New York State Court of Appeals Narrows Additional Insured Coverage — Linking Coverage to Conduct — in Landmark Decision
Prior to the Court of Appeals’ Decision on June 6, 2017 in Burlington Insurance Co. v. NYC Transit Authority, New York appellate courts had taken a decidedly broad approach in interpreting the scope of coverage under additional insured endorsements. In Pecker Ironworks v. Travelers Insurance Co., 99 N.Y.2d 391 (2003), the Court of Appeals famously declared that the term “additional insured” is well understood “to mean an entity enjoying the same protection as the named insured.” In BP Air Conditioning Corp. v. One Beacon Insurance Group, 8 N.Y.3d 708 (2007), the Court of Appeals ruled that the duty to defend an additional insured must be viewed as broadly as the duty to defend the named insured.
In Burlington Insurance Co. v. NYC Transit Authority, 2017 WL 2427300 the Court of Appeals has taken a more restrictive view of the additional insured coverage afforded under a common current endorsement form, ruling that additional insured coverage is only afforded where “negligence or some other actionable conduct” by the named insured was a proximate cause of the injury.
Prior to the issuance of the Insurance Services Office (ISO) Additional Insured Endorsement Form in question in Burlington Insurance Co., Additional Insured Endorsement Forms issued to construction contractors typically limited additional insured coverage to “liability arising out of your [the named insured’s] operations…” The Court of Appeals interpreted the “arising out of” language broadly to mean “originating from, incident to, or having connection with,” and ruled that there need only be “some causal connection” between the injury and the work of the named insured. Worth Construction Co., Inc. v. Admiral Insurance Co., 10 N.Y.3d 411 (2008). Negligent conduct by the named insured was not required; the court viewed conduct irrelevant to the trigger of additional insured coverage. Such a low level of causation is called a “but for” test.
In 2004, ISO issued Additional Insured Form CG 20 33 07 04, which revised the language of the prior edition, limiting the scope of the additional insured coverage provided to liability for damages “caused in whole or in part by:
- Your [the Named Insured’s] acts or omissions; or
- The acts or omissions of those acting on your [the Named Insured’s] ongoing operations for the additional insured.”
According to cited comments from ISO, the company intended the change in the endorsement from “arising out of” to “caused in whole or in part by” to preclude additional insured coverage for injuries caused by the sole negligence of the additional insured. Dale Corp. v. Cumberland Mutual Fire Insurance Co., 2010 WL 4909600 (E.D.Pa. 2010).
Despite commentary regarding the intent behind the revision of the endorsement form, New York’s Appellate Division, First Department ruled that the revised “caused in whole or in part by” language “does not materially differ” from the phrase “arising out of.” National Union Fire Insurance Co. of Pittsburgh, PA v. Greenwich Insurance Co., 103 A.D.3d 473, 474 (1st Dep’t 2013). In National Union, the First Department applied the same broad interpretation to the revised endorsement and its “caused in whole or in part by” language, ruling to afford additional insured coverage as long as the injury occurred in the course of the named insured’s operations for the additional insured.
Against this backdrop, the Burlington Insurance Co. case made its way to the First Department, and then the Court of Appeals. The facts of Burlington Insurance were well suited to test the First Department’s broad interpretation of the “caused in whole or in part by” language of the current Additional Insured Endorsement Form, because it was undisputed that the accident at issue was caused solely by the negligence of the party seeking additional insured coverage – the New York City Transit Authority.
The relevant facts of Burlington are as follows. The NYCTA contracted with Breaking Solutions, Inc. (BSI) to provide equipment and personnel and for BSI to perform tunnel excavation work on a New York City subway construction project. To comply with NYCTA’s insurance requirements, BSI purchased a Commercial General Liability Insurance Policy from Burlington with an Additional Insured Endorsement that listed NYCTA, the MTA, and New York City Transit Authority as “additional insureds.” However, the additional insured endorsement provided that the listed entities were additional insureds:
only with respect to liability for “bodily injury,” “property damage,” or “personal and advertising injury” caused, in whole or in part, by:
1. Your acts or omissions; or
2. The acts or omissions of those acting on your behalf.
During the policy period, a BSI excavator came into contact with an energized electrical cable buried below the concrete. It was undisputed that it was the responsibility of the NYCTA to identify and mark or protect hazards in advance, and to shut off power to electrical cables in the work area. An NYCTA employee was injured when he fell from an elevated work platform as a result of the explosion.
The injured NYCTA worker (Kenny) and his wife commenced a personal injury action against the City and BSI in the United States District Court for the Eastern District of New York, asserting causes of action under Labor Law §§240(1) and 241(6).
The City commenced a third-party action in the Kenny lawsuit against the NYCTA and the MTA, asserting claims for contractual indemnification and common law contribution. Burlington accepted the tender of the defense of NYCTA and MTA as putative additional insureds under the policy issued to BSI subject to a reservation of the right to withdraw if it was determined that the loss did not fall within the scope of the additional insured coverage. In the course of discovery, it was revealed that the accident was caused by the sole negligence of the NYCTA in failing to identify, mark or protect the cable in preparation for the work, and in failing to shut off power to the cable. Burlington then issued a disclaimer of coverage to NYCTA and MTA, asserting that because there was no evidence that the explosion had resulted from negligence or other fault on the part of its named insured (BSI), Kenny’s injury had not been caused “in whole or in part” by an “act or omission” of BSI. Therefore, Burlington concluded that NYCTA and MTA were not entitled to additional insured coverage. Burlington then commenced a declaratory judgment action in Supreme Court, New York County asserting a cause of action for a declaration stating that it did not owe NYCTA or MTA coverage with respect to the Kenny action under the BSI policy.
