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Coverage Pitfalls for Additional Insureds: Interplay With SIRS and "Other Insurance Provisions," Interpreting AI Endorsements

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, SEPTEMBER 6, 2017

Lawrence D. (Larry) Mason, Partner, Goldberg Segalla, Chicago John J. McLeod, Shareholder, McLeod Law Group, San Diego Matthew G. Jeweler , Counsel, Pillsbury Winthrop Shaw Pittman, Washington, D.C. Dawn A. Silberstein, Of Counsel, Wilson Elser Moskowitz Edelman & Dicker, San Francisco

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Strafford Publications Webinar

Coverage Pitfalls for Additional Insureds: Interplay With SIRS and “Other Insurance Provisions,” Interpreting AI Endorsements

September 6, 2017 5

Matthew G. Jeweler

Counsel | Pillsbury Winthrop Shaw Pittman LLP 202.663.9212 | matthew.jeweler@pillsburylaw.com

John J. McLeod

Shareholder | McLeod Law Group, APC 619.236.9938, x102 | jmcleod@mcleodlawgroup.com

Lawrence “Larry” D. Mason

Partner | Goldberg Segalla, LLP 312.572.8444 | lmason@golbergsegalla.com

Dawn A. Silberstein

Of Counsel | Wilson Elser Moskowitz Edelman & Dicker LLP 415.625.9255 | dawn.silberstein@wilsonelser.com

Faculty

6

Matthew G. Jeweler Counsel | Pillsbury Winthrop Shaw Pittman LLP 202.663.9212 | matthew.jeweler@pillsburylaw.com

• I. Overview of Key Issues Relating

to Additional Insured Coverage

Coverage Pitfalls for Additional Insureds:

Interplay With SIRS and “Other Insurance Provisions,” Interpreting AI Endorsements

7

Today’s Agenda

• Overview of a few important issues to consider

when obtaining additional insured (AI) coverage

• How a self-insured retention (SIR) in the named

insured’s policy is handled in the AI context

• Priority of coverage when multiple policies cover

the same risk

• Differences in and interpretation of AI

endorsement language

8

Scope of AI Coverage

• Location(s) covered
• Type of risks covered
• Property damage
• Bodily injury
• Personal and advertising injury
• Length of coverage period
• Completed operations
• How is coverage for years after the named insured finishes work

accounted for?

• The right entities as AIs
• Beware of issues re contractual privity and “blanket” AI endorsements

9

Language of the AI Endorsement

• Not all AI endorsements are created equal
• “Arising out of” vs. “caused, in whole or in part, by”
• Watch out for other restrictive, potentially

manuscript, language

• Damage arising “solely” out of the named insured’s acts
• Exclusions
• Damage arising out of the acts/omissions of the AI
• The impact of the AI’s own negligence
• Anti-indemnity statutes

10

Priority of Coverage

• Which of several applicable policies applies first?
• Do multiple policies share primary responsibility?
• Consider waiver of subrogation rights
• Named insured’s excess policies
• Try to negotiate for clear policy language
• Consider an indemnity claim against the named insured

11

Policy Limits

• Make sure the limits required in the underlying contract

are actually provided in the policy

• A policy that provides lesser limits obviously is a problem
• A policy that provides greater limits can present

complications as well

• Consider pressing for one policy with combined limits
• The underlying contract should be clear that the named

insured’s indemnity obligation is not capped or limited by the amount of the AI policy limits

12

Certificate of Insurance

• At the very least you need to obtain a certificate of

insurance that confirms AI status

• Best practice: do not rely on the certificate alone!
• Typically does not contain the key AI endorsement language
• AIs should request copies of the actual policies and

have them reviewed by counsel as appropriate

• The named insured may push back
• As a fallback, request a copy of the AI endorsement

13

Think Ahead – Terms of the Underlying Contract

• Try to incorporate as many of these items in the

underlying contract as possible

• Include important items as part of the overall contract negotiation
• Be thoughtful about limitations or perceived

limitations in the underlying contract – insurers may seek to limit coverage accordingly

• Two overarching steps to securing proper AI

coverage:

• Spelling out the parameters and key aspects of AI coverage in the underlying

contract

• Later, reviewing the policy to confirm the coverage matches up with what was

agreed 14

John J. McLeod Shareholder | McLeod Law Group, APC 619.236.9938, x102 | cgudaitis@vpl-law.com

• II. Interplay of Additional Insured

Coverage With SIRs in Named Insured’s CGL Policy

THE SIR SURPRISE

15

SURPRISE

| noun | sur·prise | sə(r)-ˈprīz |

A feeling caused by something unexpected or unusual

PERSONAL LIFE BUSINESS

16

THE SIR SURPRISE SURPRISING IMPACTS AVOIDING SURPRISES

17

SIR BACKGROUND

SIR Background The 411 on SIR’S

Historical Review- SIR’s

• vs. Deductibles

Modern trend to blur historical distinctions

18

Relationship with AI & SIR

Confers insured status Subject to limitations in AI endorsement Subject to terms and conditions of the policy Including SIR 19

