Seven years after its release, the Insurance Services Office, Inc. (ISO), 2013
additional insured (AI) language gets first decision in Charter Oak Fire
Ins. Co. v. Zurich Am. Ins. Co., No. 19-cv-4212 (LJL), 2020 U.S. Dist.
LEXIS 74002 (S.D.N.Y. Apr. 27, 2020).
Acknowledgment
Many thanks to Janie Eddy, coauthor of this
article.
In 2013, ISO introduced modifications to its standard blanket AI forms.
Among several notable changes, the forms included, for the first time, a
requirement that coverage for the AI would "not be broader than" the
trade contract requiring AI status. Without any case law precedent interpreting
this language and little explanation from ISO, many construction industry insurance commentators,
including this author, were left to speculate about the
potential implications.
The basic intent is clear: to draw a closer relationship between the
agreement of the contracting parties and the obligations of the AI form.
However, questions were left about how narrowly or expansively that standard
should be applied and what types of issues fall within the concept of
"breadth." If courts adopted a more expansive view, it would invite a
new and heightened level of scrutiny of the trade contract when evaluating AI
coverage obligations. Getting answers to those questions from courts, however,
takes time. Many dominos must fall before a court has to issue a written
decision, and many disputes resolve long before that opportunity arises.
With a New York Federal District court's April 2020 decision in
Charter Oak applying standards dictated by the contract but not the AI
endorsement, it appears that time is here.
Charter Oak Fire Insurance Company v. Zurich American
In Charter Oak, the Southern District of New York was asked to
analyze whether a contractor's commercial general liability (CGL) insurer
owed a duty to defend the building owner, an additional insured, for a bodily
injury claim based on the AI requirements in the contract. The dispute, and the
court's analysis, centered in part on whether the owner's potential
liability needed only to be "caused, in whole or in part" by the
contractor's "acts or omissions" (per the AI endorsement) or
"negligent acts or omissions" (per the trade contract AI
requirements).
Based on the "will not be broader" language, the court found that
the contract terms were to be incorporated into the contractor's insurance
policy and the negligence standard controlled. The court also determined that
certain other elements of the contract AI requirements—those reinforcing a
broad duty to defend—governed the policy and went on to hold that Zurich owed a
defense.
Background
In February 2016, the owner of an apartment building, ASB L3
("Owner"), entered into a contract with Slade Industries
("Contractor") to modernize one of its elevators. The contract
required the Contractor to purchase insurance coverage for the Owner.
Specifically, the contract stated the following.
The Contractor shall cause the commercial liability coverage required by
the Contract Documents to include: (1) the Owner … as [an] additional insured
for claims caused in whole or in part by the Contractor's
negligent acts or omissions during the Contractor's operations;
and (2) the Owner as an additional insured for claims caused in whole or in
part by the Contractor's negligent acts or omissions during the
Contractor's completed operations. [Emphasis added.]
The Contractor obtained a CGL policy with Zurich American Insurance Company,
which contained an additional insured endorsement that named as additional
insureds "only those persons or organizations where required by written
contract." Under the endorsement, the additional insured coverage applies
"only with respect to liability for [injury] caused in whole or in part by
[the Owner's] acts or omissions or the acts or omissions of those acting on
[the Owner's] behalf." Critically for this discussion—there was no
negligence requirement.
The additional insured endorsement further provided the following.
If coverage provided to the additional insured is required by a contract
or agreement, the insurance afforded to such additional insured will not
be broader than that which [the Owner is] required by contract or agreement
to provide for such additional insured.
Later that year, an employee of the Contractor, Josue Bulnes, slipped and
injured himself while working on the elevator project. Mr. Bulnes filed a
lawsuit ("Underlying Action") against the Owner in New York State
court, where he alleged that the Owner's negligence had caused him to fall
and sustain injuries. The Owner's CGL insurer, Charter Oak, timely notified
the Contractor's insurer, Zurich, of the Underlying Action and demanded
that Zurich defend the Owner as an additional insured. Zurich disclaimed
coverage and refused to defend the Owner in the Underlying lawsuit. Charter Oak
subsequently filed a declaratory judgment action against Zurich.
Testing the Implications of 2013 ISO Language
Zurich's denial, and argument to the court, was based on its view that
its AI obligations and duty to defend were limited to the contract's terms:
covering claims caused, in whole or in part, by the Contractor's
negligent acts or omissions. Zurich argued that the Underlying
Action's claims did not meet that threshold. Charter Oak disagreed and said
the nonnegligence standard of Zurich's AI endorsement should control.
Why does that difference matter? As a general proposition,
"negligence" can be interpreted in this context to require a higher
burden of proof than "acts or omissions." That is, it may require a
showing that one party violated a duty of care, as opposed to merely having
undertaken some type of affirmative activity (whether negligent or not).
