The language of the endorsement determines the coverage afforded to the additional insured. Seabulk Offshore, Ltd. v. American Home Assur. Co., 377 F.3d 408, 422 (4th Cir. 2004). Thus, unless the policy provides otherwise, the additional insured is afforded the same coverage as the named insured. Wyner v. North American Specialty Ins. Co., 78 F.3d 752, 756 (1st Cir. 1996) (“[T]he naming of additional insureds … gives to other persons the same protection afforded to the principal insured.”) So long as there is a potential for coverage, an insurer must defend the additional insured for the entire action. Plastics Engineering Co. v. Liberty Mut. Ins. Co., 514 F.3d 651, 657 (7th Cir. 2008) (“If some coverage exists, the insurer must defend the entire action, even though certain allegations may fall outside the scope of coverage.”)

Indeed, many jurisdictions recognize that an additional insured has standing to sue the named insured's insurer for bad faith. U.S. v. CNA Financial Corp., 381 F.Supp.2d 1088, 1097-1098 (D.Alaska 2005) (“[A]dditional insured may, in circumstances where a named insured might do so, recover more than policy limits and bring a bad faith claim against the insurer.”)

Because the endorsement confers contractual benefits, an insurer's duty to an additional insured is essentially the same as that to its own insured. In the context of a construction defect action, an insurer must defend the entirety of an action—which may include uncovered claims, for example, breach of contract, breach of warranty, fraud, and so on—as long at least one claim is covered (negligence, for example).

Coverage Limitations

The flipside of its “contractual” relationship is that the additional insured has the same obligations under the policy to the insurer as does the named insured, such that the additional insured's breach thereof may constitute a policy defense.

This means that an additional insured may be denied coverage for (i) failing to provide timely notice of a claim (Hartford Acc. and Indem. Co. v. Gulf Ins. Co., 776 F.2d 1380 (7th Cir. 1985)), or (ii) breaching the cooperation clause (Mayflower Ins. Co. v. Osborne, 326 F.2d 461 (4th Cir. 1964)).

Indeed, there are instances where a general contractor may be denied coverage simply because it qualifies as an additional insured. This occurs where the application of a policy exclusion depends on the contractor's status as an insured—such as the owned property exclusion or the insured versus insured exclusion.

In Allegheny Airlines, Inc. v. Forth Corp., 663 F.2d 751 (7th Cir. 1981), the insurer issued a policy—which excluded coverage for an aircraft “owned” by an insured—to an airline and named its subsidiary as an additional insured. The subsidiary's aircraft was involved in a collision, whereupon the court held that because the subsidiary was an additional insured and thus an “owner” of the aircraft, coverage was barred for the airline under the owned property exclusion.

In Wheeler v. State Farm Mut. Auto. Ins. Co., 438 F.2d 730 (10th Cir. 1971), the named insureds were passengers in car driven by the additional insureds; the latter were injured in an accident and sued the former. Noting that the policy excluded coverage for any action brought by a “co-insured,” the court denied coverage, reasoning that the policy was intended to protect against claims brought by third-parties and not other “insureds.”

Thus, insureds and insurers should be aware of instances wherein a general contractor's status as an additional insured gives rise to potentially disqualifying obligations and exclusions under the policy that may be inapplicable to the subcontractor.

The Additional Insured's Own Negligence

General contractors often seek coverage for their own negligence under their subcontractor's additional insured endorsement. While most policies cover an additional insured for liability “arising out of” the named insured's acts or omissions, courts often interpret the “arising out of” language to only require a minimal—that is, “but-for”—connection between the named insured's work and the additional insured's liability. Other courts require a greater level of causation than “but-for”, but still short of proximate cause. Perhaps because of this judicial vacillation, the ISO has, in the course of past 30 years, revised the additional insured form in an effort to clarify coverage.

One of the early additional insured forms (2010 1185) extended coverage for the additional insured's “liability arising out of [the named insured's] work for that insured by or for you.” Some courts broadly interpreted this to hold that “there need not be negligence alleged against the named insured for the additional insured to be covered.” Mikula v. Miller Brewing Co., 701 N.W.2d 613, 622 (Wis. 2005). Under this reasoning, “[a]n additional insured's own negligence is covered under this type of additional insured endorsement.” SFH, Inc. v. Millard Refrigerated Services, Inc., 339 F.3d 738, 743 n.4 (8th Cir. 2003).

However, coverage for the additional insured's own negligence would likely be precluded by construing “arising out of” to require that the subcontractor have been the “proximate” cause of the general contractor's liability. See, S & A Farms, Inc. v. Farms.com, Inc., 862 F.Supp.2d 898, 908 (S.D.Iowa 2011) (“Proximate causation generally requires evidence that a defendant's conduct was not only the 'but for” cause of a plaintiff's damages, but was also a 'substantial factor' in bringing about such damages. The injury or damage must have been either a direct result of or a reasonable probable consequence of the cause and except for the cause the injury would not have occurred.”)

Many courts, however, have disclaimed “proximate” cause as the applicable standard—“the general consensus [is] that the phrase 'arising out of' should be given a broad reading such as 'originating from' or 'growing out of' or 'flowing from' or 'done in connection with'—that is, it requires some causal connection to the injuries suffered, but does not require proximate cause in the legal sense.” Federal Ins. Co. v. Tri-State Ins. Co., 157 F.3d 800, 804 (10th Cir. 1998).

