Are You Getting Your Money’s Worth in Additional Insured Coverage?

John P. Fischer | Barnes & Thornburg

Many commercial contracts require that one of the parties be included as an “additional insured” on the general liability policies of its contracting partner (which is the “named insured” on those policies). General contractors typically require subcontractors to include them as additional insureds on the subcontractors’ policies. Lessors often require the same from their lessees, and manufacturers from their suppliers. 

From the perspective of the party seeking to be an additional insured, the reason is to shift some or all of the burden of providing coverage onto the other party’s insurers for liabilities with some connection to that other party. This preserves the limits of the general contractor’s, lessor’s, or manufacturer’s own policies for claims that have no connection to the other party.

Not all additional insured coverage is created equal, however. Depending on the language of the additional insured endorsement, courts frequently interpret some kinds of additional insured coverage to apply more broadly than others. The following types of additional insured language, for example, have subtle (or not so subtle) differences in wording that could, depending on the jurisdiction and facts, result in different outcomes on the question of whether coverage is available for the additional insured. The key differences in the policy language are italicized:

  • liability arising out of the named insured’s ongoing operations performed for the additional insured
  • liability caused, in whole or in part, by the named insured’s ongoing operations performed for the additional insured
  • liability caused, in whole or in part, by the named insured’s acts or omissions in the performance of the named insured’s ongoing operations for the additional insured
  • liability caused by the named insured’s negligent acts or omissions at or from the named insured’s ongoing operations performed for the additional insured

In the last example, coverage for the additional insured is available, on the face of the policy, if the liability is “caused by the named insured’s negligent acts or omissions.” The other three examples are not limited, on their face, to the named insured’s negligence. Courts frequently find additional insured coverage to exist under this broader language even when the named insured was not negligent, as long as there is some connection between the named insured and the liability. 

For example, there may be coverage for the additional insured’s negligence if the plaintiff was injured in the course of their employment with the named insured, or if the plaintiff was injured in an area where the named insured was doing its work—even if the named insured itself was not negligent.

Because some types of additional insured coverage are potentially broader than others, entities seeking additional insured coverage from their contracting partners frequently specify the precise type of coverage the other party must obtain, often by identifying the exact policy form to be used. It’s important to understand the nuances in language for additional insured coverage and how that language can be interpreted by insurers and courts. 

Another Record Wildfire Season: Check Your CGL Policy

Matthew R. Divelbiss and Peter D. Laun | Jones Day

With election season dominating the news cycle, it’s easy to miss the headlines from California and other Western states. “Record Wildfires on the West Coast Are Capping a Disastrous Decade.” “Global warming driving California wildfire trends – study.” “As wildfires rage, climate experts warn: The future we were worried about is here.” And the issue is not limited to the West: “Climate change could shift Pennsylvania’s wildfire season.”

But even before this record-breaking fire season (which is still underway), there was an ominous warning for policyholders: “As Wildfires Get Worse, Insurers Pull Back From Riskiest Areas.” That pullback includes attempts to restrict coverage under commercial general liability (“CGL”) policies, a central part of most companies’ insurance and risk management programs. 

CGL policies provide coverage when a policyholder accidentally causes bodily injury or property damage to a third party. Simply put, if a policyholder accidentally starts a fire that burns down someone’s house, the policyholder would look to its CGL insurer for coverage. But the new concern is that an accidental fire burns thousands of homes and businesses.      

Insurers are running from that risk in the form of “wildfire” exclusions, added as endorsements to both primary and excess CGL policies. For example, one exclusion filed with an insurance commissioner intended for use in policies issued to energy companies states: “This policy does not apply to damages, losses, costs, or expenses arising out of, resulting from or in connection with ‘wildfire’ or ‘wildfire injury’, including any cost the insured becomes legally obligated to pay as reimbursement for fighting, suppressing or bringing under control any ‘wildfire’.”

Here are three issues to think about when faced with a wildfire exclusion:

1. What is your company’s wildfire risk? Insurers are concerned about both products and operations. Do you sell products that could start a wildfire, including products that may be installed in locations that present wildfire risk? Do you perform work (such as power line or pipeline maintenance, railroad maintenance, energy development, or construction) that could somehow cause a wildfire? If a policyholder has limited risk, it may be able to negotiate to remove the exclusion. But if a policyholder’s activities pose risk, getting rid of the exclusion may be difficult. In such a circumstance, the policyholder may need to look to other insurers or insurance markets to obtain coverage, or may have to accept high deductibles and/or sublimated wildfire coverage. Alternatively, companies may need to consider more creative methods of providing for this risk, such as captives. Ultimately, policyholders may need to join together to demand federal and/or state legislative solutions to this problem.