The court held that negligence was the standard. In reaching that
conclusion, it focused narrowly on the "will not be broader than"
language in the AI endorsement—scrutinizing the term "broader," in
particular—and held that it functioned to incorporate the contract into the
Zurich policy. Per the court, the concept of breadth "relates to the
scope of coverage … an all-encompassing description of the type of
covered claims." [Emphasis added.] As a result, the court concluded, the
Owner's rights under the Zurich policy were "derivative of its rights
under the Contract," and the Owner could not enjoy greater insurance than
what was agreed in the contract.
The court's analysis did not end there, however. The court looked at the
AI promises in the Contract in their broader context, not just as isolated
terms, as including "claims caused in whole or in part by
[Contractor's] negligent acts or omissions." This
requirement—incorporated as part of the Policy—informed Zurich's defense
obligation. The court emphasized that "claim" is a broad concept,
denoting a "cause of action" or legal claim, and Zurich's duty to
defend is triggered when Contractor's negligent acts or omissions either
"bring about or effect" a lawsuit against an additional
insured—"even if those negligent acts are not specifically pled in the
complaint (and, indeed, even if [Contractor] is not named in the
complaint)."1
From the court's perspective, this affirmed the principle that Owner had
not only purchased litigation insurance through its AI status, but insurance
against any claims brought about by Contractor's
negligence—"regardless whether the underlying lawsuit named [Contractor]
or alleged that [Contractor] was the proximate cause of the injury." The
court further acknowledged that this rule made sense because, in most
construction bodily injury claims, the direct employer is omitted from any suit
because of workers compensation immunity. In the court's view, the Owner is
entitled to a defense regardless, and to rule otherwise would render the
promise of AI coverage to be illusory.
Notably, the court then carefully considered the facts of Contractor's
involvement in bringing about the injuries, facts that supported its decision
that a defense was owed.
Lessons Learned
There are several important takeaways from this decision. First and
foremost, the "will not be broader than" language can invite a court
to use general legal principles regarding incorporation by reference to
interpret the AI policy. For contractors assessing strategies as they draft
contracts, this reinforces the critical need for parties to a trade
contract—both upstream and down—to carefully consider the contract requirements
for additional insured coverage.
In Charter Oak, the litigants framed the issues narrowly. As a
result, the court's discussion of relevant AI concepts was not required to
stray into any truly unique territory. Consider the scenario, though, where a
contract contains terms and conditions that may be construed as conditions
precedent to AI coverage or broadly describes anticipated exclusions or other
limitations about the coverage. Relying on Charter Oak, a court may be
compelled to abide by those terms in construing the policy, raising difficult
questions about how to resolve conflicts, and whether the standard rules
regarding language clarity, ambiguity, and construing terms against the drafter
(usually the insurance company) still apply.
Whatever the answer, today's lesson is straightforward: precision is
paramount. Precision in word choice and formatting to ensure that no unintended
parameters inadvertently apply to AI obligations and understand the intent of
the parties so that language best matches intent. Lack of care in any respect
is only likely to invite questions over the parties' true goals, debate
over ambiguity, and potentially lead to uncertainty of result.
For claims or disputes involving existing contract language, the AI
requirements must be considered holistically, with due consideration given not
only to the relevant terms of the trade contract but also to the AI
insurer's core obligations. Here, the court determined that the concept of
"claim" informed the parties' expectations about, and ultimately
confirmed, Zurich's broad duty to defend in this common "action
over" scenario. Whatever the limiting implications may have been from the
use of a "negligence" standard, Zurich's defense
obligations—reinforced by the court's understanding of the parties'
intent in the trade contract—took precedence.
Second, however it may have defined "negligence," the court was
clear that no finding by a trier of fact was needed, and that evidence
developed during discovery in the underlying case—even evidence extrinsic to
the pleadings, as permitted by New York law in construing the duty to
defend—could be used by the AI to support its claim for coverage. Moreover,
such evidence need only, as is custom, identify a "reasonable
possibility" that the insurer will eventually owe indemnity.
Finally, in that same vein, defense can be owed by an AI policy even where
the complaint does not specifically discuss the named insured's role. This
is often a source of dispute in New York and elsewhere, and the court's
ruling reinforces a strong counterargument to AI denials on this basis.
Consider also the more recent decision, from June 5, 2020, in Travelers
Prop. Cas. Co. of Am. v. Harleysville Ins. Co. of N.Y., 2020 NY slip op.
50658(U), 67 Misc. 3d 1227(A) (Sup. Ct.). ("When an employee of the named
insured is injured while in the employ of the named insured, the additional
insured is entitled to defense because there is a reasonable possibility that
the bodily injury is proximately caused by the named insured's acts or
omissions.")
As the first bellwether on this critical concept of
"breadth" under the commonly used ISO 2013 AI endorsements,
Charter Oak has much to offer and consider and will undoubtedly be a
focal point of AI disputes going forward.