Notwithstanding a “general consensus,” the degree of causation required for coverage remains unsettled. One court holds that “'but for' causation satisfies the requirements of an insurance policy which specifies that only liabilities 'arising out of the use' are covered.” Hormel Foods Corp. v. Northbrook Prop. & Cas. Ins. Co., 938 F.Supp. 555, 557 (D.Minn. 1996). On the other hand, another court holds, “[a]rising out of, for purposes of insurance coverage, requires a causal connection greater than 'but for' causation, but less than legal, proximate cause.” Ohio Cas. Ins. Co. v. Union Pacific Railroad Co., 469 F.3d 1158, 1165 (8th Cir. 2006).

Accordingly, while most jurisdictions concur that “arising out of” is a broad standard, it is unsettled whether “but-for” causation is sufficient. Perhaps for this reason, some courts found earlier additional insured endorsements to be vague. In McIntosh v. Scottsdale Ins. Co., 992 F.2d 251 (10th Cir. 1993), an insurer issued a policy to a concert promoter and named the city as an additional insured, whereupon the plaintiff sued after he was injured during the concert. While the insurer argued that the “arising out of” language limited coverage to vicarious liability, the court found the provision vague and held that the city was entitled to coverage. ”The phrase 'arising out of' clearly relates to causation, but its terms are 'both broad and vague' . . . [a]lthough a remote connection between [the named insured's] operations and [plaintiff's] injuries would not suffice, we conclude that the facts of this case clearly demonstrate the requisite causal connection.”

In light of the foregoing, the ISO has revised some of the more recent additional insured endorsements by deleting the “arising out of” clause and instead requiring that the additional insured's liability to have been “caused” by the named insured. For example, under form CG 2010 0704, the carrier insures the additional insured “only with respect to liability … caused, in whole or in part, by: 1. [named insured's] acts or omissions; or 2. The acts or omissions of those acting on [named insured's] behalf.”

Therefore, under form 2010 0704, a general contractor is only covered for liability “caused” by the subcontractor's acts or omissions. However, as of the date of this publication, no reported decision has interpreted coverage under form 2010 0704. Accordingly, it remains to be seen whether form 2010 0704 is interpreted differently than its predecessors such that “caused” by means “proximate” cause rather than “but-for” cause. If the latter, then a general contractor may still have coverage for its own negligence; if the former, the general contractor may be required to seek a defense under its own policy.

An Indemnity Agreement Between The Parties May Supersede The Policy Provisions And Terminate An Insurer's Right To Contribution

An insurer's right to contribution may be compromised by the indemnity agreement in its insured's subcontract. Because it is deemed a specific allocation of risk between a contractor and subcontractor, many courts hold that an indemnity provision in a subcontract trumps the more general terms of the parties' insurance policies. The result is that an insurer otherwise entitled to contribution from another insurer may have its claim defeated by its insured's indemnity agreement—for example, the insurer for a subcontractor often cannot obtain contribution where the subcontract requires the subcontractor to indemnify the general contractor.

The “general rule” is that where two of more insurers provide primary coverage, mutually inconsistent “other insurance” provisions are disregarded and the insurer paying more than its share is entitled to recover from the other insurers. Employers Cas. Co. v. Employers Commercial Union Ins. Co., 632 F.2d 1215, 1218 (5th Cir. 1980). This is a function of the principle that “the right of equitable contribution exists independently of the rights of the insured.” Employers Ins. of Wausau v. Granite State Ins. Co., 330 F.3d 1214, 1218 (9th Cir. 2003).

However, an indemnity provision in a subcontract may constitute an exception to the general rule. “[A]n indemnity agreement between the insureds or a contract with an indemnification clause, such as is commonly found in the construction industry, may shift an entire loss to a particular insurer notwithstanding the existence of an 'other insurance' clause in its policy.'” 15 Couch on Insurance (3rd Ed.1999) § 219.1.

In this regard, “whether an indemnity agreement is relevant turns on the particular facts of the case, such as the intentions and relationships of the parties.” Wal-Mart Stores Inc. v. RLI Ins. Co., 292 F.3d 583, 588-589 (8th Cir. 2002). Thus, the intent of the insureds – e.g., the general contractor and the subcontractor – is often dispositive because an indemnity agreement is deemed a more specific allocation of risk than the parties' respective insurance policies. See, In re Lazarus, 478 F.3d 12,18 (1st Cir. 2007) (“[T]he more specific treatment prevails over the general.”)

As such, to the extent that it prevails over the terms of the policy—the “other insurance” clause—an insurer cannot obtain contribution in contravention of its insured's indemnity agreement. Federal Ins. Co. v. Gulf Ins. Co., 162 S.W.3d 160, 165 (Mo. 2005) (Acknowledging the “controlling effect to the indemnity obligation of one insured to the other insured over 'other insurance' or similar clauses in the policies of the insurers, particularly where one of the policies covers the indemnity obligation.”)

The Fifth Circuit has gone so far as to characterize this as the majority rule. American Indem. Lloyds v. Travelers Property & Cas. Ins. Co., 335 F.3d 429, 436 (5th Cir. 2003) (“[T]he clear majority of jurisdictions … give controlling effect to the indemnity obligation of one insured to the other insured over 'other insurance' or similar clauses in the policies of the insurers, particularly where one of the policies covers the indemnity obligation.”)

Accordingly, an insurer's rights are often construed in the context of its named insured's indemnity agreement such that a subcontract may defeat an insurer's claim for contribution where its named insured/subcontractor is required to indemnify the general contractor for very the risk assumed under the additional insured endorsement.