2. Even if your company is stuck with the exclusion, should the exclusion be clarified? As written, the exclusion above purports to apply to any losses “in connection with” a wildfire. Insurers will argue that this is very broad. For example, if a policyholder were sued because its product failed while being used to fight a wildfire, the insurers may point to “in connection with” to deny coverage. Policyholders should negotiate with their insurers to clarify any exclusion and leave no doubt that any exclusion is limited to circumstances where the policyholder is allegedly responsible for causing a wildfire. That’s the risk insurers are trying to avoid. 

3. What about contractual obligations to provide wildfire insurance? Many contracts—for example, for companies that provide right-of-way services to utilities—require that the contractor maintain insurance against wildfires. Whether you’re the “contractor” or the “utility” in this or any analogous scenario, the lack of wildfire insurance presents a problem. For the “contractor,” it could be in breach of its contractual obligations if it cannot provide the agreed upon insurance. For the “utility,” it may not have the financial protection it is counting on the contractor to provide in the event of a wildfire, but the contractor’s work may very well be key to limiting wildfire risk. In such circumstances, the parties will need to work cooperatively to find a solution that protects both parties.

Insurance issues surrounding wildfires will continue to evolve in the years ahead. As they undoubtedly arise in future policy renewals, policyholders should look to their coverage counsel and brokers to navigate this area and make sure that wildfire exclusions, if they can’t be avoided, are both clear and limited. 

Coverage for Defective Work? Michigan Joins Majority

Alexander G. Thrasher and Heather Howell Wright | International Law Office

Michigan has joined the majority of jurisdictions in holding that a general liability policy may provide coverage for claims for property damage allegedly caused by the defective work of a subcontractor. In a unanimous decision reversing the Michigan Court of Appeals, the Michigan Supreme Court held that a subcontractor’s unintentional defective work was an “accident” and, thus, an “occurrence” covered under the subcontractor’s commercial general liability (CGL) policy.

In Skanska USA Building Inc. v. MAP Mechanical Contractors, Inc., Skanska USA Building Inc. served as the construction manager on a medical center renovation project. Skanska hired defendant MAP Mechanical Contractors, Inc. (MAP) to perform heating and cooling work that included the installation of expansion joints on part of a steam boiler and piping system. Several years after the installation, extensive damage to concrete, steel, and the heating system occurred, and Skanska determined that the cause was MAP’s incorrect installation of some of the expansion joints. Skanska repaired and replaced the damaged property at a cost of about $1.4 million and submitted a claim to MAP’s insurer, co-defendant Amerisure Insurance Company. Amerisure denied coverage for the claim, and Skanska filed suit.

The trial court denied competing summary judgment motions, and Skanska and Amerisure both filed applications for leave to appeal to the Court of Appeals. The applications were granted, and the appeals were consolidated.

The policy provided coverage for “property damage” caused by an “occurrence.” The term “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Interpreting this language, the Michigan Court of Appeals held that summary judgment should be granted to Amerisure as “there was no ‘occurrence’ under the CGL policy because the only damage was to the insured’s own work product.” The term “accident” is not defined in the policy and the Court of Appeals, applying a definition of “accident” from Michigan appellate court precedent, reasoned that there was no “accident” and thus no “occurrence” to trigger coverage under the policy.

Skanska appealed to the Michigan Supreme Court. The Skanska Court began its review by focusing on the policy’s definition of “occurrence” as an “accident.” In doing so, the court relied on a definition of “accident” as “an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated and not naturally to be expected.” Amerisure contended that an “accident” must involve “fortuity,” or “something over which the insured has no control,” but the court disagreed. Instead, the court concluded that the term “accident” is both plain and broad in its meaning and a subcontractor’s faulty work may fall within the court’s definition of an “accident.” Although “fortuity” is one way to show an accident occurred, the court was steadfast that it is not the only way to do so.