Minimizing Contractual Indemnity Risks

• 1. AIE’S serve an important function
• 2. AI’S can transfer indemnity obligations
• n to the additional insurer
• 3. SIR’s limit the extent of this transfer

20

SIR Endorsements

SIR endorsements are often manuscripted endorsements Huge variance in language Critical to read the endorsement

21

$500,000

22

THE SIR SURPRISE

23

DELIVERY OF THE AI

Certificate of insurance doesn’t disclose SIR Unless you do more, you will never know

24

QUESTIONS TO ASK YOURSELF

• Is the AI attached to the

certificate?

• Does the certificate disclose

an SIR or deductible?

• What did you just get?

25

IS THERE A LIABILITY EXPOSURE FOR THE BROKER?

26

$100,000

$100,000 $100,000 $100,000 $100,000

27

SURPRISING IMPACTS

The unexpected ways a SIR can affect the coverage you think you are getting 28

• A. DEFENSE
• B. INDEMNITY
• C. BOTH

WHAT DOES IT APPLY TO?

29

PER OCCURRENCE VS. PER CLAIM SIGNIFICANCE

Occurrence = accident or event Claim = Claimant

30

Why would an insurer limit who can satisfy an SIR?

Forecast Homes, Inc. v. Steadfast Ins. Co 31

Why does an insurance company care where you got the money to pay an SIR?

32

STACKING OF SIR’S

33

34

AVOIDING SURPRISES

35

USING YOU CONTRACT TO AVOID SURPRISES

Draft your contracts to get what you want

A contract requirement is only as good as the effort taken to insure compliance Don’t forget about renewals

36

DID YOU GET WHAT YOU ORDERED?

• 1. Is the additional insured

endorsement attached?

• 2. Is an SIR or deductible

identified in the certificate?

• 3. Do you want to ask for a copy
• f the SIR endorsement?

37

IF ALL ELSE FAILS

Is there another way to get coverage under the AI policy?

38

PLAN VS. SURPRISE

39

Lawrence “Larry” D. Mason Partner | Goldberg Segalla, LLP 312.572.8444 | lmason@golbergsegalla.com

• III. Priority of Coverage for

Additional Insureds When Several Policies Cover the Same Risk

40

Priority of coverage

• Priority of coverage refers to the proper sequence in

which concurrent policies will be liable to indemnify a loss, up to their respective limits

• A policy’s “other insurance” clause describes what
• ccurs if other coverage is available for a particular loss

41

Priority of coverage challenge

Contract between General Contractor and Subcontractor requires additional insured coverage

• n a primary and non-contributory basis
• How is primary and non-contributory coverage up to

the total limits promised to the additional insured achieved?

• What happens if policies are not properly endorsed?

42

Traditional Rule: Policy Controls

• Traditional rule: “policy provisions take precedence over conflicting

provisions found in contracts between insureds.” U.S. Liab. Ins. Co. v. Mountain Valley Indem. Co., 371 F. Supp. 2d 554, 558 (S.D.N.Y. 2005). In Mountain Valley, Mobile Air agreed in a lease to procure coverage for Leroy Holding; the lease also stated that insurance of Mobile Air shall be primary and Leroy Holding’s excess

• Mobile Air obtained a policy from U.S. Liability; Leroy Holding
• btained a policy from Mountain Valley. The U.S. Liability policy

contained an “other insurance” clause that stated it would be excess to any other valid and collectible policy, while the Mountain Valley policy stated it provides primary insurance with respect to any “covered auto.” Therefore, if the terms of the lease govern, then U.S. Liability would be liable for the full disputed amount; if the terms of the insurance policies govern, Mountain Valley would be liable for the full amount

• The court held the terms of the policy take precedence over the lease

agreement to which the insurers were not party, so Mountain

Valley was liable for the full amount of the claim

43

Alternative Rule: Indemnity Agreement Controls

• There is no bright line rule with respect to priority of coverage. Some

courts inquire into the intentions and relationships of the parties to determine whether an indemnity agreement takes precedence over the language of the policy. See, e.g., Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583, 588-89 (8th Cir. 2002). In Wal-Mart Store, Wal-Mart entered a vendor agreement with Cheyenne, which was insured by RLI Insurance Co.; Wal-Mart was insured by National Union. The policies had competing “other insurance” clauses

• The Eighth Circuit found it unnecessary to resolve the “other

insurance” issue because “on the facts of this case, the indemnity agreement controls the outcome, not the ‘other insurance’ clause.” Id. at

