For owners, general contractors, and subcontractors, complications in
transferring risk via contractual indemnity and additional insured coverage can seem
never-ending, overwhelming, and expensive. Accordingly, this column has examined
recurring areas of dispute as parts of a larger puzzle.
The most recent discussion compared the vexing meanings of the two most common
contractual indemnity and additional insured endorsement triggers, namely "arising out
of the work" and "caused by acts or omissions" of the indemnitor and named insured,
respectively, given the new high court's guidance. (See "What Does 'Arising Out of
Work' Really Mean?")
While that discussion reviewed the courts' attempts to place objective
boundaries on causal connections, this examination builds on that foundation by turning
attention to the standards of proof required to establish the duty to defend under
additional insured cover and contractual indemnity.
Additional Insured Coverage
Typically, the initial decision as to whether additional insured
coverage is triggered rests with the adjuster for a downstream named insured
contractor. And that decision is prompted by an additional insured tender from
upstream by an owner, general contractor, or their insurer. But often that claims
professional must decide whether there is additional insured coverage before all the
facts are known, discovery has been exchanged, and the parties have been deposed.
And sometimes, tenders are made before a complaint is served.
If there is no complaint, then the adjuster may have to address
the tender with just incomplete facts, but choosing not to respond or responding
that the tender is premature may have consequences as explored below.
As discussed previously in "The Additional Insured Labyrinth: Pleadings and the Duty to Defend," if
there is a complaint, then additional insured coverage analysis generally begins
with considering whether there is a duty to defend the putative additional insured
party seeking coverage by comparing the allegations in the complaint pleading to the
policy endorsement wording. If the complaint contains allegations of a sufficient
nexus between the named insured and the loss, regardless of how meritless, then
there may be a duty to defend, but that is not necessarily the end of the inquiry.
A further review will likely be needed of the facts known or
knowable beyond the pleadings through investigation and discovery (i.e., the
extrinsic evidence).
Three State Standards on Extrinsic Evidence
Jurisdictions around the US are widely split on the significance
of extrinsic evidence beyond the so-called four corners of a complaint when
analyzing the duty to defend. Of course, most complaints are many pages long and,
thus, have more than four corners. But broadly, under common law—case law rather
than statute—courts in all 50 states have established three approaches to the impact
of extrinsic evidence in this context.
By a rough count, in 14 states, extrinsic evidence may only be considered to expand coverage (Alabama, Alaska, Connecticut, Kansas, Maryland, Michigan, Mississippi, Nebraska, New York, Nevada, Oklahoma, South Carolina, Vermont, and Washington). In 15 states, evidence beyond the complaint can only be used to restrict coverage, a rule clearly unfavorable to policyholders (Arkansas, Delaware, Florida, Idaho, Louisiana, Maine, Montana, Oregon, North Carolina, North Dakota, Rhode Island, Tennessee, Texas, Virginia, and Wyoming). And in the remaining 21 states, extrinsic evidence can be considered to either expand or restrict coverage.
There is no discernible pattern by geographic region, population size, or political bent that correlates the states and their approaches. Accordingly, the nation has a true patchwork of laws. However, 35 states allow extrinsic evidence to expand coverage, making this the majority rule.
Moreover, in no state is extrinsic evidence completely irrelevant to the duty to defend. Therefore, it is important for all interested stakeholders to learn as many of the loss facts as early as possible by conducting a thoughtful investigation with a particular focus on the parties' roles, relationship to each other and the loss, and theories of liability likely to be asserted.
While the governing state's standard for assessing extrinsic evidence can be decisive to the additional insured analysis, further inquiry may be needed into how to weigh circumstantial, ambiguous, or partially developed facts and liability theories.
Nuanced Emphasis on Extrinsic Evidence
Courts have provided varying guidance on how to draw inferences
from incomplete extrinsic evidence and partially developed liability theories when
determining the additional insured duty to defend. For example, an appellate court
recently instructed as follows:
An insurer has no obligation to defend only if it can be concluded as a matter of
law that there is no possible factual or legal
basis on which the defendant might eventually be held to be obligated to
indemnify plaintiff under any provision of the insurance policies. [Emphasis
added.]
Source: Authority
Fleet Servs. Corp. v. Amtrust N. Am., Inc., 248 A.D.3d 1168,
1170, 256 N.Y.S.3d 371 (2d Dept. 2026), citing Great Am. Ins. Co. v. AIG
Specialty Ins. Co., 2022 U.S. App. LEXIS 34201, *3 (2d Cir.
2022).
Thus, pursuant to this line of case law, additional insured
coverage should almost always be provided, and the named insured adjuster should
anticipate and rule out all possible findings
against coverage before denying a tender. The more experienced the claims
professional, the more they will know that the possible directions a claim could go
are legion.
Moreover, another court stated as follows:
The duty to defend does not hinge on the skill or manner in which a complaint is drafted, but rests on the substantive thrust of the complaint, and the surrounding facts.
Source: High Point Design, LLC v. LM Ins.
Corp., 911 F.3d 89, 96 (2d Cir. 2018).
