risk Management Terms
Expand SearchSearch
Terms of Use
Privacy Statement
System Requirements
Support

What Does "Separation of Insureds" Mean—Part 1

June 2001

Most liability insurance policies contain a "severability of interests" condition, which stipulates that coverage applies "separately" to each insured. This article, and the two to follow, examine coverage issues raised by this condition in the ISO CGL policy.

by Jeff Woodward
IRMI

Most liability insurance policies contain a "severability of interests" condition, which stipulates that the policy's coverage is to apply "separately" to each insured against whom a claim is made. Severability of interests guarantees that the policy will respond to a suit brought against one insured by another insured. It also makes clearer the meaning of exclusionary provisions in the policy that address acts or omissions of "the insured"; that phrase, interpreted in light of a severability of interests provision, must be read as applying only to the insured who is looking for coverage under the policy. "The insured" does not mean "any insured."

In standard Insurance Services Office, Inc. (ISO), coverage forms (businessowners, commercial property, commercial general liability), severability of interests is addressed in policy conditions entitled "Separation of Insureds"; or (in the ISO business auto policy) language equivalent to a separation of insureds provision is contained in the definition of "insured." In this IRMI Insights article, and in two to follow, I would like to take a look at coverage issues raised in particular by the Separation of Insureds condition of the ISO commercial general liability form. Because equivalent language is found in other standard insurance policies, however, the points raised here will have relevance to commercial property and commercial automobile insurance as well.

This first installment of the discussion will deal with subsection 1 of the commercial general liability (CGL) insurance policy's Separation of Insureds condition (Condition 7).

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:

a. As if each Named Insured were the only Named Insured.

The opening exception applies to the entirety of Condition 7, and its function is clear. The separate application of the policy's coverages to each insured does not include the limits of insurance. That is, each insured does not have a separate amount of insurance equal to the policy limits; all insureds share those limits. Nor does the application of insurance to each named insured as if it were the only named insured mean that each named insured becomes, in effect, the first named insured with respect to its own coverage. There is still only one first named insured under the policy.

Aside from these two exceptions, however, subsection "a" of the CGL Separation of Insureds condition means that, when there are two or more named insureds under the policy, coverage for Named Insured A will apply as if there were no Named Insured B. Under such circumstances, "you" means only Named Insured A. The effect of this provision is to restore coverage for several kinds of named-insured-versus-named-insured claims that would otherwise fall within one of the CGL policy's exclusions.

For example, there is no coverage under the CGL policy with respect to property damage to "property you own," a phrase which (according to the meaning of the term "you") means property owned by "any person or organization qualifying as a Named Insured under this policy." Imagine an occurrence in which the property of Named Insured A is damaged through the negligence of Named Insured B, and A makes a liability claim against B. The damaged property, technically speaking, is "property you [Named Insured A] own," and thus should trigger the policy's property damage exclusion. But because of the Separation of Insureds condition, the policy's coverage applies to Named Insured B as if there were no Named Insured A. Named Insured B therefore has coverage for the claim against it because, as the policy applies to B, the damaged property of A is not "property you own"—that is, not property owned by a named insured.

A similar coverage issue, with a similar resolution, would arise in the case of two CGL named insureds, one of which produces component parts for the other's product. If Named Insured A's component product causes damage to Named Insured B's finished product, CGL coverage for A's resulting liability would depend on the applicability of the "damage to your product" exclusion. That exclusion eliminates coverage for damage to "[a named insured's] product arising out of it or any part of it."

In our hypothetical example, the damage to Named Insured B's product arose out of a "part of it" which happens to be Named Insured A's product. Does the "damage to your product" exclusion therefore eliminate coverage for B's claim against A? The answer is no. "Separation of insureds" means that the policy's coverage applies to Named Insured A as if there were no Named Insured B, which means that B's product is not "your product." Named Insured A has coverage for the products liability claim against it, just as if its component had caused damage to any other (non-insured) manufacturer's product.

Reading the CGL policy "as if each named insured were the only named insured" can produce coverage results that, at first glance, are surprising. A decision of the U.S. Tenth Circuit Court of Appeals—West American Insurance Co. v AV&S, Inc., 145 S3d 1224 (1998)—illustrates the point. An employee of a pizza parlor, while driving his own car to make deliveries for the employer, struck and injured a pedestrian. The pedestrian sued the driver, the pizza parlor-employer, the corporation for which the employer was a franchise operation, and other franchisees of the corporation.

The corporation and all the franchisees were named insureds on the same businessowners policy (BOP), which contained coverage terms and exclusions identical to those of the standard CGL. One of those exclusions eliminated coverage with respect to "the ownership, maintenance, use or entrustment to others of any ... auto ... owned or operated by or rented or loaned to any insured." Since the owner-driver of the auto in question had insured status as an employee of the named insured pizza parlor, this auto exclusion was cited by the insurer is denying coverage for each of the claims brought by the injured pedestrian under the BOP.

In the resulting coverage dispute that ultimately came before the Tenth Circuit Court of Appeals, the franchising corporation and the other franchisees argued that the policy's separation of insureds condition—identical to the CGL's—prevented application of the auto exclusion to them. The circuit court agreed, focusing its analysis on the stipulation that the policy's coverages are to be applied "as if each Named Insured were the only Named Insured." If the franchising corporation, or any of the named insured franchisees other than the one whose employee caused the accident, were "the only named insured" under the policy, then the employee would not himself be the employee of a named insured under the policy, he would not therefore have "insured" status, and the auto exclusion would not apply. In the words of the court:

We find that because the Separation of Insureds clause treats each named insured separately as the only insured, the term "any insured" in the auto exclusion clause only applies to the single insured that actually owned the vehicle or whose employee operated the vehicle and the employees claiming insurance through that named insured. As a result, the policy only excludes from coverage claims for bodily injury against either ... the single named insured that actually operated or entrusted the automobile or [the driver], and does not exclude claims against [the franchising corporation] and the other franchisees, the other named insureds covered by the policy.

Some other lower appellate court decisions have attempted to make similar arguments based on item 2 of the Separation of Insureds condition, which states that the policy's coverage will apply "separately to each insured." (We will take a look at this second provision and its interpretation in a subsequent IRMI Insights article.) But the Tenth Circuit's decision in West American v AV&S is based on the much more sweeping and absolute language of item 1, applicable only to named insureds. The decision is a precise and literal reading of that language.

Under a CGL policy written for Named Insured A and Named Insured B, neither A nor B is "any insured" with respect to the other, if coverage applies "as if each named insured were the only named insured." The same would be true of B's employees as regards a claim against A, and of A's employees as regards a claim against B.


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.

Advertisements
    
 
© 2000-2014 International Risk Management Institute, Inc. (IRMI). All rights reserved.