N.Y. Court of Appeals Affirms Holding Regarding An Insurer's Broad Duty To Defend Additional Insureds
October, 2007
New York’s highest court recently issued a decision affirming, in part, a decision by the First Department, holding that a carrier was obligated to defend a purported additional insured in an action where it had not yet been shown or established that an alleged injury arose from the named insured’s operations, despite language in the subject policy’s additional insured endorsement limiting coverage for the additional insured to cases where its liability arises out of the named insured’s ongoing operations for the additional insured. BP Air Conditioning Corp. v. One Beacon Ins. Group, 8 N.Y.3d 708, 840 N.Y.S.2d 302 (2007).
The additional insured endorsement at issue specified that a party “is an additional insured only with respect to liability arising out of [the named insured’s] ongoing operations performed for that insured.” Prior to the BP Air holding, this common “blanket” additional insured endorsement language was often, but not always, interpreted by New York courts (and applied by carriers) as requiring or triggering additional insured coverage only after a showing, by underlying trial or otherwise, that a purported additional insured’s liability arose out of the named insured’s operations or negligence, whichever was required by the particular additional insured endorsement at issue.
The Court held that the underlying complaint’s allegations, which very generally alleged that the occurrence was caused by, among many other defendants, the named insured (as is often the case with complaints, i.e., a worker trips on a bucket and names every contractor on site), was sufficient to trigger the carrier’s defense obligation to the additional insured. In reaching its decision, the Court of Appeals relied on the oft-cited principles that “an additional insured enjoys the same protection as the named insured” and that a carrier’s broad “duty to defend is broader than its duty to indemnify.”
The underlying facts are typical of those situations involving additional insured issues which arise as between contactors at a construction project. Plaintiff BP Air Conditioning Corp. (“BP”) was hired as an HVAC subcontractor for a construction project at One World Trade Center. BP, in turn, subcontracted a portion of the work to Alfa Piping Corp. (“Alfa”), through a purchase order. The purchase order required Alfa to obtain commercial general liability insurance naming BP as an additional insured.
Thereafter, Joseph Cosentino, an employee of another subcontractor of BP, was injured while working at the project when he slipped and fell on a patch of oil. It was not clear, even after discovery, which contractor was the source of the patch of oil on which Cosentino slipped. The oil could have originated from any of the contractors who used oil to thread pipe at the work site, including One Beacon’s named insured, Alfa.
Cosentino commenced an action against the general contractor, which, in turn, brought a third-party action against BP and Alfa. As a result, BP tendered its defense to One Beacon, seeking additional insured coverage under the commercial general liability policy issued by One Beacon to Alfa. One Beacon declined BP’s tender on the basis that coverage did not yet exist under the terms of the policy’s blanket additional insured endorsement. BP then commenced this action against One Beacon, seeking a declaration that it was entitled to additional insured coverage on a primary basis under the One Beacon policy issued to Alfa.
The One Beacon policy’s additional insured endorsement provided as follows:
Who is An Insured (Section II) is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability arising out of your ongoing operations performed for that insured.
BP filed a motion for partial summary judgment asking the court to declare that One Beacon is obligated to undertake BP’s defense in the underlying action on a primary basis. One Beacon opposed the motion, arguing that additional insured coverage for BP is not triggered until the cause of Cosentino’s accident is adjudicated.
The motion court agreed that the allegations against Alfa in the underlying action triggered additional insured coverage for BP under One Beacon’s policy. On appeal, the First Department, citing the well-settled principle that an insurer’s duty to defend is broader than its duty to indemnify, and relying heavily on the Court of Appeals’ decisions in Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 818 N.Y.S.2d 176, 180 (2006) and Pecker Iron Works of N.Y. v. Traveler’s Ins. Co., 99 N.Y.2d 391, 393 (2003), affirmed the lower court’s decision.
One Beacon appealed the First Department’s decision. The Court of Appeals, noting that the question before it is whether liability must be determined before an additional insured is entitled to a defense in an underlying action, concluded “that additional insured coverage is not contingent upon a liability finding and that the obligation of an insurer to provide a defense to an additional named insured under the policy exists to the same extent as it does to a named insured.”
Noting the oft-cited rule that the duty to defend is broad and the principle set forth in Pecker Iron that “‘additional insured’ is a recognized term in insurance contracts, [and] the well-understood meaning of the term is an entity enjoying the same protection as the named insured,” the Court rejected One Beacon’s argument that the additional insured endorsement’s limitation of coverage to liability arising out of Alfa’s ongoing operations required a liability determination before BP is entitled to a defense. The Court stated that “when considering [the additional insured] language in light of an insurer’s broad obligation to defend an insured, it does not affect the standard under which a duty to defend is determined.”
The Court of Appeals concluded that the general allegations of the underlying complaint “form a factual and legal basis on which One Beacon might eventually be held to be obligated to indemnify BP under any provision of the insurance policy and certainly bring this claim within the ambit of the protection purchased.”
Notably, the existence or “trigger” of additional insured coverage was not at issue in Pecker Iron, rather, the issue concerned the level of coverage an additional insured was entitled to when the underlying contract was silent on the issue and the subject insurance policy contained an “escape” clause which stated that the coverage provided to additional insureds was excess unless otherwise required by contract. The Court of Appeals held in Pecker Iron that primary coverage would be presumed since “the well-understood meaning of the term [additional insured] is an entity enjoying the same protection as the named insured.”
The Court of Appeals did modify the First Department’s ruling that BP, as an additional insured, was entitled to primary coverage from One Beacon without resort to or comparison of the coverage available from BP’s own insurance. The Court of Appeals recognized that other policies providing coverage to BP may potentially have to share with One Beacon in BP’s defense, subject to an analysis of the priority of coverage as between those other policies.
Learning Point: As a result of the BP Air holding, under New York law, an insurer’s duty to defend a putative additional insured under a standard additional insured endorsement’s “liability arising out of your operations/negligence” language is determined by the allegations in the underlying pleadings, regardless of whether there has been an actual showing or determination that the purported additional insured’s liability arises out of the named insured’s operations or negligence. As a practical matter, carriers might consider redrafting their endorsements to make clear that their duty to defend a putative additional insured does not exist unless and until certain conditions for coverage as an additional insured are actually established.
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