Shortly after American Hardware issued the policy and the endorsement, a Clark Lift employee as injured at the Sparks facility while acting within the course and scope of his employment. The employee sought damages from Southern Wine in the state district court for Southern Wine's negligence in causing his injuries.

Southern Wine, through its general liability insurer, appellant Federal Insurance Company, tendered the defense of the action to American Hardware, which refused the tender on the grounds that its additional insured endorsement did not cover the additional insured's direct acts of negligence and coverage was triggered only when the alleged negligence could be imputed to the additional insured through the named insured's operations, i.e ., when the additional insured can be held vicariously liable for the named insured's negligence.

Federal Insurance and Southern Wine then sought a judicial determination and declaration that American Hardware had a duty to provide coverage to Southern Wine under the endorsement. American Hardware removed the declaratory relief matter to the federal district court. During the federal proceedings, the parties filed a stipulation of facts for cross-motions for summary judgment, stipulating that the accident and injury occurred as set forth in the employee's complaint.

The court certified to the supreme court the question of whether the additional insured endorsement provided coverage for an injury caused by the sole independent negligence of the additional insured.

Federal Insurance and Southern Wine argued that the policy's additional insured endorsement language was ambiguous as to the scope of coverage. In particular, they asserted that the endorsement was unclear as to whose negligence was covered and whose was excluded, and that applying a broad interpretation, the endorsement must be read to cover Southern Wine for any negligent acts performed by it that gave rise to liability in the action.

American Hardware contended that the endorsement clearly and unambiguously precluded coverage for liabilities caused by the additional insured's own negligence. The court, however, disagreed, holding that an insurer wishing to restrict a policy's coverage should use language that "clearly and distinctly communicates to the insured the nature of the limitation." Here, American Hardware's endorsement contained no such limiting language.

The court stated that it, as well as other jurisdictions, had recognized that the scope of coverage provided by the phrase "arising out of [the named insured's] operations" was ambiguous, since it was unclear whose acts are covered. Specifically, under one reasonable interpretation, the court explained that the endorsement limited coverage to circumstances in which the named insured's negligent acts or operations directly caused the plaintiff's injury, that is, circumstances in which the additional insured was held vicariously liable for the named insured's negligence.

The court further explained that, under another interpretation, the endorsement covered the additional insured's direct negligence, so long as the plaintiff's injury had some connection to the work or operations the named insured performed for the additional insured. Thus, the court determined that in accordance with its precedent and consistent with persuasive authority from other jurisdictions, the endorsement was ambiguous, since it was reasonable to interpret that language both in favor of and against coverage for the additional insured's independent negligence.

The court explained that in exercising its independent judgment in absence of any concrete facts pointing to a different intent, it looked to its traditional rules for interpreting ambiguous insurance contracts: unclear terms are interpreted against the insurer and, unless express limiting language exists, in favor of coverage. Therefore, without concrete evidence of a different intent, when the term "arising out of the operations" of a named insured was included in an additional insured provision, that term must be read to include coverage for acts arising from the additional insured's own negligence.

Accordingly, because the language used in the endorsement did not allocate fault, and in light of the rule to broadly construe policies in favor of coverage, it was objectively reasonable that the additional insured would have expected that the endorsement provide coverage for liability connected to the named insured's operations, regardless of fault.

With respect to the term "arising out of the operations," the court explained that several other courts likewise had construed that term in favor of coverage, determining that an insurer's failure to use restrictive language to exclude specified types of liability implies that the parties intended not to limit coverage. The court concluded that the term did not preclude coverage for the additional insured's own negligent acts because, if those acts could be linked to the named insured's operations and were causally connected to the injury, the term did not allocate fault. Although an insurer could limit the coverage provided to an additional insured, to do so it must include in the endorsement explicit language excluding particular causes of losses suffered . And, the court explained, absent an express exclusion, it was bound to construe the term broadly, in favor of coverage.

Thus, when an additional insured endorsement covered liabilities arising out of operations of the named insured performed for the additional insured, that endorsement included coverage for liabilities caused by the additional insured's direct negligent acts, so long as those acts were connected to the named insured's operations performed for the additional insured.