The Scope of "Ongoing Operations" Additional Insured Endorsements: Broader
than Expected
February 2007
Additional insured endorsements come in all
shapes and sizes. Some cover the sole negligence of the additional insured.
Others cover the additional insured only for the named insured's negligent acts.
Still others cover particular projects or a particular activity. In every case,
the language of the endorsement and the jurisdiction's interpretation of that
language governs the scope of the coverage provided.
by R. Steven
Rawls and Rebecca Appelbaum
Butler Pappas
Weihmuller Katz Craig, LLP
One type of additional insured endorsement expressly excludes coverage for
completed operations: another includes language purporting to limit the scope
of coverage provided to the "ongoing operations" of the named insured. Courts
addressing these endorsements often direct their analysis at interpreting the
phrase "arising out of" and whether these endorsements provide coverage for
the additional insured's own negligence. SeeAndrew
L. Youngquist, Inc. v. Cincinnati Ins., 625 N.W.2d 178, 184-5 (Minn.
App. 2001) (holding that the phrase "arising out of your ongoing operations"
covers the additional insured's own negligence); see also Mikula
v. Miller Brewing, 701 N.W.2d 613 (Wis. App. 2005). As several courts
make evident, these "ongoing operations" additional insured endorsements more
often than not will cover claims arising out of the insured's completed work
despite the endorsement's apparently clear language limiting coverage to ongoing
operations.
"Ongoing Operations" Language
Here are two examples of "ongoing operations" additional insured endorsements:
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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 and then
only as respects any claim, loss or liability arising out of the operations
of the Named Insured, and only if such claim, loss or liability is determined
to be solely the negligence or responsibility of the Named Insured.
-
***
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WHO IS AN INSURED (Section II) is amended to include as an insured, any
person, organization, trustee, estate or governmental entity to whom or
to which you are obligated by:
- virtue of a written contract; or
- The issuance or existence of a permit;
- to provide insurance such as is afforded by this policy, but only with
respect to liability arising out of:
- your ongoing operations performed for that insured; or
- facilities used by you;
-
and then only for the limits of liability specified in such contract,
but in no event for limits of liability in excess of the applicable limits
of this policy.
-
However, such person, organization, trustee, estate or governmental entity
shall be an insured only with respect to occurrences taking place after
such written contract has been executed or such permit has been issued.
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All other Terms and Conditions of this Insurance remain unchanged.
Insurers have frequently asserted that both of these endorsements provide
coverage only for ongoing operations. Insurers rely on these endorsements to
deny coverage for completed work. However, most courts interpreting the phrase
"ongoing operations" have rejected this limitation on coverage. Interestingly,
courts that don't interpret "ongoing operations" have limited coverage on this
basis. SeePro Con
Construction, Inc. v. Arcadia Ins., 794 A.2d 108 (N.H. 2002) (finding
that the named insured's ongoing operations to be painting and that the injuries
alleged were not connected to painting operations so there was no coverage for
the additional insured). See also Fleniken v. Entergy Corp., 790 So. 2d 64 (La. App. 2001) (noting that
the injury occurred while the named insured was performing its operations).
"Ongoing Operations" Language Eliminates Coverage for Completed Operations
In Pardee Construction v. Insurance Co. of the West,
92 Cal. Rptr. 2d 443 (Cal. App. 2000), the court explained that the revision
of the endorsement to specifically include "ongoing operations" "effectively
precludes application of the endorsement's coverage to completed operations
losses." Pardee at 456.
The plaintiff homeowner's association sued Pardee for construction defects
in a multiphase residential project. Pardee tendered its defense, as an additional
insured, to the four insurers that issued policies to the four subcontractors
whose work was allegedly defective. Each insurer either denied or failed to
acknowledge any responsibility to Pardee. The trial court granted summary judgment
in favor of the insurers, reasoning that "the policies did not incept until
after construction of the project was complete and thus were not issued to provide
Pardee coverage as to it." Pardee at 448.
In finding that three of the four insurers' policies required a defense of
Pardee, the appellate court considered the language of the additional insured
provisions and found that "the unambiguous language of the policies and endorsements
provides Pardee with coverage for the completed operations of the named insured
subcontractors." Id. at 454. The court explained
that there was no language in the endorsements "expressly limiting the time
frame of the additional insured coverage to the time of the ongoing operations
of the named insured." Id. (citation omitted).
The court then explained how the insurers could have used language to exclude
coverage for the subcontractor's completed operations. The court first cited
the evolution of the Insurance Services Office, Inc. (ISO), additional insured
form, suggesting that the insurers could have used a form employed since the
mid 1980s that explicitly excluded coverage for completed operations. Next,
the court cited the 1993 ISO form, with its revisions to "expressly restrict
coverage for an additional insured to the 'ongoing operations' of the named
insured." Pardee at 456. In explaining the change,
commentators noted that "it was never the intention of insurers to provide additional
insureds with completed operations coverage" and the prior language inadvertently
accomplished that result. Id. at 456, n.16.
Citing industry commentators, the court noted that "these endorsements provide
coverage only with respect to 'your ongoing operations,' which effectively eliminates
coverage for completed operations" and the failure to include this, or any,
limiting language manifested the insurers intent not to exclude coverage to
Pardee for completed operations. Id.
"Ongoing Operations" Is Not Limited to Work in Progress
Pardee clearly explained the effect of the
revised form and how the use of "ongoing operations" was intended to restrict
coverage to "work in progress only" so that "when the named insured's operations
for the additional insured are no longer 'ongoing,' the additional insured no
longer has coverage." Pardee at 456, n.16. Despite
this, other courts considering this language in practice have found coverage
for completed work.
