"Passing the Buck": Focus on Addtional Insured Issues

November 30, 1999

Murchison & Cumming were again honored to speak at the 2003 West Coast Casualty Conference held in Anaheim, California. James Carraway, Bryan M. Weiss, Nancy N. Potter and Carolyn A. Mathews, rounded out the panel, bringing light additional insureds issues through their presentation entitled “Passing the Buck”.

Starting off the presentation, Carolyn Mathews provided an overview of additional insured defense and how both sides can be more productive if they “play fair”. Although her handout materials discuss A.I. endorsements, Nancy Potter provided her “Top 10 List” of ways to get recalcitrant A.I. carriers to the bargaining table, which included bringing Krispy Kreme Donuts to the meeting! James Carraway, the Partner-in-charge of the firm’s Nevada office, discussed A.I. issues as they pertain to Nevada, providing examples of cases he has recently handled. Bryan Weiss, a partner in the firm’s Insurance Law Practice Group, wrapped up the presentation by discussing recent cases impacting additional insured issues, specifically highlighting the Golden Eagle case that arguably diminishes the application of the Presley case, which is regularly referenced by attorneys in their tender letters.

Excerpts from their handout materials are below.

Murchison & Cumming attorneys regularly serve as speakers at seminars. Our attorneys also provide private in-house seminars for clients, on topics of interest to clients. To arrange for a private seminar at your company’s office with any of Murchison & Cumming’s attorneys or to request our attorneys speak on a program, please contact Arleen Milian at (213) 623-7400 or amilian@murchisonlaw.com

The Buck's First Stop
Language of the Policy

By: Nancy Potter

ADDITIONAL INSURED ENDORSEMENTS

The 2009 Endorsement

Terms:

2009
1993

Who Is An Insured (Section II) is amended to include as an insured the person or organization (called "additional insured") shown in the Schedule but only with respect to liability arising out of:

Your ongoing operations performed for the additional insured(s) at the location designated above; or
Acts or omissions of the additional insured(s) in connection with their general supervision of such operations...

2009
03/97

Your ongoing operations performed for the additional insured(s) at the location designated above; or
Acts or omissions of the additional insured(s) in connection with their general supervision of such operations. ...
Additional Exclusions
1. "Bodily injury" or "property damage" for which the additional insured(s) are obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages that the additional insured(s) would have in the absence of the contract or agreement.
2. "Bodily injury" or "property damage" occurring after:
  1. All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the completed operations has been completed; or
  2. That portion of "your work" out of which the injury or damage arises has been put to its intended use ...
3. "Bodily injury" or "property damage" arising out of any act or omission of the additional insured(s) or any of their "employees" other than general supervision by the additional insured(s) of your ongoing operations performed for the additional insured(s).
4. "Property damage" to:
  1. Property owned, used or occupied by or rented to the additional insured(s);
  2. Property in the care, custody or control of the additional insured(s) or over which the additional insured(s) are for any purpose exercising physical control; or
  3. Any work, including materials, parts or equipment furnished in connection with such work, which is performed for the additional insured(s) by you.

A 2009 does not cover completed operations, which is the major source of liability in construction defect cases.

The 3/97 version of the 2009 endorsement goes on to exclude coverage for contractual liability (i.e., insured contracts.)

Some subcontracts specify the acceptable form of endorsement. If they do specify, 2009's will seldom be satisfactory. If you represent a G.C., you should make sure the contract specifies that the A.I. endorsement contain terms such as those on a 2010 Endorsement.

The 2010 Endorsement

Terms of the 11/85 Version, titled "ADDITIONAL INSURED - OWNERS, LESSEES OR CONTRACTORS (FORM B)"

2010
11/85

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of "your work" for that insured by or for you.

This is the "standard" form of A.I endorsement and is frequently specified as the acceptable form of additional insured endorsement. While it may not, itself, allow you to pass the buck, it at least makes somebody share the burden.

The 3/97 Version of the 2010 Endorsement

2010
03/97

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.

The 3/97 Version of the 2010 Endorsement (as well as the 1993 version) provides coverage only for ongoing operations, and not for completed operations. Therefore, like the 2009, they may not be acceptable to G.C.’s who are meticulously documenting their insurance rights.

Blanket A.I. Endorsements

A blanket A.I. endorsement can be manuscripted to clarify the exact risk undertaken (such as excluding architects’ and engineers’ professional services) or that the insurer’s agent has been given notice of the increased risk (by, for example, requiring that a Certificate of Insurance have been issued.) Generally, the concept is that if the insured agrees in writing to make another party an A.I., the other party is automatically an A.I.

