5th Circuit Holds Additional Insured Coverage Not Limited by Contract

In its March 1, 2013 decision in In re Deepwater Horizon, 2013 U.S. App. LEXIS 4512 (5th Cir. Mar. 1, 2013), the Fifth Circuit had occasion to consider the extent to which an insurer’scoverage obligations to an additional insured are tied to the contractual indemnity owed by its named insured to that additional insured.  Transocean owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit located in the Gulf of Mexico.  The Deepwater Horizon sank into the Gulf after an onboard explosion.  At the time of the explosion, the Deepwater Horizon was engaged in drilling activities pursuant to a Drilling Contract between Transocean and BP.  BP subsequently faced certain pollution-related liabilities arising out of the sinking of the drilling unit, and BP tendered those liabilities to Transocean’s insurers.  The insurers denied coverage arguing that BP did not qualify as an additional insured under the policies’ language, spawning litigation between BP and the insurers in the U.S. District Court for the Eastern District of Louisiana.

Transocean’s insurers successfully argued in the lower court that its additional insured obligations to BP were limited by the terms of a Drilling Contract between Transocean and BP.  The Contract required that BP “shall be named as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this Contract.”  With respect to pollution-related liabilities, the Contract contained a separate indemnity provision which required BP to assume full responsibility for any pollution or contamination originating below the surface of the water, whereas Transocean agreed to indemnify BP for pollution or contamination originating on or above the surface of water.  The lower court concluded that because the Drilling Contract did not require Transocean to assume BP’s pollution liabilities pertaining to spills originating beneath the surface of the water, Transocean owed no indemnity to BP for the claim and, correspondingly, BP was not an additional insured with respect to those specific pollution liabilities.

The Fifth Circuit reversed, noting that under Texas law, which governed the interpretation of the policies, “where an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity claims.”  The Fifth Circuit found that the insurance provision in the Drilling Contract was separate and discrete from the indemnity provisions in the Contract.  As such, BP’s rights as an additional insured were not limited by the contractual liabilities actually assumed by Transocean.  In other words, even though Transocean may not have an indemnity obligation to BP for underwater pollution events, this contractual indemnity obligation cannot be read into the insurance policies in order to limit the scope of coverage afforded to BP by the insurers.  Rather, only the insurance policies can impose limitations on coverage.  Thus, because the policies issued to Transocean did not restrict the scope of additional insured coverage to the indemnity assumed by Transocean, the court concluded that BP was entitled to coverage for subsurface pollution liabilities, notwithstanding the indemnity provisions in the Drilling Contract.

New York’s Highest Court Addresses Rescission of Policy to Additional Insured

In its recent decision in Admiral Ins. Co. v Joy Contractors, Inc., 2012 NY Slip Op 4670 (N.Y. June 12, 2012), the New York Court of Appeals, New York’s highest court, considered whether a general liability policy can be rescinded to the detriment of an innocent additional insured.

Admiral Insurance involved coverage for liabilities associated with the collapse of a tower crane in Manhattan in March 2008.  The collapse resulted in numerous deaths and injuries, and caused significant property damage as well as the destruction of an entire building.  The policy’s named insured, Joy Contractors, had been operating the crane at the time of the collapse.  It was insured under a primary general liability policy issued by Lincoln, and a $9 million follow-form excess liability policy issued by Admiral.  Immediately following the incident, Joy gave notice to both Lincoln and to Admiral.  Several entities, including the project’s general contractor and the building’s owner, qualified as additional insureds under Joy’s policies.

Admiral initially issued a reservation of rights with respect to several grounds.  Included among these grounds was the right to rescind its policy on the basis that Joy had represented in its application that it specialized in drywall installation, that it did not perform building exterior work.  Admiral later denied coverage to Joy, and the additional insureds, on the basis of a residential construction exclusion in its policy.  It also took action to rescind the policy on the basis of the misrepresentation.  