Read together, Authority Fleet
Servs. Corp., Great Am. Ins. Co., and High
Point Design, LLC, suggest that the adjuster should broadly read the
complaint, gleaning its thrusts and predicting all possible ways that the facts may
prove out. Clearly, this approach would strongly favor providing additional
insurance in most cases.
However, other courts have said that there is a reasonableness
component to the additional insured decision. For example, in Tzumi Elecs. LLC v. Burlington Ins.
Co., (2d Cir. 2024), the same court stated that an insurer's duty to
defend depends on whether the following occurs.
[T]he allegations of the complaint suggest a reasonable possibility of coverage, not
whether the insured construes or interprets the allegations as such. [Emphasis
added.]
Source: Tzumi Elecs. LLC v. Burlington
Ins. Co., 2024 U.S. App. LEXIS 32052, *4 (2d Cir. 2024).
"Reasonable minds may differ," as the expression goes, but claims
professionals who decide to reject an additional insured tender may be taking
considerable risk: They may not only lose the opportunity to control the litigation
and contain costs through a joint defense, but they may also encourage cross-claims
between the defendants, driving up values and protracting claims when they would be
better served focusing on expediting resolution with the claimant.
Defense and Contractual Indemnity
So far, this discussion has focused on the duty to defend in the additional insured context, but many contractual indemnity provisions also contain a duty to defend. Again, there are jurisdictional differences to consider as to enforceability.
For example, under California's Crawford rule, a duty to defend the indemnitee may arise immediately upon
request to the indemnitor even if the indemnitor is not negligent. However, in other
states, the duty to defend may not be broader than the duty to indemnify because the
contractual right runs to the contracting party rather than an insurer. (See Brooklyn View v. PRP, 159
A.D.3d 865 (2d Dept. 2018).)
Thus, in those states, unlike California, the duty to defend may
not be triggered until there is an adjudication of negligence, which could take
years. However, even then, it may be possible to draft enforceable contract wording
that expresses a clear intent to defend regardless of negligence. (See MSR Tr. v. Nationstar Mortg.
LLC, No. 21-CV-3089 (GBD) (RWL), 2022 U.S. Dist. LEXIS 135431
(S.D.N.Y. July 28, 2022).)
Of course, these contracts must also comply with applicable
construction anti-indemnity statutes to be enforceable. Moreover, additional insured
and contractual duties to defend are often simultaneously at issue in the same
claim. Thus, even though those duties run to different places, neither should be
viewed in isolation.
Conclusion
Reading the policy and contract is always good practice, but the
inquiry cannot stop there when it comes to the duty to defend. As the above
discussion has highlighted, the duty-to-defend determination varies significantly by
state and typically involves a multistep analysis that considers facts beyond the
allegations. While the rules regarding pleadings, extrinsic facts, and proof may
seem like technical legal matters, they can be decisive and result in different
outcomes in different places for similar claims. Moreover, defense costs can exceed
liability exposure, making this a compelling topic. The duty to defend; an important piece in the risk transfer puzzle.
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.
For owners, general contractors, and subcontractors, complications in transferring risk via contractual indemnity and additional insured coverage can seem never-ending, overwhelming, and expensive. Accordingly, this column has examined recurring areas of dispute as parts of a larger puzzle.
For example, the two first discussions surveyed recent trends of courts rejecting attempts to thwart additional insured coverage (see "Additional Insured Obstacles Fall: Is Coverage Restricted?") and the growing willingness to find additional insured coverage is owed early in the life of a claim as a matter of law based on the nexus between the loss and the downstream named insured's activity (see "Additional Insured Obstacles Fall: Coverage Is Not 'Premature'").
The most recent discussion compared the vexing meanings of the two most common contractual indemnity and additional insured endorsement triggers, namely "arising out of the work" and "caused by acts or omissions" of the indemnitor and named insured, respectively, given the new high court's guidance. (See "What Does 'Arising Out of Work' Really Mean?")
While that discussion reviewed the courts' attempts to place objective boundaries on causal connections, this examination builds on that foundation by turning attention to the standards of proof required to establish the duty to defend under additional insured cover and contractual indemnity.
Additional Insured Coverage
Typically, the initial decision as to whether additional insured coverage is triggered rests with the adjuster for a downstream named insured contractor. And that decision is prompted by an additional insured tender from upstream by an owner, general contractor, or their insurer. But often that claims professional must decide whether there is additional insured coverage before all the facts are known, discovery has been exchanged, and the parties have been deposed. And sometimes, tenders are made before a complaint is served.
If there is no complaint, then the adjuster may have to address the tender with just incomplete facts, but choosing not to respond or responding that the tender is premature may have consequences as explored below.
As discussed previously in "The Additional Insured Labyrinth: Pleadings and the Duty to Defend," if there is a complaint, then additional insured coverage analysis generally begins with considering whether there is a duty to defend the putative additional insured party seeking coverage by comparing the allegations in the complaint pleading to the policy endorsement wording. If the complaint contains allegations of a sufficient nexus between the named insured and the loss, regardless of how meritless, then there may be a duty to defend, but that is not necessarily the end of the inquiry.
