October 31, 2011

Summary: This article discusses separation of insureds under a liability policy; this was previously known as severability of interests. This article explains the meaning of separation of insureds, and offers court cases that have interpreted the phrase as it affects issues of coverage under an insurance policy.

Topics covered:

Introduction
General liability coverage for insureds
CGL exclusions
Court cases
Other information
Other liability policies
The severability clause

Introduction

The wording of current liability insurance policies has brought about questions concerning who is insured and to whom the various exclusions and conditions apply. The separation of insureds clause under the CGL form, for example, states that the insurance applies “as if each named insured were the only named insured” and “separately to each insured against whom claim is made or suit is brought.” So a question arises: if the named insured makes a liability claim against an entity who is an insured under the named insured's CGL form, will the insurer defend that other insured and pay the named insured for his or her alleged damages?

Another example is exclusion (j) (4) on the CGL form. That exclusion deals with property damage to personal property in the care, custody, or control of the insured. Here, the question is: does the exclusion apply only to the particular insured that has the personal property in his or her hands, or can it be applied to all the insureds under the CGL form simply because one of the insureds has control of the property?

General Liability Coverage for Insureds

The idea of the named insured's being a claimant under his own liability policy or of the insurer paying for the claim of one insured against another may seem odd. But the fact is, under current liability policies, there often may be coverage in such cases.

Standard general liability coverage forms have spread the net of “who is an insured” over a broad range of entities. The named insured is, of course, an insured, but so are (under certain circumstances) spouses, partners, executive officers and directors, employees; additional insureds are also insureds who can be placed into that status through the simple use of an endorsement to the liability policy. The interests of the insureds are brought together and protected by the liability policy of which they are a part, protected against claims from the “outside.” If, however, one of the insureds seeks damages from another of the insureds, that same liability policy will treat these competing insureds as separate entities, as “outside” parties.

The separation of insureds clause guarantees that the general liability form will treat each insured as a separate insured. So, if the named insured is injured through the negligence of another insured and makes a claim under his or her own CGL form, the insurer is obligated to defend the other insured and pay the damages, assuming no exclusion is applicable to the claim.

Claims and lawsuits between parties who are insureds under the same liability policy are not usual, but such insureds should be aware of the fact that their liability policy is there to respond to claims made against them, even if those claims are made by fellow-insureds.

Some provisions of the liability policy affect the interests of all the insureds and treat all the insureds the same; but, a distinction is sometimes made between the “insureds” and the “named insured.” If the clause distinctly mentions the named insured or applies to “you” and “your”, the clause refers to the named insured only. For example, the duties in the event of occurrence or claim clause states that if a claim is made or suit is brought against any insured, “you” (the named insured) must record the specifics and notify the insurer; the fellow insureds do not have this responsibility. On the other hand, this same clause states that “no insured” will voluntarily make a payment or incur any expense without the consent of the insurer; this means each and every insured, not just the named insured.

CGL Exclusions

Some observations about the liability policy's exclusions should be made. First, some exclusions refer only to the named insured (you) and others refer to the insured. If the exclusion is only for the named insured (such as (j) (1)—property damage to property owned, rented, or occupied by the named insured), that exclusion can not be said to apply to the interests of an insured other than the named insured. If the named insured negligently damages another insured's property and that other insured makes a claim, the named insured's CGL form would respond to that claim.

Second, where an exclusion applies to “the insured”, how are the other insureds affected? For example, exclusion (a) refers to bodily injury or property damage expected or intended from the standpoint of “the insured.” If the named insured is a retail store and one of its employees intentionally hits a customer who was being a bother, it is probable that the exclusion will apply to a claim against the employee. However, the named insured company did not expect or intend the incident to happen, let alone the injury, so the exclusion should not prevent liability coverage for the named insured if a claim is made against it for the injury its employee caused. Know that the phrase “the insured” is particular in its application as opposed to “an insured” or “any insured” in that such a phrase refers to the particular insured (for example, the employee hitting a customer), but not to other insureds.

(As an example of judicial thinking here, the Supreme Court of California in Minkler v. Safeco Insurance Company of America, 232 P.3d 612 (2010) declared that “each exclusion in a liability policy applicable to an or any insured must be examined individually, and in context, to determine the effect a severability clause might have on its operation”.)

Similarly, exclusion (e) on the CGL form—employers liability—refers to bodily injury to an employee of the insured. The question here is whether this exclusion applies to claims against all insureds or simply against the insured who is the employer of the injured worker. As an example: an employee of Jones is injured through the negligence of Smith, who is an insured under the liability policy of Jones. If the employee makes a claim against Smith, is Jones' insurer obligated to defend the claim and pay any damages? This exclusion uses the word “the” instead of “an” or “any”; therefore, the exclusion should be applied only to Jones as “the” employer of the injured worker and Smith should have coverage for the claim.