• 587. The court reached this result because: (1) the relationship between

the parties shows Cheyenne intended to indemnify Wal-Mart and that

RLI provided insurance to Cheyenne that covered the claim; (2) to make Wal-Mart, an insured of RLI, liable to RLI, would frustrate the purpose of insurance; and (3) to make Wal-Mart or National Union liable to RLI would start a circular chain of litigation that would ultimately leave RLI liable

44

“Horizontal” versus “Vertical” Exhaustion

• Horizontal Exhaustion: Priority that dictates that an

excess policy does not respond to a loss until all applicable primary insurance policies have been

• exhausted. [Policy terms control over the intent of the

parties in indemnity agreements: CA; IL; NY; NJ.]

• Vertical Exhaustion: Courts look to indemnity

agreements to determine intent of parties. [Intent of the parties controls over the policy terms: Arkansas; Kentucky; Missouri; Texas; Virginia.]

45

Minority Priority Approach: “Targeted Tender”

• The “targeted tender” or “selected tender” rule is unique to
• Illinois. John Burns Construction Co. v. Indiana Ins. Co., 189 Ill.

2d 570, 727 N.E.2d 211 (2000)

• Insured entitled to a defense from two or more primary

insurers can designate a particular carrier to defend and indemnify a specific lawsuit

• The selected or “targeted” insurer will owe the sole duty to

defend and indemnify the action and be precluded from seeking contribution from a nonselected or “deselected” insurer, regardless of any “other insurance” clause in the targeted insurer’s policy

• Horizontal exhaustion of underlying insurance is still required

even in a selective tender situation. Kajima Constr. Servs. v.

• St. Paul Fire & Marine Ins. Co., 227 Ill. 2d 102, 879 N.E.2d 305

(Ill. 2007)

46

2013 ISO Changes Impacting Priority of Coverage

• The Insurance Services Office (“ISO”) provides commonly used CGL

coverage forms. New forms, for both claims-made (claim must be brought during coverage period) and occurrence policies, came into effect on April 1, 2013. The new forms provide a new AI endorsement and a revised

• ptional endorsement changing the definition of “insured contract.”
• The 2013 ISO AI forms include several major changes. For example:

1. Insurance provided to an AI will apply only to the extent permitted by

• law. See, e.g., Form No. CG 20 37 04 13

2. If AI coverage is required in a contract or agreement, the AI will not be provided coverage that is any broader than is required in that contract or agreement. See id 3. The limits available to an AI will be the lesser of the limits required by contract or available under the policy to the NI. See id 47

Scope of coverage limited by state law

• With respect to the first change, this language is intended to

address state anti-indemnity statutes. Some states limit the types of acts or omissions for which a party to a contract may be covered as an AI, or otherwise regulate indemnity and insurance requirements

• In Florida, indemnification provisions in a construction contract

where the downstream party agrees to indemnify the upstream party for the upstream party’s negligence are void unless the contract contains a monetary limit on the extent of indemnification, among other requirements. See FLA. STAT. § 725.06(1) (2014)

• Other states outright prohibit construction contracts from

requiring AI coverage that extends beyond liability for the negligence or fault of the named insured. See, e.g., COLO.

• REV. STAT. § 13-21-111.5(6)(d)(I) (2014)

48

Uniformity?

• The new AI language is intended to be an easy fix given

the myriad state laws that could feasibly apply. Accordingly, even if the policy otherwise affords broader coverage, coverage will be restricted for the AI to conform to the relevant state anti-indemnity law. The new language likely precludes any argument that the parties “contracted around the law” for broader coverage

49

No coverage for sole negligence

• More recent editions of standard AI endorsements

preclude coverage for AI’s sole negligence

• This language does not necessary preclude

coverage if the NI was also partially at fault

50

Coverage limited by contract

• The second change ensures that insurers do not provide greater

coverage than required by the contract; in other words, the AI’s coverage will not be broader than that required by the contract even if the policy affords greater coverage to the NI. See Form No. CG 20 37 04 13 (If AI coverage is required in a contract or agreement, the AI will not be provided coverage that is any broader than required in that contract or agreement with the NI.)

• For example, if the contract states that the NI only provides coverage

to an AI for the NI’s vicarious liability, then the 2013 AI endorsement

• nly provides coverage for the NI’s vicarious liability, even though the

policy would ordinarily provide broader coverage

• This change also seems to mean that insurers can deny the AI

coverage even when the NI has broader coverage. For example, if the contract documents require the contractor to maintain CGL limits of $1 million per occurrence, but the contractor obtains coverage for $2 million per occurrence, the owner would only receive the benefit of the $1 million in coverage 51

Limits of coverage

• The final change affects the amount, or limits, of

coverage available to the AI. See Form No. CG 20 37 04

• 13. (The limits available to an AI will be the lesser of the

limits required by contract or available under the policy.)