A further review will likely be needed of the facts known or knowable beyond the pleadings through investigation and discovery (i.e., the extrinsic evidence).
Three State Standards on Extrinsic Evidence
Jurisdictions around the US are widely split on the significance of extrinsic evidence beyond the so-called four corners of a complaint when analyzing the duty to defend. Of course, most complaints are many pages long and, thus, have more than four corners. But broadly, under common law—case law rather than statute—courts in all 50 states have established three approaches to the impact of extrinsic evidence in this context.
By a rough count, in 14 states, extrinsic evidence may only be considered to expand coverage (Alabama, Alaska, Connecticut, Kansas, Maryland, Michigan, Mississippi, Nebraska, New York, Nevada, Oklahoma, South Carolina, Vermont, and Washington). In 15 states, evidence beyond the complaint can only be used to restrict coverage, a rule clearly unfavorable to policyholders (Arkansas, Delaware, Florida, Idaho, Louisiana, Maine, Montana, Oregon, North Carolina, North Dakota, Rhode Island, Tennessee, Texas, Virginia, and Wyoming). And in the remaining 21 states, extrinsic evidence can be considered to either expand or restrict coverage.
There is no discernible pattern by geographic region, population size, or political bent that correlates the states and their approaches. Accordingly, the nation has a true patchwork of laws. However, 35 states allow extrinsic evidence to expand coverage, making this the majority rule.
Moreover, in no state is extrinsic evidence completely irrelevant to the duty to defend. Therefore, it is important for all interested stakeholders to learn as many of the loss facts as early as possible by conducting a thoughtful investigation with a particular focus on the parties' roles, relationship to each other and the loss, and theories of liability likely to be asserted.
While the governing state's standard for assessing extrinsic evidence can be decisive to the additional insured analysis, further inquiry may be needed into how to weigh circumstantial, ambiguous, or partially developed facts and liability theories.
Nuanced Emphasis on Extrinsic Evidence
Courts have provided varying guidance on how to draw inferences from incomplete extrinsic evidence and partially developed liability theories when determining the additional insured duty to defend. For example, an appellate court recently instructed as follows:
Thus, pursuant to this line of case law, additional insured coverage should almost always be provided, and the named insured adjuster should anticipate and rule out all possible findings against coverage before denying a tender. The more experienced the claims professional, the more they will know that the possible directions a claim could go are legion.
Moreover, another court stated as follows:
Read together, Authority Fleet Servs. Corp., Great Am. Ins. Co., and High Point Design, LLC, suggest that the adjuster should broadly read the complaint, gleaning its thrusts and predicting all possible ways that the facts may prove out. Clearly, this approach would strongly favor providing additional insurance in most cases.
However, other courts have said that there is a reasonableness component to the additional insured decision. For example, in Tzumi Elecs. LLC v. Burlington Ins. Co., (2d Cir. 2024), the same court stated that an insurer's duty to defend depends on whether the following occurs.
"Reasonable minds may differ," as the expression goes, but claims professionals who decide to reject an additional insured tender may be taking considerable risk: They may not only lose the opportunity to control the litigation and contain costs through a joint defense, but they may also encourage cross-claims between the defendants, driving up values and protracting claims when they would be better served focusing on expediting resolution with the claimant.
Defense and Contractual Indemnity
So far, this discussion has focused on the duty to defend in the additional insured context, but many contractual indemnity provisions also contain a duty to defend. Again, there are jurisdictional differences to consider as to enforceability.
For example, under California's Crawford rule, a duty to defend the indemnitee may arise immediately upon request to the indemnitor even if the indemnitor is not negligent. However, in other states, the duty to defend may not be broader than the duty to indemnify because the contractual right runs to the contracting party rather than an insurer. (See Brooklyn View v. PRP, 159 A.D.3d 865 (2d Dept. 2018).)
Thus, in those states, unlike California, the duty to defend may not be triggered until there is an adjudication of negligence, which could take years. However, even then, it may be possible to draft enforceable contract wording that expresses a clear intent to defend regardless of negligence. (See MSR Tr. v. Nationstar Mortg. LLC, No. 21-CV-3089 (GBD) (RWL), 2022 U.S. Dist. LEXIS 135431 (S.D.N.Y. July 28, 2022).)
Of course, these contracts must also comply with applicable construction anti-indemnity statutes to be enforceable. Moreover, additional insured and contractual duties to defend are often simultaneously at issue in the same claim. Thus, even though those duties run to different places, neither should be viewed in isolation.
Conclusion
Reading the policy and contract is always good practice, but the inquiry cannot stop there when it comes to the duty to defend. As the above discussion has highlighted, the duty-to-defend determination varies significantly by state and typically involves a multistep analysis that considers facts beyond the allegations. While the rules regarding pleadings, extrinsic facts, and proof may seem like technical legal matters, they can be decisive and result in different outcomes in different places for similar claims. Moreover, defense costs can exceed liability exposure, making this a compelling topic. The duty to defend; an important piece in the risk transfer puzzle.
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.