In Valley Insurance v. Wellington Cheswick, LLC,
2006 WL 3030282 (W.D. Wash. 2006), a condominium association sued the owner,
developer, and general contractor, alleging construction defects. The construction
contract required that the subcontractors name the owner, developer, and general
contractor as an additional insured under the subcontractors' general liability
policies. Pursuant to the additional insured endorsements, the owner, developer,
and general contractor sought a defense and indemnification from the subcontractors'
general liability insurers.
Two of the subcontractor policies contained additional insured endorsements
that limited coverage to claims arising out of the named insured subcontractor's
ongoing operations. These insurers declined coverage because the defects alleged
by the association occurred after the work had been completed. The insurers
argued that the purpose of the "ongoing operations" language "was to limit additional
insured coverage to losses that occurred while the contractor was onsite or
while work was actually in progress." Wellington at 5.
In considering that argument, the court explained that the underlying complaint
alleged that the owner, developer, and general contractor were liable for damages
resulting from improper construction by the subcontractors. The court noted
that the phrase "ongoing operations" was not defined in the policies at issue.
The court then looked to the dictionary for the common and ordinary meaning.
Citing the Merriam-Webster online dictionary, the court found that "ongoing"
was defined as "being actually in process" and "operations" was defined to mean
the "performance of a practical work or of something involving the practical
application of principles or processes." Id. (citation omitted).
After reviewing these definitions, the court determined that the "the common
and ordinary meaning of this phrase is simply those things that the company
does." Wellington at 5 (citing Marathon Ashland Pipe v. Maryland Cas., 243 F.3d
1232, 1238 (10th Cir. 2001)). The defendants' liability for the property damage
"arises from the ongoing operations performed by the subcontractors. While the
property damage may not have occurred during those ongoing operations, the alleged
liability did." Id. Thus, the court held
that the owner, developer, and general contractor were additional insureds under
the policies at issue.
Similarly, in Wausau Underwriters Ins. v. Cincinnati
Ins., 2006 WL 2990205 (2nd Cir. 2006), Cincinnati argued that "ongoing
operations" "'connoted actions currently in progress' such as 'active work,'" Wausau at 1 (emphasis in original). Cincinnati
argued that because the subcontractor was no longer providing the contracted-for
plowing and salting work, that the claim (a slip and fall in the additional
insured's parking lot) did not arise out of the named insured's ongoing operations.
The court rejected this argument, stating that "New York courts have not adopted
such a narrow definition of 'ongoing operations.'" Id.
Analysis
Wellington and Wausau's determination that an additional insured endorsement provides coverage for "ongoing
operations," even if the work out of which the liability arises had been completed,
ignores the definition of "ongoing" and improperly relied on the Marathon court's construction of the definition.
Marathon did not address whether the phrase
"ongoing operations" addressed ongoing or completed operations. The issue in Marathon was simply whether the phrase "ongoing
operations" encompassed the type of operations being performed by the named
insured at the time of the events giving rise to Marathon's liability.
Marathon was sued by a temporary employee hired by SSI, Marathon's building
erection subcontractor. In its 30-year relationship with SSI for building erection,
Marathon had regularly asked SSI to hire temporary employees to be supervised
by Marathon. SSI had a policy of general liability insurance with Maryland Casualty
and, as required by its service contract, included Marathon as an additional
insured under its general liability policy. Marathon sought coverage under SSI's
Maryland Casualty policy for the temporary employee's claim.
Maryland Casualty argued that the phrase "your ongoing operations," contained
in the additional insured endorsement, was limited to building erection work
as referenced in the endorsement's schedule. Maryland argued that because the
temporary employee was not injured during SSI's performance of building erection,
but rather while SSI was providing the services of the employee unrelated to
building erection, that Marathon was not an additional insured. Because "ongoing
operations" was not defined in the policy, the court looked to the dictionary
to determine the plain and ordinary meaning of the term.
The court explained that "[t]he common and ordinary meaning of this phrase
is that a company's 'ongoing operation' is simply those things that the company
does, as opposed to the meaning suggested by Maryland Casualty which would limit
'ongoing operations' to mean only the core or most prominent operations that
a company might undertake." Marathon at 1238.
In finding coverage, the court noted that the "occasional nature of [SSI's hiring]
activity does not negate the fact that it was an 'ongoing operation' for SSI." Id. The court concluded that "at the very
least, this limitation is ambiguous as to whether the parties intended to cover
the risks associated with SSI's activities in this regard and therefore must
be read in favor of the insured." Id. at
1239.
Similarly, in Wausau, the Second Circuit relied
on a prior New York Appellate Division decision which focused on the scope,
not the timing, of the contractor's work. The earlier case held that a pipe
rupture resulting in a scalding injury arose out of the contractor's "ongoing
operations" even though the contractor was not actively testing or installing
a valve at the time of the incident because "'[u]nder any plain meaning of the
word, the contractor's work was 'ongoing' as long as the tests designed to assure
proper performance remained undone'." Wausau at 1 (citing Perez v. New York City Housing Auth.,
754 N.Y.S.2d 635, 636 (N.Y. App. Div. 2003)).
Conclusion
Courts frequently broadly construe the scope of additional insured endorsements.
Insurers relying on a distinction between completed operations and "ongoing
operations" in their GL policies should exercise caution when applying their
understanding of the meaning of those phrases to additional insured endorsements
that contain those phrases. Despite the apparently clear limitation of the phrase
"ongoing operations," some courts have broadly construed additional insured
endorsements containing that term to include both "ongoing operations" and completed
operations.
Contributing author
Rebecca C. Appelbaum is a senior associate with
Butler Pappas Weihmuller Katz Craig, LLP, practicing in the area of third-party
coverage.
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