What Does "Separation of Insureds" Mean—Part 2
August 2002
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.
by Jeff Woodward
IRMI
In a previous IRMI Insights article,
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 discussed above) 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 caselaw, 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.
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