As it related to rescission, the intermediate appellate court held that a policy could not be rescinded to the detriment of innocent additional insureds.  The appellate court relied primarily on the decisions in Lufthansa Cargo, AG v New York Mar. & Gen. Ins. Co., 834 N.Y.S.2d 659 (1st Dep’t 2007) and BMW Fin. Servs. v Hassan, 710 N.Y.S.2d 607 (2nd Dep’t 2000), lv denied 717 N.Y.S.2d 547 (2000), both of which addressed rescission to the detriment of an additional insured.  In BMW, the named insureds under an auto liability policy represented that they would be the primary drivers of a vehicle and that their children would be additional drivers, when in fact, the children were the primary drivers.  The court held that this misrepresentation should not operate to the detriment of BMW, named as an additional insured under the policy.  Likewise, in Lufthansa, the named insured represented that a certain employee would not be operating an insured truck, but it was that very same excluded driver that was operating the insured truck at the time of an accident.  The court held that Lufthansa, as an innocent additional insured, should not be affected by the named insured’s misrepresentation.

The New York Court of Appeals found BMW and Lufthansa distinguishable from the facts before it.  In both instances, the misrepresentations did not go to the fundamental nature of the risk being insured.  More specifically, the misrepresentations in those cases did not “deprive the insurer of knowledge of or the opportunity to evaluate the risks for which it was later asked to provide coverage — i.e., the risk of damages arising from automobile theft (BMW) and accident (Lufthansa).” Such misrepresentations were materially different than the named insured misrepresenting the entire nature of the risk to be insured, i.e., drywall installation as opposed to exterior building work employing the use of tower cranes.  As the court observed, “Admiral evaluated the risk of, and collected a premium for, providing excess insurance for interior drywall installation, not the obviously much greater risk presented by exterior construction work with a tower crane at a height many stories above grade.” 

Ultimately, the Court of Appeals held that the innocent “additional insured” decisions in BMW and Lufthansa, and the decisions on which those two cases were based, cannot have the effect of allowing coverage for an additional insured on a policy that is deemed never to have existed as a result of rescission.

Delaware Court Rejects Extrinsic Facts In Determining Duty to Defend Additional Insured

In its recent decision in The Premcor Refining Group v. National Fire Insurance Co. of Hartford, 2012 U.S. Dist. LEXIS 49097 (D. Del. Apr. 6, 2012), the United States District Court for the District of Delaware considered what allegations and extrinsic evidence can be considered in the context of determining a duty to defend a putative additional insured.

National Fire’s insured, Griffith Roofing, had contracted with Premcor to perform construction work.  One of Griffith’s employees was hurt while performing this work, and brought suit against Premcor, alleging that his injuries were caused by Premcor’s sole negligence.  Premcor tendered its defense as an additional insured under Griffith’s policy with National Fire.  While the National Fire policy had an endorsement providing coverage for additional insureds, where required by contract, the endorsement excluded liability resulting from the putative additional insured’s “sole negligence.”

Notwithstanding this exclusion, and the fact that the complaint alleged liability resulting from Premcor’s sole negligence, Premcor argued that it was entitled to a full defense under Griffith’s policy.  Premcor first argued that a certificate of liability insurance issued by Griffith’s broker modified the policy’s additional insured coverage because it stated that Premcor was an additional insured and the certificate did since it did not contain any language limiting the scope of coverage.  The court rejected this argument, pointing out that the certificate expressly stated that it was for informational purposes only and did not amend the coverage actually afforded by express terms of the policy.  In any event, explained the court, Griffith’s broker did not have actual or apparent authority to amend the terms of the National Fire policy.

More significant for the court was Premcor’s argument that the court should look beyond the pleadings in the underlying suit, since the facts established through discovery indicated that the underlying accident was not the result of Premcor’s sole negligence.  In other words, Premcor argued that the duty to defend, at least in the context of additional insured coverage, should not be limited to the four corners of the complaint. 

The Premcor court acknowledged, but ultimately distinguished, two decisions by the Delaware Supreme Court in which extrinsic facts were considered in determining a duty to defend.  In Pike Creek Chiropractic Center, P.A. v. Robinson, 637 A.2d 418 (Del. 1994), the court considered extrinsic evidence from the underlying case, where discovery had already been completed, to determine whether the insured’s contractual duty to defend was triggered.  Likewise, in American Ins. Group v. Risk Enterprise Management, Ltd., 761 A.2d 826 (Del. 2000), the court held that notwithstanding the general rule that a duty to defend is based on the four corners of the complaint, consideration of extrinsic facts was allowed in determining a duty to defend a third-party action where discovery was completed in the first party action and, in fact, the first party action had already settled. 