SAMPLE:

Section II - Who Is An Insured is amended to add: Any person or organization who you become obligated to include as an additional insured under this policy, as a result of any contract or agreement you enter into, excluding contracts or agreements for professional services, which requires you to furnish insurance to that person or organization of the type provided by this policy, but only with respect to liability arising out of your operations or premises owned by or rented to you. However, the insurance provided will not exceed the lesser of:

The coverage and/or limits of this policy, or
The coverage and/or limits required by said contract or agreement.

The risk for the subcontractor’s insurer is in not knowing how many subcontracts its named insured has entered into. Some blanket A.I. endorsements include language specifically stating that contracts entered into both before and after policy inception provide blanket A.I. coverage to the G.C. Have these insurers really performed an underwriting investigation sufficient to determine what they are taking on through such a blanket endorsement?

"Primary" Language

Many subcontracts require that the subcontractor’s policy provide that it is primary to the G.C. ’s own policy. If the coverage is modified in compliance with the subcontract, the buck has been passed off to others. Frequently, this does not happen, probably because the specific requirements are not conveyed by the subcontractor to its broker, or from the broker to the insurer. Some G.C.s are careful enough to check and require that the proper form of 2010 endorsement be manuscripted to provide that the additional insurance is primary to the G.C.’s own coverage.

Without "primary" language, arguably, coverage is governed by the "Other Insurance" clause of the policies. "Other insurance" clauses generally provide, absent other endorsements, that all of the insurance at the same level (e.g., all primary insurance for the G.C. and all A.I.'s) contributes according to equal shares.

G.C.s can protect their own policy limits by endorsements to their policies providing that A.I. coverage is primary. For example, Endorsement CG 00 55 03 97 provides in pertinent part:

1. Other Insurance
  1. Excess Insurance
    1. Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.

When this insurance is excess, we will have no duty under COVERAGES A or B to defend the insured against any "suit" if any other insurer has a duty to defend the insured against that "suit." If no other insurer defends, we will undertake to do so, but we will be entitled to the insured’s rights against all those other insurers.

The subcontractor’s insurer would be well advised to obtain Declarations pages, at a minimum, from the G.C.’s policies in order to determine whether the G.C.’s policy is also obligated to contribute to the defense, or whether it is all up to the A.I.’s.

Some G.C.s are choosing to either go without CGL coverage, or to have a substantial Self-Insured Retention (SIR). The terms of that SIR may be important to the additional insurer because, depending on the language, payments by the additional insurer on behalf of the G.C. may or may not satisfy the SIR.

The Certificate Of Insurance - That And A Dime. ...
1. The Certificate says on its face: "THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND, OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW."
2. The Certificate also states: "THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERMS OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS."
3. It is not enough for the G.C. to be identified as a Certificate Holder. All that means is that the subcontractor has a policy. The Certificate must state that the Certificate Holder is an A.I. If the insurer’s agent is doing its job properly, the Certificate will state that the G.C. "is an additional insured but only with respect to claims or damage at [name of project or address]."
4. Sometimes, a Certificate of Insurance is issued, but the appropriate information is never conveyed by the agent to the insurer. When a claim is made, the insurer declines based on lack of an A.I. endorsement, and time is wasted establishing an A.I. obligation.
5. Arguably, a Certificate issued and signed by the insurer’s authorized agent is an admission that the insurer has an A.I. obligation to the holder. Make sure, therefore, that if a physical copy of the A.I. endorsement is not available, the Certificate is signed by the insurer’s agent, not just the subcontractor’s broker. An agent can bind the insurer, a broker cannot.
6. Note also that although you may be able to prove there was some commitment to provide A.I. coverage, the Certificate generally does not identify the form of the A.I. endorsement. What if no physical copy of the endorsement was ever generated? Depending on its usual underwriting practice, the insurer may be able to prove that it only issued 2009's, and thus, had no obligation to defend the G.C. in a construction defect case.

THE POLICY GIVETH AND THE POLICY TAKETH AWAY

Effect Of "Montrose" Endorsements

Montrose

Montrose Chemical Corporation v. Admiral Insurance

Montrose

Century Indemnity v. Hearrean

Pepperell v. Scottsdale Insurance Co.

Effect Of "Somebody Else’s Problem" Endorsements

Examples

If other valid and collectible insurance is available to any insured for a loss we cover under Coverage A or B of this Coverage Part, then this insurance is excess of such insurance and we will have no duty to defend any claim or "suit" that any other insurer has a duty to defend.
*	*	*
The insurance afforded by this policy is excess insurance in excess of the Self-Insured Retention or any other valid and collectible insurance available to the Insured, whichever is greater.