The court also rejected the Court of Appeals’ conclusion that “accident” cannot include damage limited to the insured’s own work product because the policy at issue did not limit the definition of “occurrence” with any reference to the owner of the damaged property.

Finally, the court rejected Amerisure’s argument that providing coverage for the faulty subcontractor’s work would convert the insurance policy into a performance bond. The court observed: The fact that “coverage may overlap with a performance bond is not a reason to deviate from the most reasonable reading of the policy language.”

Whether faulty or defective workmanship constitutes an “occurrence” under the CGL is a state-specific question, and courts across the country are divided on this issue. While some states have held that faulty workmanship or improper construction is not an “occurrence” because it can never be an “accident,” others have held that faulty workmanship can be an “accident” if the resulting damage occurs without the insured’s expectation or foresight. The recent trend has been for courts to find that a construction defect or faulty workmanship satisfies the “occurrence” and “property damage” requirements under a general liability policy and losses sustained as a result of such defects may be covered. The Michigan Supreme Court’s decision is yet another example that the tide continues to change in favor of insureds as to whether property damage caused by defective work may be covered under a general liability policy.

Fifth Circuit Holds Insurer Owes Duty to Defend Latent Condition Claim That Caused Fire Damage to Property Years After Construction Work

Jeremy S. Macklin | Traub Lieberman

Most general liability policies only provide coverage for “property damage” that occurs during the policy period. Thus, when analyzing coverage for a construction defect claim, it is important to ascertain the date on which damage occurred. Of course, the plaintiffs’ bar crafts pleadings to be purposefully vague as to the date (or period) of damage to property. A recent Fifth Circuit decision applying Texas law addresses this coverage issue in the context of allegations of a condition created by an insured during the policy period that caused damage after the policy expired.

In Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554 (5th Cir. 2020), Gilbert Gonzales (the insured) was a siding contractor. In 2013, the underlying plaintiff hired Gonzales to install new siding on his house. In 2016, the underlying plaintiff’s house was damaged in a fire. The underlying plaintiff sued Gilbert in Texas state court alleging that when Gonzalez installed the siding in 2013, he hammered nails through electrical wiring and created a dangerous condition that caused a fire three years later in 2016.

At the time Gilbert performed construction work, he was insured by Mid-Continent Casualty Company. Mid-Continent disclaimed coverage to Gonzales on the basis that the complaint unequivocally alleged that property was damaged in 2016 and there were no allegations that property damage occurred prior to 2016 or was continuing in nature.

The Fifth Circuit started its analysis by acknowledging Texas’ strict eight-corners rule for determining an insurer’s duty to defend. Relying on prior Texas and Fifth Circuit decisions (Don’s Building Supply, Inc. v. OneBeacon Insurance Co.Wilshire Insurance Co. v. RJT Construction, LLC, and VRV Development L.P. v. Mid-Continent Casualty Co.), the court narrowed its focus to “actual, physical damage alleged in the underlying litigation.” The court reasoned, “[i]f the only alleged damage occurred outside of the policy period, then there is no duty to defend. But if any of the alleged damage occurred during the policy period, then the duty to defend attaches.”

The court held that the underlying lawsuit “plainly alleges physical injury to property that occurred within the policy period.” The court identified three reasons for its holding: (1) the underlying complaint stated that the 2016 fire “relates back to [the] construction and/or installation of siding” in 2013, (2) the policy defined “property damage” to include “all resulting loss of use of that property,” so damage to the wire includes damage to the entire house, and (3) the underlying plaintiff’s claim of damages alleged that “the electrical wires were damaged in 2013.”

Judge Catharina Haynes dissented, explaining that she would hold that property damaged occurred after the policy period ended, when the fire broke out in 2016. Judge Haynes agreed that the court is bound by Don’s BuildingWilshire, and VRV Development, but she emphasized that those cases also hold that when an underlying plaintiff alleges actual, physical damage due to the insured’s negligent conduct, the alleged property damage does not relate back to the time of the negligent act when determining when the property damage occurred. Judge Haynes criticized the majority for focusing on the time of the negligent conduct.

The Gonzales decision highlights the importance of analyzing each allegation in an underlying pleading to determine when any physical injury may have occurred. The dissent also leaves the door open for a different panel of Fifth Circuit judges to distinguish or reverse Gonzales.

