Additional Insured Obstacles Fall: Is Coverage Restricted?

Full Circle

In restricting coverage to the AI's vicarious liability, the court in Garcia tellingly quoted extensively from a 1973 trial level New York case, Long Island Lighting Co. v. Hartford Acc. & Indem. Co., 76 Misc. 2d 832, 350 N.Y.S.2d 967 (Sup. Ct. 1973), that stated as follows.

[T]here is a more circumscribed meaning to "because of" than merely being a sequential link in the chain of events. The phase appears to include persons held in by way of vicarious liability for derelictions of the named insured.

The court in Garcia then stated, "The omission of the words "but only" in [the policy] does not materially change the limitation of the additional insured provision to instances of vicarious liability."

However, the Long Island court offered no reasoning to support these conclusions.

The court in Garcia also surveyed decisions from Illinois, Ohio, and Texas. However, all those cases also predate the ISO forms issued in July 2004 and Burlington, which explicitly rejected this restrictive interpretation citing ISO's expressed intent.

Thus, Cincinnati and Garcia should be viewed in the context of their reliance on the New York lower court Long Island Lighting case that predates and is inconsistent with the ISO circular and overruled by Burlington. The stronger reasoning in Burlington may explain why Cincinnati has only been cited 10 times and, generally, for other propositions.

In Whole or in Part

The heart of the matter may be the meaning of the parenthetical phrase modifying the triggering nexus, "caused, in whole or in part," including the significance of the comma in that wording.

For example, in Cincinnati, the court stated that "[t]here is a clear difference between 'caused' and 'caused in part by': the latter term means that even if the complaint alleged the [named insured] was only 1% responsible for causing the faulty workmanship, then the insurer would have a duty to defend [the putative AI]." However, the stronger reasoning suggests that the "in whole or in part" qualifier has a different implication than the court in Cincinnati presumes. Arguably, the simply stated nexus "caused" should include all losses if at all caused by the named insured.

Moreover, the court in Burlington reasoned that "caused, in whole or in part" adds only one meaning—namely, that those words require only that there must be a proximate or legally actionable causal nexus between the named insured's acts and the loss. The clause does not relate to vicarious liability of the putative insured. As that court stated, "in whole or in part" describes only the type of causation, to wit "these words require proximate causation since 'but for' causation cannot be partial."

One of Cincinnati's progenies, the lower Arizona federal court case of P.F. Chang's China Bistro Inc. v. Associated Indus. Ins. Co., No. CV-21-01035-PHX-JJT, 2022 U.S. Dist. LEXIS 193363 (D. Ariz. Oct. 24, 2022), illustrates the circular nature of the vicarious liability restriction interpretation. PF Chang cited Cincinnati, stating as follows.

[T]he subordinate clause "in whole or in part" following "caused" … clarifies that the coverage must be provided even if [the named insured] is only partially at fault…. There is a clear difference between caused and caused in part: the latter term means that even if the complaint alleged the named insured was only 1% responsible for causing the faulty workmanship, then the insurer would have a duty to defend the AI.

But this "clear difference" between "caused," "caused in part," and caused "in whole or in part" is not further explained in PF Chang and is again inconsistent with the explanation in Burlington that the "whole or in part" wording means only the named insured must have proximately caused the loss, nothing more and nothing less, and not that coverage is capped to vicarious liability.

Overwhelming Majority Rule

More recently, a New Jersey Federal court rejected the vicarious liability limitation on AI coverage suggested in Navigators Specialty Ins. Co. v. Citizens Ins. Co. of Am., 739 F. Supp. 3d 259 (D.N.J. 2024), stating that "the overwhelming majority rule is that the Insurance Contract's 'caused, in whole or in part by' language is consistent with a duty to defend that applies in both direct and vicarious liability contexts." Id. at 267.

The Navigators court surveyed jurisdictions that follow the majority rule, which include Indiana, Kentucky, Tennessee, Massachusetts, Ohio, Pennsylvania, Louisiana, Maryland, Montana, Connecticut, Wyoming, Maine, and Texas, and commentators have largely agreed. ¹

Conclusion

As this discussion has highlighted, courts are strongly trending toward a broader interpretation of AI coverage and have repeatedly rejected insurers' shifting attempts to delay or hinder a party's allocation of risk through insurance.

In most construction cases, there is no need to wait for a jury determination on causation and no need for a DJ court to wait for a jury verdict on causation in the underlying personal injury case as a matter of fact and as a matter of law. Courts can determine whether a causal connection exists for purposes of AI coverage as a matter of law years before trial. Moreover, while the causal connection between the named insured and the loss will necessarily be a fact-sensitive inquiry, it is the rare loss where the putative AI is solely negligent, which happened to be the case in Burlington.

Further, insurers attempting to restrict AI coverage to the vicarious liability of putative AIs are relying on a thin and outdated line of cases, which were themselves based on shaky, circular analytical footing. As Supreme Court Justice Oliver Wendell Holmes once stated:

It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV and it is still more revolting if the grounds on which it was laid down have vanished long since and the rule simply persists from blind imitation of the past.

Source: "The Path of the Law," The Harvard Law Review, 1897.

Now that two of the more common reasons that insurers claim to deny AI tenders have been debunked, there should be more certainty around coverage, fewer instances of named insured subcontractors being left in breach for failing to obtain the required AI coverage, and greater opportunities to facilitate resolutions.