When the Insurance Service Office, Inc. (“ISO”) – the organization that drafts the standardized forms used by most insurance companies – revised its standard additional insured endorsement in 2013, it was an open question what effect the revisions would have on the insurer’s duty to defend. The 2013 revision added a provision that, if additional insured coverage is required by separate contract, the insurance afforded to the additional insured under the policy endorsement would “not be broader than” that required by the contract. The exact meaning of the phrase “will not be broader than” remained uncertain, particularly in situations where the additional insured endorsement and the underlying contract contained conflicting language.
In April of 2020, the U.S. District Court for the Southern District of New York delivered a long-awaited decision interpreting the phrase “will not be broader than” in the ISO form. In Charter Oak Fire Insurance Company v. Zurich American Insurance Company, et al., 462 F Supp 3d 317 (SD NY 2020), the Southern District of New York held that an insurer’s duty to defend was limited to the scope of additional insured coverage required by the underlying trade contract, even where the language of the policy endorsement provided for a more expansive duty to defend. This ruling, although based on New York law, should remind everyone involved in contract negotiation that additional insured clauses in contracts must be carefully thought through and should match the terms of the coverage provided by the additional insured endorsement.
Factual Background
The Charter Oak decision arose out of a personal injury claim on a relatively small-scale construction project in downtown New York. ASB L3 72-76 Greene Street, LLC (“ASB”), the owner of a Manhattan apartment building, contracted with Slade Industries, Inc. (“Slade”) to modernize one of its building’s elevators. The contract between ASB and Slade (the “Prime Contract”) required Slade to procure commercial general liability coverage for ASB through the following language:
The Contractor shall cause the commercial liability coverage required by the Contract Documents to include: (1) the Owner * * * as [an] additional insured[ ] for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s completed operations.
Slade procured commercial general liability coverage from Zurich American Insurance Company (“Zurich”). Slade’s Zurich policy included two additional insured endorsements, which named, as additional insureds, “only those persons or organizations where required by written contract.” The endorsements further provided that coverage applied “only with respect to liability for [injury] caused, in whole or in part, by [Slade’s] acts or omissions or the acts or omissions of those acting on [Slade’s] behalf.” Most importantly, the endorsements stated that “[i]f coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which [Slade is] required by the contract or agreement to provide for such additional insured.” (emphasis added)
While working on the project, one of Slade’s employees fell and injured himself, prompting him to file a lawsuit alleging that ASB’s negligence caused his injuries. ASB, who was insured by Charter Oak Fire Insurance Company (“Charter Oak”) under a commercial general liability policy, was the lone defendant in the personal injury action. The injured employee did not name his employer, Slade, as a defendant – as is common in such actions, likely due to general employer immunity under workers’ compensation statutes.
Charter Oak subsequently provided Zurich with timely notice of the personal injury action and demanded that Zurich defend ASB under the additional insured endorsement. Zurich disclaimed coverage and refused to defend ASB, arguing that, under the Prime Contract, Zurich’s duty to defend was limited solely to claims caused by Slade’s negligent acts and omissions. Charter Oak disagreed, insisting that Zurich’s duty to defend under the additional insured endorsement extended to all claims caused by Slade’s acts or omissions, whether negligent or otherwise. This led to the central question in Charter Oak: did Zurich have a duty to defend ASB against the injured employee’s claim?
Analyzing an Insurer’s Duty to Defend in Light of the 2013 Revisions
Before resolving the issue presented in Charter Oak, the court reiterated two key principles of New York law. First, an insurer may refuse to defend “only if it could be concluded as a matter of law that there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy.”[i] Second, to determine whether there is a possible factual or legal basis triggering an obligation to defend, New York courts look to the insurance contract, the underlying complaint, and the information possessed by the insurer.[ii]
Looking first at Slade’s Zurich policy, the court focused on the portion of the additional insured endorsement incorporating ISO’s 2013 revisions: “[i]f coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which [Slade is] required by the contract or agreement to provide for such additional insured.” The Prime Contract required Slade to include ASB as an additional insured “for claims caused in whole or in part by [Slade’s] negligent acts or omissions during [Slade’s] operations.” So, was the additional insured coverage limited only to claims caused by Slade’s negligent acts or omissions?
