Chapter 6 Duty to Defend/duty to Indemnify
| Library | The Handbook on Additional Insureds (ABA) (2018 Ed.) |
CHAPTER 6 Duty to Defend/Duty to Indemnify
Joseph A. Wilson
Typically, an insurer's obligations to defend or indemnify an additional insured are controlled by the same principles that govern its obligations to named insureds. Nonetheless, additional factors and requirements should be considered in connection with claims for coverage by additional insureds.
I. Overview of Covered Claims
In order to qualify for coverage, a putative additional insured must typically satisfy several criteria. First, the policy under which the party is seeking coverage must extend coverage to additional insureds, either under an endorsement specifically naming the party as an additional insured1 or under a "blanket" clause or endorsement, which generally extends coverage to parties satisfying certain contractual or other requirements.
Second, if the party qualifies as an additional insured, coverage may be restricted to claims relating to the named insured's activities or operations, for which the additional insured is being held responsible.
A. Named Additional Insureds
A party that is specifically identified as an additional insured by endorsement is entitled to coverage in accordance with the terms of the additional insured endorsement or other clause affording coverage for additional insureds.2
B. Blanket Endorsements
If a party is not specifically named as an additional insured on a policy, it may still qualify as an additional insured under a "blanket" endorsement.3 Such an endorsement or clause will typically extend coverage to parties for whom the insured agreed to procure coverage as an additional insured.
II. Agreement to Procure Coverage
Generally, in the absence of explicit language requiring that a contracting party be named as an additional insured, a contract will not be read to include such language.4 For example, a requirement to maintain insurance covering the named insured for the contracted operations may be insufficient to create an obligation to procure coverage for an additional insured:
A provision in a construction contract cannot be interpreted as requiring the procurement of additional insured coverage unless such a requirement is expressly and specifically stated.5 In addition, contract language that merely requires the purchase of insurance will not be read as also requiring that a contracting party be named as an additional insured.6
A. Written Agreements
Many insurance policy clauses concerning coverage for additional insureds require the named insured to have agreed in writing to procure additional insured coverage for the party seeking that status. Judicial interpretation of such requirements is varied, depending upon the jurisdiction, as well as the precise phrasing of the clause.
For example, some courts have held that an oral agreement does not satisfy a policy requirement of a "written contract or agreement or permit," whereas other courts have held that an oral agreement to procure insurance can satisfy a policy requirement of a "written contract, agreement or permit."7 Similarly, some courts have held that an unexecuted contract can satisfy the requirement of a written contract if the parties acted in accordance with the terms of the contract prior to execution.8 Other courts have held that a contract must be either signed or fully performed to be "executed."9
In some instances, additional insured status may be extended only to parties in contractual privity with the named insured.10 The extent of coverage in such cases largely depends on the wording of the policy provision granting additional insured status.11
B. Certificates of Insurance
Certificates of insurance are frequently issued in connection with construction projects or other operations, as evidence that a party maintains sufficient liability insurance. However, certificates of insurance may also serve as evidence that a party has been added as an additional insured to a policy; in some circumstances, the certificate of insurance can modify or amend the policy and result in a party obtaining additional insured status.
In general, a certificate of insurance with adequate disclaimers or qualifications is insufficient by itself to create coverage in favor of a party named on the certificate.12 However, in certain instances—such as when the certificate is issued by a binding agent of the insurer—the existence of the certificate of insurance can prevent the insurer from denying the coverage indicated on the certificate.13
III. Causal Relationship: "Arising out of
A typical policy clause extending coverage to additional insureds—whether a specific named insured endorsement or a blanket endorsement—will extend coverage to the additional insured only for liabilities "arising out of" the named insured's activities (i.e., work, operations, etc.).14
Many courts have thus recognized that where the named insured's operations or work were not a proximate cause of the claim for which coverage is sought, there is no coverage available for the additional insured.15
A. Named Insured's "Work" or "Product
Courts have generally interpreted the requirement that liability arise out of the insured's "work" or "product" broadly, frequently encompassing claims that were caused by any act or omission in furtherance of the named insured's work under the relevant agreement or other arrangement.16
For example, courts in some jurisdictions have held that injuries sustained by an employee will be deemed to arise out of his employer's "work" if the injuries occur on the job site and in the course of employment.17 Liability "arises out of" the named insured's work so long as the named insured's employee is injured while acting in furtherance of his or her employment.18 The test for determining whether specific activities are within the scope of employment or purely personal turns on whether the activities are both reasonable and sufficiently work-related.19
B. Named Insured's Ongoing Operations and Completed Operations
Many policies will extend coverage to an additional insured for coverage arising out of the named insured's "ongoing operations." Other endorsements or clauses may extend coverage for "completed operations." These two clauses provide coverage for distinct and different claims.
"Ongoing operations" is typically interpreted to encompass only work in prog-ress.20 "Completed operations," by contrast, generally includes work that is no longer in progress, or that has been put to its intended use. The two clauses are frequently interpreted as mutually exclusive.21
Most courts have found that ongoing operations include injuries or damage sustained by a party as a direct result of the insured's work, while that work is in progress.22 However, injuries would not be deemed to arise out of an insured's operations if the insured is not actively performing operations and the injuries do not arise out of the insured's workmanship or products.23
Provisions for completed operations generally cover the risk of loss for bodily injury or property damage that arises out of the insured's operations, if those losses occur after the operations have been completed, put to their intended purpose, and away from the insured's premises.24 A claim arising out of a named insured's work falls within that coverage once that work is completed or has been put to use.25
C. Named Insured as Lessor
A variation of the construction-related additional insured endorsement is the landlord/lessee endorsement, which extends coverage to those persons or organizations from whom the named insured leases property.
Such clauses are typically interpreted to afford coverage only for claims arising out of the demised premises.26 In determining whether a claim falls within the demised premises, applicable principles for interpreting leases generally control.27
IV. Duty to Defend
In general, an insurer has a broad duty to defend its insured whenever the allegations of the complaint suggest a reasonable possibility of coverage, even if those allegations are ultimately proven to be groundless, false, or baseless.28 As some courts have suggested, an insurer "has an absolute duty to defend a complaint which contains allegations covered by the language of the policy, but it has absolutely no duty to defend those claims which fall outside the coverage of the policy."29
A. Complaint—Four-Corners Rule
Where an insurance policy includes the insurer's promise to defend the insured against specified claims, as well as to indemnify the insured's actual liability, the insurer's duty to furnish a defense is broader than its obligation to indemnify.30 In general, a liability insurer is obligated to defend a suit if the facts alleged within the "four corners" of the pleadings would give rise to any claim within the coverage of the policy.31 Some jurisdictions apply an "eight-corner" rule, which depends on the "four corners" of two documents—the relevant pleading and the policy itself.32
The duty to defend arises whenever the allegations in a complaint against the insured fall within the scope of the risks undertaken by the insurer, regardless of how false or groundless those allegations might be.33 Typically, if the complaint against the insured asserts a single claim within the policy coverage, the insurer must defend the entire action, even though the complaint asserts additional claims or alternative theories clearly falling outside the policy's coverage.34 On the other hand, some courts have suggested that patently groundless allegations that purport to create a duty to defend far beyond that which the insurer could have anticipated when it issued the policy cannot create a duty to defend.35
In determining whether any of the allegations would give rise to a claim within the coverage of the policy, many courts read the allegations liberally in favor of coverage, with any doubts resolved in favor of the insured.36
B. Extrinsic Evidence
In some circumstances, a party's characterization of the causes of action alleged...
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