Unless and until a Court rules that these provisions render coverage illusory, additional insurers who have such language in their policies will not have to defend, or participate in the defense of, the additional insured.

Other Exclusions
- condominium / town home/ tract home exclusions
- water intrusion exclusions
- mold damage exclusions

HANDING IT BACK TO THE ADDITIONAL INSURED’S CARRIER
1. Requiring A.I. Endorsements
2. Covering The G.C.’s Own Errors
3. The "Burning Limits" policy
4. Responsibility Under Umbrella And Excess Policies

THE DISAPPEARING SUBCONTRACTOR
1. When Will A Policy Issued To A Successor Entity Cover The Prior Project?
2. If The Subcontractor Is Acquired, Does The Parent’s Policy Pick Up Liability, And Can You Go After The Parent’s Concurrent Policies?

WHAT ABOUT INSURED CONTRACTS?

Golden Eagle v. Insurance Company of the West

CONCLUSION
- A list of all of the documentation the G.C. should procure from the subcontractor prior to beginning work. The documents would include:
  1. A fully signed copy of the subcontract.
  2. The Certificate of Insurance (see a. below)
  3. The Additional Insured endorsement.
  4. The Declarations page from the subcontractor’s policy.
- The insurer could also provide
  1. An example of a properly prepared Certificate of Insurance with the proper language to convey A.I. coverage set forth.
  2. An exemplar copy of the acceptable form(s) of A.I. endorsement.
  3. A list of endorsements, which would be unacceptable. (Ideally, any unfamiliar endorsements would be procured and analyzed to determine whether they unreasonably restrict coverage.)
  4. A "tickler file" whereby the G.C. would keep track of the expiration dates of the subcontractors’ policies, and demand A.I. coverage under the following years’ policies.

For those G.C.'s who still consider themselves "hammer and nails guys" and want nothing to do with all of this legal and insurance red tape, these procedures will seem onerous in the extreme. Probably few will ever complete a job with complete documentation of their insurance rights in hand. Thus, for the foreseeable future, insurers and attorneys will have to complete the documentation themselves, years after the fact, or find that the buck has stopped at their desk.

Playing Fair
The Defense Of Additional Insureds

By: Carolyn Mathews

When it comes to allocating the cost of the defense and indemnity of an additional insured, the view is different from each side of the negotiating table.

THE “HOT POTATO” GAME:
- From the view of the additional insured and its primary carriers, the AI carriers engage in inordinate delays while they play “hot potato” with the additional insured, its primary carrier, and the carriers for other subcontractors.

THE BULLY ON THE BLOCK:
- From the view of the carriers for the various subcontractors, the process is wholesale bludgeoning with bullying tactics and threats.
  - Counsel for the additional insured developer/general contractor tenders its defense to every insurer of every subcontractor involved in the project, regardless of whether the homeowner plaintiffs are alleging any defects in the insured subcontractor’s work, whether an applicable AI endorsement exists, or whether the damage allegedly occurred after the policy was no longer in force.
  - The tender letter invariably demands that every subcontractor provide the additional insured with a “full and complete defense” and it cites portions of Presley Homes, Inc. v. American States Ins. Co (June 2001) 90 Cal.App.4^th 571 and indemnity provisions of the subcontract.
  - The carrier has little or no information regarding the claim because counsel for the additional insured plays “hide the ball.” A copy of the AI endorsement, a copy of the complaint, a copy of the subcontract, a preliminary defect list, or a matrix of the completion dates of the homes at issue seldom accompany the tender letter. Moreover, counsel for the additional insured ignores the carrier’s calls and letters requesting those documents for months, if not years, after tendering the defense. Then they shoot off a letter that indignantly demands, upon threat of “bad faith” litigation, that the carrier “step up to the plate” and immediately pay all of the fees of and costs incurred by the attorneys selected by the insured