Charter Oak answered no, arguing that the term “broader” referred only to the policy limits. In other words, if the named insured had $5 million in limits, but only promised $2 million in coverage to the additional insured, then the additional insured would only get $2 million in coverage.
The court rejected that argument. “The ordinary understanding of the term ‘broader,’” the Southern District explained, “relates to the scope of the coverage – how narrow or broad it is – and not to the amount of coverage or the policy limits.” As such, Zurich’s duty to defend ASB was limited to claims caused in whole or in part by Slade’s negligent acts or omissions.
Unfortunately for Zurich, however, the court further found that the Prime Contract’s use of the term “claims” meant Zurich’s coverage of ASB was not limited to actual liability caused by Slade’s negligence. Rather, the Prime Contract only required that Slade’s negligent acts “bring about or effect” a lawsuit against ASB to trigger Zurich’s duty to defend, regardless of whether those negligent acts were specifically pled in the complaint. In fact, according to the court, Slade need not even be named in the complaint for Zurich’s duty to defend to be invoked. So, the further question became whether there was any evidence that Slade’s negligence gave rise to the claims, even if that evidence was not pled in the complaint?
The court then turned to the third factor in its analysis: the information possessed by Zurich. Based on discovery conducted in the personal injury action, the court found that Zurich was aware of facts reasonably suggesting that it was Slade’s negligence which gave rise to the claim, not any act or omission of ASB. Therefore, since it was both reasonably possible that Slade’s negligent conduct gave rise to the claim against ASB and reasonably possible that the employee’s injuries were caused by Slade’s acts or omissions, Zurich had a duty to defend ASB.
Oregon Law Demands a Different Result
Oregon practitioners will likely recognize that the outcome would be different in Oregon, a strict “eight corners” jurisdiction. Under Oregon law, whether an insurer has a duty to defend is determined by the “four corners” of two documents: the insurance policy and the complaint against the insured. Unlike the Southern District of New York in Charter Oak, Oregon courts do not consider the information possessed by the insurer in evaluating the duty to defend. In fact, an insurer’s knowledge of facts outside those alleged in the complaint is wholly irrelevant in most cases. Instead, Oregon law dictates that an insurer has a duty to defend an action against its insured only if the claim stated in the complaint could, without amendment, impose liability for conduct covered by the policy. Regrettably for Zurich, however, Oregon law did not govern the Charter Oak dispute.
Charter Oak’s Impact
The Charter Oak decision serves as a reminder that attorneys should meticulously review any language in a trade contract that outlines either the requirements for or limitations on additional insured coverage. A failure to devote sufficient attention to these provisions can have an outsized impact on the insurer’s duty to defend, and may even render the coverage listed in an additional insured endorsement illusory. This can occur because the ISO 2013 additional insured endorsement mandates that additional insured coverage “will not be broader than” the coverage required by the trade contract, even where the endorsement itself provides for more expansive coverage. As such, parties cannot rely on the language of the policy endorsement alone to determine whether a duty to defend exists. The contract terms and the additional insured endorsement should be laid side by side to ensure that there are no gaps.
While ISO’s additional insured endorsement will undoubtedly garner more attention from courts in the future, attorneys can avoid uncertainty by ensuring that their trade contracts wholly and specifically capture the scope of additional insured coverage that the parties intend to require.
[i] Citing CGS Indust., Inc. v. Charter Oak Fire Ins. Co., 720 F3d 71, 82 (2d Cir 2013) (quoting Servidone Constr. Corp. v. Sec. Ins. Co. of Hartford, 64 NY2d 419, 488 NYS2d 139, 477 NE2d 441, 444 (1985)).
[ii] See Fitzpatrick v. Am. Honda Co., 78 NY2d 61, 571 NYS2d 672, 575 NE2d 90, 93-94 (1991).