Court Cases

Of course, these conclusions are always subject to judicial interpretation. The following information presents some court cases that have discussed the issue of who is an insured when the insurance policy has a separation of insureds clause.

In the following decisions, courts have held that no employee of the named insured could recover under the named insured's policy against anyone included as an added insured, in spite of the presence of a separation (or severability) clause. Some of these cases were tried in federal courts, but the insurance contracts involved were interpreted according to applicable state law. The following cases are still considered good law, not having been overruled in a different case or by a higher court. Illinois—Ohio Casualty Ins. Co. v. United States Fidelity & Guaranty Co., 223 N.E.2d 851 (1967); Iowa—Hartford Accident and Indemnity Co. v. Continental Casualty Co., 384 F.2d 37 (1966); Kentucky—Kelly v. State Automobile Ins. Assn., 288 F.2d 734 (1961); Michigan—Chrysler Corp. v. Insurance Co. of North America, 328 F. Supp. 445 (1971); Minnesota—St. Paul Fire & Marine Ins. Co. v. Wabash Fire & Casualty Ins. Co., 264 F. Supp. 637 (1967); Mississippi—Benton v. Canal Ins. Co., 130 So. 2d 840 (1961); Montana—Travelers Ins. Co. v. American Casualty Co., 441 P.2d 177 (1968); and Tennessee —Maryland Casualty Co. v. American Fidelity & Casualty Co., 330 F.2d 526 (1963).

In addition, courts in Alabama, Nevada, North Carolina, North Dakota, and Washington (or federal courts applying those states' law) have held similarly.

Note that the Benton case has been cited in other cases, with a focus mainly on the use of different language to describe who is an insured. In Centennial Insurance Company v. Ryder Truck Rental, Inc., 149 F.3d 378 (USCA 5th 1998), the court of appeals noted that the Benton holding reached only insurance policies with severability of interests clauses worded in a certain way; the Benton decision would not be applicable in the Centennial case because the language of the policy in question in the Centennial case differed from that in the Benton case. While Benton held that a separate insured could not recover against another insured under the same policy, the Centennial holding was that an exclusion that applied to “the insured” did not bar coverage for an additional insured where the policy contained a separation of insureds provision that treated each insured as a separate insured.

And in Penske Truck Leasing Company v. Republic Western Insurance Company, 407 F. Supp.2d 741 ( E.D. N.C. 2006), a Federal district court echoed this sentiment, because the language of the clause in the Benton case was not the same as the language in the Penske case. The court said that the language of the severability clause in the particular policy in question in the Penske case required the court to apply an exclusion separately to the insured who sought coverage and against whom a claim has been brought. Incidentally, the court in this case also included instructive words pertaining to the difference between exclusions that use the words “the insured” as opposed to the words “any insured”.

The Travelers case was cited in a decision from the Supreme Court of South Dakota. In St. Paul Fire and Marine Insurance Company v. Schilling, 520 N.W.2d 884 (S.D. 1994), the court cited the Travelers case to show that courts are divided as to whether the presence of a severability clause invalidates an employee exclusion. This is shown by the cases listed next.

In other jurisdictions, courts have favorably cited the severability clause in holding that the employee exclusion does not apply to bodily injury claims of an employee of the named insured against another insured under the named insured's policy: Alaska—Marwell Construction, Inc. v. Underwriters of Lloyd's London, 465 P.2d 298 (1970); Arkansas—Employers Mutual Liability Ins. Co. v. Houston Fire & Casualty Ins. Co., 213 F. Supp. 738 (1963); Florida—Shelby Mutual Ins. Co. v. Schuitema, 183 So. 2d 571 (1966); Missouri—Bituminous Casualty Corp. v. Aetna Life 7 Casualty Co., 599 S.W.2d 516 (1980); Nebraska—Liberty Mutual Ins. Co. v. Iowa National Mutual Ins. Co., 181 N.W.2d 247 (1970); Texas—Commercial Standard Ins. Co. v. American General Ins. Co., 455 S.W.2d 714 (1970); Utah—Caribou Four Corners, Inc. v. Truck Ins. Exchange, 443 F.2d 796 (1971); and West Virginia—Pepsi-Cola Bottling Company of Charleston v. Indemnity Insurance, 318 F.2d 714 (1963). As something of an example of the basic reasoning in these decisions, the Supreme Court of South Dakota in Northland Insurance Company v. Zurich American Insurance Company, 743 N.W.2d 145 (2007) said this: “If severability provisions invalidated a policy's exclusions, such a provision would operate to provide more coverage to an additional insured than to the named insured, and such an outcome will not be endorsed because it directly contravenes earlier case reasoning”.