Heads I win, Tails You Lose: Southern Owners Insurance Company v. MAC Contractors

Julius Parker | Butler Weihmuller Katz Craig

On July 29, 2020, the Eleventh Circuit Court of Appeals issued its opinion in Southern Owners Ins. Co. v. MAC Contractors, of Fla., LLC, — Fed. Appx. —, 2020 WL 4345199 (11th Cir. July 29, 2020).  While claiming to follow its own precedent, which narrowly interpreted the Florida Supreme Court’s decisions in United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) and Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008), the Court reached the conclusion that a complaint which alleged that a newly-constructed home was “replete with construction defects” sufficiently pled “property damage” within the meaning of a general liability policy.  As such, it concluded that the insurer owed a duty to defend its insured home builder against a construction defect claim. This constitutes a departure from the court’s previous position on this issue.

In Amerisure Mut. Ins. Co. v. Auchter Co., 673 F.3d 1294 (11th Cir. 2012), the Eleventh Circuit interpreted the J.S.U.B. and Pozzi Window cases to reach the conclusion that a general liability policy did not cover a claim made against the insured general contractor for a roof which was defectively installed by a subcontractor.  The roof was composed of ceramic S-shaped tiles which required fastening at a precise torque in order to function as designed.  The roofing contractor failed to apply the correct torque, leading to the tiles becoming dislodged and falling off the building during heavy winds.  

The Court explained its reasoning:

The only damages Amelia alleges are those to correct the faulty roof supplied by Auchter’s subcontractor.  In so claiming, Amelia is effectively seeking to secure the roof that Auchter should have installed in the first instance: one that conformed with the contract specifications.  Amelia’s claim is thus simply a “claim for the cost of repairing the subcontractor’s defective work.”  U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 890 (Fla. 2007).  As such, Amelia’s claim alleges no “property damage.”  See id.

Auchter, 673 F.3d at 1307.

Following Auchter, the Eleventh Circuit held that where the work of one subcontractor damages the work of another subcontractor, the complaint alleges “property damage” requiring the insurer to defend.  See Carithers v. Mid-Continent Cas. Co., 782 F.3d 1240 (11th Cir. 2015).  There, a brick mason installed brick veneer on a house and a different subcontractor defectively applied a coating over the bricks.  The Court thus held that the complaint alleged property damage to property other than the coating subcontractor’s work (i.e., the bricks).

Relying on Carithers, the Eleventh Circuit in MAC Contractors held that the District Court erred in granting summary judgment in favor of the insurer:

Here, the language of the underlying complaint, “at least marginally and by reasonable implication, could be construed” to create potential coverage under the policy. …  The operative amended complaint alleged that KJIMS used subcontractors for work on the residence and that the residence was “replete with construction defects” and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint’s allegations are broad enough to allow KJIMS to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.

MAC Contractors, 2020 WL 4345199 at *4, citing Trizec Props., Inc. v. Biltmore Constr. Co., Inc., 767 F.2d 810, 813 (11th Cir. 1985).

The problem with MAC Contractors is that it departs from the firmly-established rule that the plaintiff must plead concrete facts which show that coverage is implicated.  Nat’l Union Fire Ins. Co. v. Lenox Liquors, Inc., 358 So. 2d 533 (Fla. 1977).  The complaint in MAC Contractors did not allege that any one subcontractor damaged the work of any other subcontractor, only that the house was “replete with construction defects.”  Rather, the Eleventh Circuit found the duty to defend based upon the possibility that the complaint could be interpreted to allege that one subcontractor damaged the work of another subcontractor.  Basing the duty to defend on the ambiguity of a complaint turns the duty to defend on its head.

Following MAC Contractors, plaintiffs’ counsel in construction defects will be encouraged to plead vague allegations of property damage, because the more vague the complaint, the more it could be read to allege that which it does not.  Fortunately for insurers, the Court elected not to publish its decision in the Federal Reporter.  Therefore, under Rule 36-2 of the Eleventh Circuit’s Rules, the case may not be cited as binding precedent.  That of course begs the question, “Why issue an opinion which runs roughshod over prior established law and then banish it to the ethereal realm of unpublished decisions?”  The decision is pending a Motion for Reconsideration by the three-judge panel only, so perhaps there is hope for a sounder outcome upon reconsideration.