The Premcor court noted that Pike Creek and American Ins. Group were exceptions to the rule and limited to situations where “a complete discovery record had been developed and the underlying litigation was resolved.”  In fact, National Fire cited to a case involving Premcor where it cited to these very two cases, unsuccessfully, for the proposition that extrinsic evidence could be used in determining a duty to defend a putative additional insured.  See, Premcor Refining Group, Inc. v. Matrix Service Industries, 2009 WL 960567 (Del. Super. 2009).  The court therefore rejected Premcor’s argument, explaining that:

Absent completion of discovery and resolution of the underlying case, Delaware law is inclined against looking beyond the pleadings to determine whether a duty to defend exists. 

Thus, concluding that the underlying lawsuit alleged injuries as a result of Premcor’s sole negligence, the court held that National Fire had no duty to defend or indemnify Premcor at the present time. 

Eighth Circuit Holds Claim Against General Contractor Not an Occurrence

In its recent decision in Secura Ins. v. Horizon Plumbing, 2012 U.S. App. LEXIS 4477 (8^th Cir. Mar. 5, 2012), the United States Court of Appeals for the Eighth Circuit, applying Missouri law, considered whether an underlying breach of contract claim could be construed as an “occurrence” triggering coverage under a general liability policy.

The claims at issue in Secura arose out of the construction of an apartment complex in Kansas City, Missouri.  The owner, Metropolitan, hired Weitz Company as the project’s general contractor, and Weitz, in turn, hired Horizon Plumbing as the plumbing subcontractor.  The project ran into financial troubles and delays, which ultimately resulted in Metropolitan terminating Weitz.  Weitz later sued Metropolitan for breach of contract. Metropolitan asserted a counterclaim against Weitz, alleging that Weitz committed numerous breaches of contract, including failure to timely complete the project, failure to provide progress reports, failure to supervise and pay subcontractors in a timely fashion, failure to maintain adequate accounting records, and failure to correct deficient and defective work.  Weitz and Metropolitan both asserted third-party claims against Horizon for defective plumbing.  Among other things, they alleged that Horizon failed to properly connect various balcony drains, which allowed for water intrusion and mold.  Horizon’s insurers defended and ultimately settled these third-party claims.

At issue in Secura was whether Weitz, as an additional insured under Horizon’s policies, was entitled to coverage with respect to Metropolitan’s counterclaim.   Metropolitan was awarded $5 million in connection with its counterclaim, and the court ordered Horizon to pay Weitz $115,619.80 in attorneys’ fees and $12,576.30 in costs, these amounts be described as the portion of Weitz’s defense of the counterclaim arising out of Horizon’s allegedly defective plumbing work.  Horizon’s insurers paid this amount.  Weitz claimed subsequently claimed that as an additional insured under Horizon’s policy, it was entitled to reimbursement of the entirety of its costs in defending Metropolitan’s counterclaim – an amount approximating an additional $1.1 million.  Horizon’s insurers took the position that no coverage obligation was owed with respect to the remainder of the counterclaim because it did not allege “property damage” resulting from an “occurrence.”

Weitz argued that Metropolitan’s breach of contract counterclaim triggered coverage because it sought damages for, among other things, Horizon’s defective plumbing.  The court disagreed, finding that each of Weitz’s alleged failures “was within [its] control and management and its failure to perform cannot be described as an undesigned or unexpected event” and thus did not constitute an “occurrence.”  Moreover, the court rejected Weitz’s argument that the claim for failure to repair constituted an occurrence, explaining that:

Contrary to Weitz's contention, the disclosure of damages sought for failure to remediate defective workmanship was not based on an "occurrence" but rather a breach of a specific contractual duty to correct deficient work. There was no allegation of an accident or that Weitz's conduct had caused property damage. The fact that Weitz's failure to correct the defective workmanship resulted in financial expenses to Metropolitan was a "normal, expected consequence of [Weitz's] breach of contract and not an occurrence."