THE PRESLEY CASE:
- Presley applies if the additional insured endorsement conforms to the holding in that case. The parties to the tender must look to the wording of both the policy and the additional insured endorsement to see if the language conforms to that interpreted by the Presley court.
  - The “full and complete defense” holding in Presley does not exonerate the developer/contractor’s primary insurer from an obligation to defend its insured. In fact, if a potential for coverage exists for the damages alleged, the developer/contractor’s primary insured owes its named insured a “complete defense.” Moreover, the Presley holding does not provide support for the refusal of the developer/general contractor’s primary insurer to arbitrarily lower its share of its insured’s defense fees and costs - although it is frequently being misused for that purpose.
  - Presley most certainly does not support primary carriers’ demands that AI carriers agree not to seek reapportionment. Nevertheless, that demand is now frequently made. Theoretically, an additional insured can tender solely to any single one of the AI carriers whose policy and endorsement provisions cover the damages sought by the homeowner/defendant, and that carrier will be obligated to provide a “full and complete” defense. However, the selected AI carrier can, and probably will, provide that defense through counsel of its own choosing and it can, and probably will, seek reapportionment and contribution from every other liable carrier, including the developer/general contractor’s primary carrier.

APPORTIONING DEFENSE COSTS:
- Thoreau said, “Any fool can make a rule, and every fool will mind it. But the court’s rulings on apportionment between carriers recognize that you cannot put the same shoe on every foot.“
  - In Centennial Ins. Co. v. U.S. Fire Ins. Co. (2001) 88 Cal.App.4th 105, the court refused to establish a “bright line” equal share rule as the appropriate method for allocating defense costs among multiple liability insurance carriers. Citing Fireman’s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1298, 1308, the court said a trial court must determine the method of allocation that “will most equitably distribute the obligation among the insurers ‘pro rata in proportion to their respective coverage of the risk’ as ‘a matter of distributive justice and equity.’”
  - The courts have adopted a number of ways of apportioning the burden among multiple insurers. The six methods most frequently employed are labeled.
    1. ”Time on the risk”
    2. "Policy limits”
    3. ”Combined time on the risk and policy limits”
    4. ”Premiums paid”
    5. ”Maximum loss method”
    6. ”Equal Share method”

THE TIERED APPROACH:

Prior to the ruling in Presley, carriers usually employed a tiered approach to allocating defense costs. In that approach the developer/contractor’s primary carrier was usually responsible for twenty-five to thirty percent of its insured’s defense costs, and the Ai carriers were placed in tiers with decreasing percentage responsibility.

For example:

TIER ONE 30%	TIER TWO 35%	TIER THREE 25%	TIER FOUR 10%
Primary Carriers	Roofing Rough Carpentry Sheet Metal Grading Waterproofing	Finish Carpentry Electrical Plumbing Concrete Stucco	Carpets Drywall Landscaping Door Knobs Fireplaces

The percentage assigned to each tier is divided among the number of subcontractors whose carriers accept the tender. If more than one carrier accepts for a particular subcontractor, they split the share allocated to that subcontractor.

THE EQUAL SHARES APPROACH:
- With the advent of the Presley ruling, and the primary carriers unfounded interpretation that it relieved or lessened their burden with respect to the defense of their insured. Cost share agreements are more frequently based on an “equal share” allocation or a variation of that method referred to as “weighted equal shares.”
- The “equal share” method is self-explanatory, i.e. an equal division of the defense costs assigned to the primary carrier and each subcontractor, regardless of whether the subcontractor installed hundreds of leaking roofs or merely supplied the doorknobs. Although this method hardly complies with the court’s requirement of “distributive justice and equity,” it is less onerous when numerous carriers have accepted the developer/general contractor’s tender.
- In the “weighted equal share” method, the defense costs are still divided into equal shares, but some subcontractors are assigned more shares than others, depending upon the defects alleged by the plaintiffs. Although this method achieves a more equitable distribution among subcontractors, it still results in a greatly deceased burden on the primary carriers.

Survey of Recent Cases Involving Additional Insured Issues

By:  Bryan M. Weiss

In the past few years, a number of court decisions have been issued which impact the relationships between additional insureds, named insureds, insurance carriers and even insurance brokers. The following survey of cases summarizes those decisions and the impact each may have on the industry…

IV.      Contractual Liability Coverage and “Damages”

In Golden Eagle Ins. Co. v. Insurance Co. of the West (2002) 99 Cal.App.4th 837, the court held that attorneys fees and costs incurred by an additional insured are “damages” falling within a policy’s contractual liability coverage and thus are included within an additional insurer’s indemnity obligation.