• The restrictive effect of this language is that if the

construction contract requires limits of liability that are less than the policy limits, the lower limits required in the contract will cap the coverage available to the AI even though the policy limits would otherwise be greater.

52

Scope of coverage

• This revision creates additional complications when the

contract contains separate primary and umbrella or excess coverage requirements. See Form No. CG 20 37 04 13 (The limits available to an AI will be the lesser of the limits required by contract or available under the policy.)

• For example, a contract may require at least $2 million in AI

coverage under a primary CGL policy and at least $5 million in umbrella coverage. If the party required to obtain the AI coverage procures a CGL policy with $3 million limits and an umbrella policy with $5 million limits, the new language would restrict the AI limits of the primary policy to $2 million. The umbrella carrier would argue that its policy could never be triggered for the AI, because the $3 million in underlying limits can never be exhausted. A gap in coverage results.

• There is not much law on the 2013 amendments; time will tell

how these changes affect insureds’ rights

53

Fixing the Priority of Coverage Challenge

• Policy Solution: endorse excess and umbrella

policies to provide primary/non-contributory coverage [and take special precautions with “follow- form” policies]

• Contract Solution: require primary/non-contributory

coverage on primary, excess and umbrella policies

54

Dawn A. Silberstein Of Counsel | Wilson Elser Moskowitz Edelman & Dicker LLP 415.625.9255 | dawn.silberstein@wilsonelser.com

• IV. Interpreting the Additional

Insureds Endorsement Language

Coverage Pitfalls for Additional Insureds

55

In The Beginning – “Arising Out Of”

CG 20 10 11 85 “Blanket” AI Endorsement:

Where Required By Written Contract 56

“ARISING OUT OF”

• Broadly interpreted
• Causation
• Any “but for” cause in the chain of causation
• As broad as the indemnity agreement
• Can include active negligence of the AI
• Can apply when Named Insured not at fault
• Temporal
• No temporal limitation

57

A Carrier’s Perspective …

58

AI Coverage Limitations:

• CG 20 09 03 97
• Ongoing Operations
• During Construction
• Bodily Injury
• Off-Site Property Damage
• “Arising Out of Broadly Interpreted”
• No Causation Required
• No Temporal Limitation

59

“CAUSED IN WHOLE OR IN PART BY”

Caused in whole or in part by CG 20 33 07 04 Ongoing Ops. CG 20 37 07 04 Completed Ops. 60

“Caused In Whole Or In Part By”

• “But For” v. “Proximate Cause”
• The term [“but for”] refers to a link in the chain … and in the abstract

does no more than state the obvious, that "any given event, including an injury, is always the result of many causes“ … and "[m]ost causes can be ignored in tort litigation.”

• In contrast, "proximate cause" refers to a "legal cause" to which the

Court has assigned liability (Burlington Ins. Co. v NYC Tr. Auth., 2017 N.Y. LEXIS 1404. at p. 9 [N.Y. Ct. App. June 6, 2017] quoting Derdiarian v Felix Contracting Corp., 51 NY2d 308, 314, 414 N.E.2d 666, 434 N.Y.S.2d 166 [1980]) 61

Burlington Ins. Co. v NYC Tr.

• Auth. 2017 N.Y. LEXIS

1404 (29 N.Y.3d 313).

“Caused, in whole or in part" requires proximate

• r legal causation. (Id. at p. 10.)

62

Privity of Contract – (Some Jurisdictions)

• Section II – Who Is An Insured is amended to

include as an additional insured the person(s) or

• rganization(s) shown in the schedule
• perations when you and such person or
• rganization have agreed in writing in a

contract or agreement that such person or

• rganization be added as an additional insured
• n your policy

63

Privity of Performance v. Privity of Contract GC 20 38 03 13

64

Read the Schedule

65

AI Horror Stories

66

Worker Injured 5 Years After Completion

• NI Installed A Chandelier
• Subcontract Required:
• Subcontractor to Name GC as AI
• A Certificate evidencing continuation of

liability coverage, including coverage for completed operations, …for ten (10) years after final completion of the Project

• Custodian Electrocuted While Changing a Light Bulb

5 year after completion

• Sustains serious brain injury falling off a ladder

67

When Wrap Go Wrong – Policy Exclusions Defeating AI Coverage

• Roof repair during the winter
• Storm of the Century
• Shrink Wrap System Failed
• Water and Mold
• Shrink Wrap Contractor Not

Enrolled Under Wrap/OCIP

• Provided GC An AI Endorsement
• Policy Excluded:
• Projects Covered by a Wrap/OCIP
• Mold

68

69

Questions?

70