Additional Insureds - A Question of Interpretation
Some of the most complex and hotly contested large commercial claims disputes have to do with Additional Insured (AI) coverage.
Provisions related to AI coverage are especially common in construction contracts in which subcontractors may be required to name other companies, such as the general contractor and developer, as additional insureds on their policies.
Although AI coverage is commonplace, claims continue to raise thorny coverage issues. Not a week goes by where we do not see a new legal decision on this topic. Since the claims often involve serious bodily injuries to construction workers, the dollars are large and tend to reach excess layers. That means a multitude of parties and insurers are involved. Also, many rulings require a close reading of construction contracts as well as insurance policies.
Why are there still so many coverage questions?
In the past, AI wordings came in the form of "arising out of" endorsements. But these started to be construed broadly, frustrating insurers who found themselves on the hook for substantial coverage to additional insureds even when their named insureds were not at fault for the underlying injury.
In 2004 "arising out of" endorsements started to be superseded by so called "caused by" endorsement forms. The "caused by" endorsement provides somewhat narrower coverage, limiting damage to that directly caused by the named insured’s work.
Now, both "arising out of" and "caused by" AI endorsements remain in the marketplace, as well as many other variations of the wording. Obviously, knowing how the language of such endorsements could be interpreted will help underwriters in managing such risks and also guide claims personnel when they have to respond to such claims.
The problem is that the scope of coverage under each endorsement can vary, depending not only on the language used but the sometimes unpredictable (state-specific) interpretation of that language.
For instance, while some courts have interpreted "arising out of" broadly to encompass all damage "relating to” the insured’s work, other courts have held that it limits coverage to the additional insured’s "vicarious liability" for the named insured’s conduct. Similarly, while some courts have interpreted "caused by" endorsements to require proximate causation between the named insured’s acts and the plaintiff’s injury, other courts have imposed a less stringent standard of causation.
We think it’s important that our clients succeed at aligning actual coverage with their underwriting intent. We asked specialists from the Chicago law firm Tressler to write a paper on the subject that includes some current legal decisions and the implications of different wordings. You can find it in the last edition of Policy Wording Matters.