(Note that a review of these decisions reveals that none of them have been reversed.)

The Liberty Mutual case is cited in a case from the United States District Court in Pennsylvania , a case that offers an extensive review of the separation of insureds clause and the judicial interpretations of that clause: Carbone, Inc. v. General Accident Insurance Company, 937 F. Supp. 413 (USDC, E.D. Pennsylvania 1996). This case also explores the different results that can occur when the insurance policy uses the words “any insured” as opposed to “the insured” in exclusions. The court notes that the vast majority of jurisdictions that have addressed the issue hold that the severability doctrine or a separation of insureds clause modifies the meaning of an exclusion phrased in terms of “the insured” such that the exclusion will only be effective if it applies with respect to the specific insured seeking coverage. In other words, “the insured” means only the person claiming coverage. The use of “any insured” can create joint obligations and prohibit recovery by an innocent co-insured, thus causing exclusions to be unaltered by the separation of insureds clause. But, the use of “the insured” does cause an alteration.

Some cases have followed this latter trend. Barnette v. Hartford Insurance Group, 653 P.2d 1375 (1982), Reliance Insurance Company v. Aetna Casualty and Surety Company, 468 N.E.2d 621 (1983), and Worcester Mutual Insurance Company v. Marnell, 496 N.E.2d 158 (1986) are cases where courts have cited the severability clause in holding that an insurance policy does apply to claims that might otherwise have been denied due to the employee exclusion; Barnette was a Wyoming case and Reliance and Worcester were from Massachusetts. (Note that in Argent v. Brady, 901 A.2d 419 [2006], in commenting on the Worcester Mutual case, the Superior Court of New Jersey said that “a preponderance of the cases finding coverage as the result of severability clauses arise from claims by innocent parties or ones against whom claims are tangential”.)

A case worth reviewing is from the Supreme Court of Oklahoma. It cites the Barnette case and offers an extensive list of case law from around the country on the subject of the separation of insureds clause under a liability policy. The case is BP America, Inc. v. State Auto Property & Casualty Insurance Company, 148 P.3d 832 (2005).

Other Information

Separation of insureds should not be confused with putting additional insureds on a liability policy or cross liability coverage.

An additional insured should certainly be treated as a separate insured in keeping with the separation of insureds clause. However, such insureds are given their status through the use of endorsements and their coverage is governed by the wording on those endorsements. If an additional insured makes a claim against the named insured or vice-versa, the question of the insurer providing defense and payment of the claim should be answered with an examination of the additional insured endorsement and not just the separation of insureds clause.

Cross liability coverage usually comes into play when a manufacturer and its subsidiaries are insureds on the same liability policy and process the same basic product. The liability policy provides defense and coverage if, for some reason, the manufacturer sues a subsidiary and vice-versa through the separation of insureds clause. However, the cross liability coverage can be excluded through the use of endorsement CG 21 41 11 85, exclusion—intercompany products suits. This endorsement effectively quashes the applicability of the separation of insureds clause, albeit on a limited basis.

The applicability is limited because CG 21 41 11 85 states that the insurance does not apply to any claim for damages by any named insured against another named insured because of BI or PD arising out of “your products” and included within the products-completed operations hazard. So the exclusion is limited to the named insured's products hazard; all other cross liability exposures are covered (unless specifically excluded) through the separation of insureds clause.

Other Liability Policies

The business auto, garage, and motor carrier coverage forms all contain the separation of insureds principle under their definitions of “insured”. That definition states that the coverage afforded applies separately to each insured who is seeking coverage or against whom a claim is made or suit is brought. The businessowners coverage form has a separation of insureds clause in its liability conditions section, a clause similar to that found on the CGL coverage form.

The Severability Clause

In 1955, the following condition was added to all standard liability policies: Severability of Interests—The term “the insured” is used severally and not collectively, but the inclusion herein of more than one insured shall not operate to increase the limits of the company's liability. When this condition was incorporated into standard provisions, it was explained that it was intended to make it clear that, where the term “the insured” is used in exclusions or conditions, “it is to be applied as meaning the insured against whom claim is made or suit is brought.”

The revised severability condition, found in the 1973 version of the general liability policies under the policy definition of “insured,” clarifies the earlier language by incorporating the explanation quoted above: The insurance afforded applies separately to each insured against whom claim is made or suit is brought, except with respect to the limits of the company's liability.

The current general liability coverage form calls this severability condition the separation of insureds clause, but the basic meaning remains the same: each named insured is treated as if it were the only named insured, and the insurance coverage applies separately to each insured against whom claim is made or lawsuit is brought. Incidentally, the wording of the provision is the same for both the occurrence form and the claims-made form of the general liability policy.