Facts:     D.J. Plastering (D.J.) was a subcontractor on several residential construction projects of Davidson Communities, Inc. The subcontractor required D.J. to “indemnify, defend and save harmless Contractor ... from ... any and all claims, demands, causes of action, damages, costs, expenses, losses or liabilities, in law or in equity, of every kind and nature whatsoever ... arising out of or in any manner directly or indirectly connected with the work to be performed under this agreement, howsoever caused, regardless of any negligence of Contractor....” D.J. was insured under successive CGL policies issued by Golden Eagle, ICW and CIC. The policies covered D. J.'s liability for third party bodily injury or property damage claims, and D. J.'s assumption of the tort liability of prime contractors, such as Davidson, under indemnity agreements (contractual liability coverage). Davidson was also named as an additional insured on the ICW policies.

Homeowners brought several lawsuits against Davidson for construction defects Davidson cross-complained against its subcontractors, including D. J., for express indemnity and negligence. Davidson, as ICW's additional named insured, tendered the defense of the action to ICW; it denied the request. Golden Eagle, ICW and CIC, all of which defended D.J. on Davidson's cross-complaint, collectively settled D. J.'s indemnity exposure to Davidson for damages paid to the construction defect plaintiffs. D. J.'s obligation to indemnify Davidson for its attorney fees and costs in the underlying action was submitted to binding arbitration. The arbitrator awarded Davidson $605,374.25. Golden Eagle and ICW paid the award in equal shares. Golden Eagle then brought this action against ICW for declaratory relief, equitable contribution and equitable indemnity, seeking reimbursement of the amount it paid toward the arbitration award, on the ground that ICW was solely responsible for Davidson's defense costs because it was an additional insured under the ICW policies.

The trial court granted Golden Eagle's summary judgment motion, finding that Davidson's defense costs in the underlying action were not "damages" within the meaning of the CGL policies, and thus D. J.'s liability for such costs under the indemnity agreements was not covered. The court determined that ICW breached its obligation to defend Davidson as an additional insured, and thus "in equity and good conscience ICW should reimburse [Golden Eagle]" for its payment of one-half of the arbitration award against D.J.

Holding on Appeal: On appeal, ICW argued that the judgments must be reversed because the contractual liability provisions of the CGL policies of Golden Eagle, CIC and ICW cover D. J.'s liability for Davidson's defense costs in the underlying action, and the three insurers should contribute equally to satisfying the arbitration award. All policies in question provided contractual liability coverage, wherein the policies covered damages assumed by the named insured pursuant to a contract. The court first noted that under the subcontracts in question, D.J. expressly assumed the tort liability of Davidson for property damage claims of third persons. Accordingly, the subcontracts were insured contracts within the meaning of the CGL policies. ICW contended that given the contractual liability coverage, the policies should be interpreted to include Davidson's defense costs in the underlying action as sums D.J. became "legally obligated to pay as damages because of" property damage. Golden Eagle and CIC countered that the defense costs are not covered because the policies' definitions of insured contract refer only to the assumption of tort liability and do not expressly include the assumption of defense costs. The court disagreed, noting that the term "damages" as used in the insuring clauses of the Golden Eagle and CIC policies is not defined, and given the contractual liability coverage of the policies, the term could reasonably be interpreted to include the indemnitee's costs in defending against third party claims for covered property damages. The court concluded that an insured with contractual liability coverage would reasonably expect that the indemnitee's attorney fees and costs are sums the insured becomes "legally obligated to pay as damages because of" covered tort claims." Davidson suffered "detriment" or "loss" by incurring attorney fees and costs as a direct result of third party claims for property damage arising from D. J.'s work, and the arbitration award on the indemnity agreement is monetary compensation therefor.

Comments: The importance of this case is its emphasis on the contractual liability coverage of a CGL policy. Where a named insured has entered into an “insured contract” with another entity, whereby it agrees to assume that entity’s tort liability, the contractual liability coverage of the policy obligates the insurer to indemnify its named insured for damages incurred by the other entity. This case extends those obligations to the indemnitee’s defense costs as well, not just its “damages” from an indemnity standpoint.

The above are excerpts from Murchison & Cumming’s presentation entitled “Passing the Buck.” If you would like to receive a complete copy of these articles as published in the West Coast Casualty Construction Defect Seminar Program, please contact Arleen Milian at (213) 623-7400 or by email at amilian@murchisonlaw.com.

"Passing the Buck": Focus on Addtional Insured Issues

ADDITIONAL INSURED ENDORSEMENTS

The 2010 Endorsement

Blanket A.I. Endorsements

"Primary" Language

The Certificate Of Insurance - That And A Dime. ...

THE POLICY GIVETH AND THE POLICY TAKETH AWAY

THE DISAPPEARING SUBCONTRACTOR

WHAT ABOUT INSURED CONTRACTS?

CONCLUSION

Survey of Recent Cases Involving Additional Insured Issues