The trial court upheld Burlington’s denial of coverage, ruling that the language of the additional insured endorsement required negligence by the named insured. The Appellate Division, First Department reversed the decision of the trial court, and ruled that the endorsement did not require any negligence by the named insured, and that despite the fact that the NYCTA was solely liable for the accident, the NYCTA and MTA were nonetheless entitled to additional insured coverage under the Burlington policy. The First Department reiterated its view that the phrase “caused by” does not materially differ from the phrase “arising out of.” Therefore, the First Department applied the same broad test that had been applied to the “arising out of” language employed in the prior version of the endorsement. The First Department determined that additional insured coverage was triggered as long as the injury was causally connected to an act of the named insured. The court found that the actions of the BSI employee in operating the excavator that set off the explosion was a sufficient “act or omission” of the named insured to trigger coverage, regardless of whether the named insured was negligent or otherwise at fault for the mishap. The First Department rejected evidence concerning ISO’s intent in revising the Additional Insured Endorsement Form, limiting its analysis to the actual words used in the policy. The First Department reasoned that if the parties had intended to make negligence or fault of the named insured a prerequisite for additional insured coverage, they were free to have used such words in the endorsement.
Endorsement Language Requires Conduct of the Named Insured To Be Proximate Cause of the Injury
In its Decision and Order of June 6, 2017, a Court of Appeals majority (4-2) reversed the First Department’s Decision and Order, and ruled that the language of the Burlington Additional Insured Endorsement only affords additional insured coverage where conduct by the named insured was a proximate or legal cause of the injury. The Court of Appeals analyzed the language employed and concluded that the term “caused in whole or in part by” the named insured’s acts or omissions means that additional insured coverage is only afforded where conduct by the named insured was at least a partial proximate cause of the injury. The court also determined that the language “in whole or in part” could not be construed as a mere “arising out of” or “but for” liability test. Instead, the court reasoned that the “whole or in part” language could only be meant to intend proximate cause. The court cited Derdiarian v. Felix Contracting Corp., 51 N.Y.2d 308, 314 (1980), the seminal case which defines proximate cause as conduct which is a “substantial cause” in causing injury. The court also cited the Eastern District of Pennsylvania’s decision in Dale Corp. v. Cumberland Mutual Fire Insurance Co., 2010 WL 4909600 (E.D.Pa. 2010) as support for its conclusions. In Dale Corp., the court held that the same “caused in whole or in part by” language in an additional insured endorsement required “proximate cause” in order to trigger coverage.
Unlike the First Department, the Court of Appeals majority did consider commentary by ISO representatives indicating that the purpose of the revisions to the Additional Insured Endorsement was to preclude coverage for an additional insured’s sole negligence. The general rule is that in interpreting a contract, the court may not consider parole evidence unless the terms at issue are found to be ambiguous. No such finding of ambiguity was made by the majority.
The majority decision by the Court of Appeals in Burlington leaves some questions unanswered. The majority agreed with the dissent that the language of the endorsement at issue did not require a finding of negligence by the named insured. However, the majority ruled that the additional insured endorsement limits coverage for damages proximately caused by the named insured’s “negligence or some other actionable act or omission.” Further clarification from the court will be necessary to define more precisely the boundaries of “some other actionable act or omission.”
The majority did make clear, however, that under the terms of the additional insured endorsement, a putative additional insured whose conduct is the sole proximate cause of the injury is not entitled to additional insured coverage.
In a lengthy dissenting opinion, Judge Fahey argued that under well settled principles of contract interpretation, courts must give insurance policy provisions their “plain and ordinary meaning.” The dissenters argued that had the drafter of the endorsement intended to require “negligence” or “proximate cause” for coverage, the drafters were free to use such terms. Instead of interpreting the words according to their plain meaning, the majority used “legal jargon” (proximate cause) to define the terms. The dissent accused the majority of abandoning longstanding rules of insurance policy interpretation, and asserted that the majority ruling undercut the goal of certainty in applying rules of policy interpretation.
The Effect of Burlington Moving Forward
The effect of this decision is that for additional insured endorsements employing the “caused in whole or in part by your acts or omissions” language, it will be necessary for upstream parties such as owners and general contractors who are seeking additional insured coverage to establish that the “proximate cause” of an injury was at least in part the negligence or “actionable conduct” of the named insured. Moreover, there will be no additional insured coverage available where it is clear that an injury resulted solely from the negligence of the additional insured. This will undoubtedly lead to more disputes between insurers over additional insured coverage.
Insurers should keep in mind that the duty to defend an additional insured is still “exceedingly” broad. If, based upon the allegations in the pleadings, there is a possibility additional insured coverage could exist, insurers would have a duty to defend the additional insured. In Burlington, liability and causation had already been determined when the Court made the coverage ruling.
Some owners and contractors may now insist that policies purchased by subcontractors include the prior version of the additional insured endorsement with its broader “arising out of” language.
Another noteworthy element of the Burlington Insurance case is that the injured party was not an employee of the named insured. In a scenario where the injured plaintiff is an employee of the named insured who sustains injuries during the course of work under the contract, one may still argue that such an accident, by necessity, was due at least in part to an act or omission of the named insured or those acting on its behalf. See, Kel-Mar Designs, Inc. v. Harleysville Ins. Co. of N.Y., 127 A.D.3d 662 (1st Dep’t 2015).
We expect that New York law interpreting these endorsements will continue to evolve as cases with different fact patterns appear before New York appellate courts. We will keep you posted regarding any significant developments.
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