In passing, the court noted that while an additional insured is entitled to a defense, an insurer’s coverage obligation to an additional insured is limited to damages arising out of the named insured’s work.  Horizon’s insurers, explained the court, should not be required to provide a full defense merely because Metropolitan’s counterclaim included a small component related to Horizon’s work.  As the court concluded, “the insurers have already paid Weitz for all defense costs related to Horizon's work and they owe nothing more.”

First Circuit Limits Definition of “You” to Policy’s Named Insured

In its recent decision in Wright-Ryan Constr., Inc. v. AIG Ins. Co. of Can., 2011 U.S. App. LEXIS 15502 (1^st Cir. July 27, 2011), the United States Court of Appeals for the First Circuit, applying Maine law, had occasion to consider whether the term “you” as used in a general liability policy is limited to the policy’s named insured, or whether it includes additional insureds.

This issue in Wright-Ryan arose out of a priority of coverage dispute involving two primary policies under which Wright-Ryan qualified as an insured.  The first policy, issued by Acadia Insurance Company, was issued directly to Wright-Ryan.  The second policy, issued by AIG to a subcontractor of Wright-Ryan’s, provided additional insured coverage to Wright-Ryan on a primary and non-contributory basis for all liability “arising out of [the subcontractor’s] premises or operations.”  Wright-Ryan was sued in a bodily injury lawsuit brought by an employee of the subcontractor.  Wright-Ryan tendered the matter to the subcontractor and to AIG directly, but when neither responded, Acadia defended the matter directly and ultimately settled the case.  Acadia and Wright-Ryan then commenced a declaratory judgment action against AIG to recover the settlement amount as well as Wright-Ryan’s defense costs.

The Maine federal district court concluded that Wright-Ryan qualified as an additional insured under the AIG policy, but that the AIG policy was excess to the Acadia policy.  Looking to the policies’ other insurance clauses, the First Circuit disagreed.  Both policies contained the following excess other insurance provision:

a. Primary Insurance  This insurance is primary except when b., below, applies.

. . .

b. Excess Insurance

This insurance is excess over:

(1) Any of the other insurance, whether primary, excess, contingent, or on any other basis . . . (a) That is . . . coverage for "your work"; . . .

(2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.

When this insurance is excess, we will have no duty . . . to defend the insured against any "suit" if any other insurer has a duty to defend the insured against that "suit".

The First Circuit focused on the word “you” as used in these provisions.  Acadia and Wright-Ryan argued that the AIG policy could not be considered excess over the Acadia policy since the word “you” in the AIG policy was limited to that policy’s named insured.  As such, they argued that the excess other insurance provision in the AIG policy should not even be considered in terms of the coverage afforded to Wright-Ryan.  AIG, however, argued that the word “you” as used in its policy should be read to include additional insureds, in which case the AIG policy would be excess to any other policy providing coverage for Wright-Ryan’s work.  The court rejected AIG’s contention, noting that the first page of each policy expressly stated that  “[t]hroughout this policy the words 'you' and 'your' refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy.”  Further, Section II. of the policies, titled “WHO IS AN INSURED” extended coverage to certain individuals and entities not otherwise identified in the policies’ declarations, such as officers, employees and newly acquired organizations.  Absent from Section II. was any reference to additional insureds.  Thus, held the court:

Reading these provisions together, we find the definition of "you" to be unambiguous: it refers solely to a person or organization listed as a Named Insured in the policy Declarations or “qualifying as Named Insured” by virtue of being newly formed or acquired by a Named Insured.

Applying this definition to the AIG and Acadia policies, the court concluded that the AIG policy could not be considered excess to the Acadia policy, since the word “you” in the AIG policy referred not to Wright-Ryan, but rather to the subcontractor.   On the other hand, because the word “you” in the Acadia policy referred solely to Wright-Ryan, the coverage afforded under Acadia policy necessarily was excess to the coverage afforded to Wright-Ryan under the AIG policy.