The Broad Duty To Defend Standard Applied To Named Insureds Also Applies To Additional Insureds
October, 2006
The Appellate Division, First Department, recently issued a decision which addressed two key topics relevant to the coverage provided to additional insureds, strictly interpreting, and indeed, significantly expanding upon two Court of Appeals holdings in the process. The Court held that: (1) an insurer was obligated to defend a purported additional insured in an action where it was not clear and was not yet established that the alleged injury arose from the named insured’s operations, despite the language of the insurer’s additional insured endorsement which stated that additional insured coverage would exist “only with respect to liability arising out of your ongoing operations”; and (2) the coverage afforded to the additional insured was primary to the additional insured’s own insurance, without regard or resort to the policies’ other insurance clauses. BP Air Conditioning Corp. v. One Beacon Ins. Group, ___ N.Y.S.2d, 2006 N.Y. Slip Op. 05297, 2006 WL 1843350 (1st Dep’t 2006).
A general contractor hired plaintiff, BP Air Conditioning Corp. (“BP”), 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”). The purchase order representing the agreement between BP and Alfa required Alfa to obtain commercial general liability insurance naming BP as an additional insured.
Thereafter, Joseph Cosentino, an employee of Karo Sheet Metal, Inc. (“Karo”), 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 Alfa.
Cosentino commenced an action against the general contractor, which, in turn, brought a third-party action against BP and Alfa. BP and Alfa were later added as direct defendants. As a result, BP tendered its defense to One Beacon Insurance Group (“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 therefore commenced this action against One Beacon, seeking a declaration that it was entitled to additional insured coverage on a primary basis under Alfa’s One Beacon policy.
One Beacon’s commercial general liability policy included an additional insured endorsement providing in relevant part 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 motion court to declare that One Beacon was 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 would not be triggered until the cause of Cosentino’s accident had been adjudicated. One Beacon also argued, in the alternative, that even if its duty to defend BP under its policy had been triggered, One Beacon was not required to bear 100% of BP’s defense costs as the primary insurer since coverage by other carriers who were not parties to the action (including BP’s own carrier) might also be implicated, requiring such carriers to share in the cost of defending BP.
The motion court held that the allegations against Alfa in the underlying action triggered additional insured coverage for BP under One Beacon’s policy. However, the court denied BP’s motion to the extent that it sought a declaration that the additional insured coverage was primary on the ground that such a determination could not be made without examining the other potentially applicable policies. BP appealed, and One Beacon cross-appealed.
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), the First Department affirmed the lower court’s decision, holding that “there can be no doubt” that One Beacon was obligated to defend BP in the underlying action since “Cosentino’s amended complaint alleges that his injuries were caused by the negligence of, among other defendants, Alfa, BP’s subcontractor and the subject policy’s named insured.” BP Air, at 3. Thus, the Court concluded, there was a “reasonable possibility” that the underlying action will result in a judgment against BP within the scope of the coverage provided by One Beacon’s policy. Id.
The Court specifically stated that it was guided by the “controlling principle” set forth in Pecker Iron, that, “in the absence of unambiguous contractual language to the contrary, an additional insured enjoy[s] the same protection as the named insured.” Id. at 1. 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 receive 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 that primary coverage will be presumed since “the well-understood meaning of the term [additional insured] is an entity enjoying the same protection as the named insured.” Peck Iron, at 393.
The Court in BP Air reasoned that since, under Pecker Iron, an additional insured “enjoys the same protection as the named insured,” the same principles which govern an insurer’s duty to defend its policyholder also govern the activation of the insurer’s duty to defend an additional insured. BP Air, at 4. “As applied here, this principle can mean only that, for named insureds and additional insureds alike, the activation of the duty to defend depends on the allegations of the pleadings.” Id.
The Court also relied on Cook, where the Court of Appeals addressed an insurer’s broad duty to defend its policyholder under a homeowner’s policy in a wrongful death action where the policyholder shot and killed an intruder in his home and the wrongful death complaint included allegations of negligence. The Court of Appeals held that a defense was required, noting, “when a policy represents that it will provide the insured with a defense, we have said that it actually constitutes ‘litigation insurance’ in addition to liability coverage. Thus, an insurer may be required to defend under the contract even though it may not be required to pay once the litigation has run its course.” Cook, at 180. Cook did not actually involve or address additional insured coverage, or the defense duty thereunder.
The First Department expressly rejected One Beacon’s argument that the liberal principles governing the duty to defend apply only to named insureds and not to parties covered pursuant to additional insured endorsements. The Court also rejected One Beacon’s argument that coverage under an additional insured endorsement is triggered only when a court has made findings of fact giving rise to coverage under the terms of the endorsement.
Further, relying on Pecker Iron, the Court modified the motion court’s decision regarding the level of coverage available to BP under the One Beacon policy, declaring that BP, as an additional insured, was entitled to primary coverage from One Beacon. Moreover, while recognizing that other policies providing additional insured coverage to BP may potentially have to share in BP’s defense with One Beacon, the Court stated that BP’s own policy will be excess to any such additional insured coverage since, as in Pecker Iron, the contractual provision requiring Alfa to procure additional insured coverage contained no indication that as an additional insured BP will receive only excess, as opposed to primary, coverage. “Thus, as between BP’s coverage as an additional insured under Alfa’s policy and BP’s coverage as a named insured under its own policy, the additional insured coverage is primary.” BP Air, at 9. Note that Pecker Iron did not actually address priority of coverage as between multiple policies, but rather, only the issue of what level of coverage was required for an additional insured when the underlying contract was silent.
The Court’s decision, decided by a 3-2 majority, contains a lengthy dissent, and indeed, an extended debate between the majority and dissent. However, this case apparently settled after the First Department rendered its decision, and so, for the time being, these issues will not be addressed by Court of Appeals.
Learning Point: In the First Department, an insurer’s duty to defend a putative additional insured under a standard additional insured endorsement’s “liability arising out of your operations” language is determined by the allegations in the underlying pleadings, regardless of whether there has been a determination of liability against the named insured. In addition, the insurer’s duty to defend the additional insured is primary to the additional insured’s own insurance, apparently without regard to the two policies’ “other insurance” clauses.
If the Court’s holding endures, carriers will be well advised to amend their additional insured endorsements to make clear that additional insured coverage, including any duty to defend a putative additional insured, does not exist unless and until a nexus between the liability and the named insured is established. Indeed, the BP Air Court indirectly suggested this approach, noting that “[s]ince nothing in the subcontract or CGL policy here at issue indicates that plaintiff, as an additional insured, is to be afforded less protection than the named insured, we conclude, as did the IAS court, that the insurer’s duty to defend plaintiff in the underlying personal injury action has been triggered.” BP Air, at 1.
Back to New York CM Report of Recent Decisions (2006v3) 2006 Volume 3 Table of Contents
