Chapter 7 Scope of Coverage

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 7 Scope of Coverage

Adam M. Smith and Lorraine M. Armenti

I. Introduction

This chapter discusses the scope of coverage afforded additional insureds. It specifically compares the coverage afforded additional insureds to that afforded named insureds under general liability policies. Situations in which these two classes of insureds share the same protection are explored, as are situations in which their coverage differs. In each circumstance, a discussion of the basis for the same or different treatment is highlighted. This chapter also focuses on those policy terms and exclusions most frequently discussed by courts and commentators when comparing and defining the coverages afforded both additional insureds and named insureds. In this vein, the chapter addresses the "separation of insureds" provision commonly found in liability policies and the impact of that provision on the applicability of exclusionary language to an additional insured. Rescission of a policy is also discussed, particularly in situations where only the conduct of a named insured is at issue, and the innocent additional insured is unaware of any wrongdoing or mistake. This chapter also includes a brief history of the evolving language of additional insured endorsements, particularly in the area of defining coverage for an additional insured's "own" negligence or "sole" negligence and circumstances where liabilities of an additional insured do not arise out of the named insured's "work" or "ongoing operations." Finally, the chapter concludes with a discussion of cross liability exclusions and the interplay of those exclusions with the "separation of insureds" provisions.

II. Additional Insureds Entitled to Same Protection as the Named Insured

Traditionally, commercial general liability policies provide the same rights and protections to all persons and entities that qualify as insureds, including additional insureds.¹ As set forth in the oft-cited phrase from the Court of Appeals of New York, "'[a]dditional insured' is a recognized term in insurance contracts. . . . As cases have recognized, the well-understood meaning of the term is an entity enjoying the same protection as the named insured."² In fact, most jurisdictions adopt a broad and liberal view regarding the coverage afforded to additional insureds to ensure that they have the same rights afforded named insureds.³

Although policy terms, conditions, and exclusions generally apply with equal force to named insureds and additional insureds, there are certain exceptions.

A. Policy Premiums

Although a named insured must pay premiums and deductibles, an additional insured is generally not obligated to pay premiums⁴ or deductibles⁵ unless specifically required by the policy. The primary reason offered by courts for why additional insureds are not presumptively responsible for premiums and deductibles is that the additional insured was not a party to the original policy and, therefore, should not be bound by certain terms.⁶ The fact that an additional insured is a beneficiary of the policy is of no moment.⁷ Absent an express or implied contract as to premiums, an additional insured is absolved of responsibility because

[l]iability to pay premiums results only from contract, express or implied, and no duty is cast upon an additional insured to inquire whether the premiums of the named insured are paid, nor are they liable for the outstanding premiums in the event of [the] named insured's default in the absence of a contract.⁸

Courts have reached conflicting conclusions regarding whether an additional insured may exhaust a self-insured retention in lieu of a named insured, often depending on the unique language of the subject policy. While California and New York courts have held that only a named insured may exhaust a self-insured retention,⁹ Florida courts have allowed exhaustion by a third party.¹⁰

B. Notice Provisions

Many courts have discussed the notice provision of a standard liability policy and the obligation it imposes on named insureds and additional insureds. The prevailing opinion is that the additional insured has an independent duty to tender notice of a claim.¹¹ As stated by the New York Appellate Division in Structure Tone v. Burgess Steel Products Corp.,¹² "the duty to give reasonable notice as a condition of recovery is implied in all insurance contracts." Thus, both named insureds and additional insureds are commonly obligated to provide notice of a claim, even in the absence of explicit language in the notice provision directed toward additional insureds.¹³ In this way, the named insured's action or inaction with respect to notice does not affect the additional insured's implied duty to provide notice.¹⁴ However, courts have allowed an exception to this rule where policy language unambiguously required that only the primary insured provide notice.¹⁵ Absent notice, an insurer is unaware that the additional insured seeks a defense and/or indemnification under the relevant policy.¹⁶ For a full discussion of notice issues, see Chapter 10.

III. Scope of Coverage Not Greater Than Coverage for the Named Insured

A. General Principles

It is well settled that the coverage afforded to additional insureds is no greater than the coverage afforded to the named insured.¹⁷ Adding an additional insured to a policy does not "extend the nature of the substantive coverage originally given by the policy but merely gives to other persons the same protection afforded to the principal insured."¹⁸ Absent policy language that explicitly indicates an alteration in coverage, "the purpose of provisions to add insureds is 'to extend the policy coverage to others . . . not to change the nature of the coverage. . . .'"¹⁹ Indeed, in the context of an omnibus clause in a public liability insurance policy, the scope of coverage as between a named insured and an additional insured was explained as follows:

It seems to be well settled that the policy does not extend any greater coverage to an additional insured than to the named insured, so as to insure such person for an unauthorized use when the named insured would not have been covered under the same circumstances.²⁰

Thus, the scope of coverage provided to an additional insured is the same as that provided to a named insured, with terms and conditions applying with equal force to these insureds. For example, the same standard for determining an insurer's duty to defend applies to named insureds and additional insureds.²¹ Put another way, when coverage is sought for an additional insured without payment of an additional premium, the coverage is derivative in nature and the additional insured's rights can be no greater than the named insured's rights.²²

For example, in Wyner v. North American Specialty Insurance Co., a tenant filed a lawsuit against its landlord for loss of business income associated with ongoing construction at the leased building.²³ The landlord, who was an additional insured under the tenant's insurance policy, sought coverage for the property damage claim under the tenant's policy.²⁴ The trial court denied the landlord's coverage claim based on the owned property exclusion, holding that there was no coverage because the property damage was to property owned by the landlord.²⁵ On appeal, the landlord argued that the owned property exclusion, which precludes coverage for damage to property "you" own, does not apply to its claim because "you" refers to named insureds only, not all insureds.²⁶ Relying upon the oft-cited principle that "'the naming of additional insureds does not extend the nature of the substantive coverage,'" the First Circuit affirmed the lower court's ruling that the owned property exclusion applied to the landlord.²⁷ Because "the endorsement naming the additional insured contains no language suggesting that the nature of coverage, declarations or exclusions were thereby altered, we see no reason to deviate from the 'well-settled [rule] that the policy does not extend any greater coverage to an additional insured.'"²⁸ Similarly, an additional insured may also be required to abide by any policy terms that would apply to the named insured. For example, in Lexington Ins. Co. v. Exxon Mobil Corp.,²⁹ the Texas Court of Appeals found that an additional insured seeking coverage under a policy would be bound by an arbitration clause in that policy. The court held that the additional insured "cannot seek to recover under the terms of . . . [the] . . . policy and at the same time avoid the provisions in the policy that it disfavors."³⁰

B. Limit of Liability

It is also well settled that named insureds and additional insureds are collectively entitled to only one limit of liability.³¹ Policy limits are finite such that an additional insured being added to a policy does not increase the limits of liability available under a policy; instead, claims by the additional insured deplete the policy limits in the same way as claims by the named insured.³² In fact, courts that have considered circumstances in which exhaustion of the policy limits has occurred due to settlement payments made on behalf of the named insured have generally concluded that an insurer may decline to defend the additional insured.³³ The rationale most commonly noted in support of this position is the promotion of settlement of lawsuits.³⁴

The impact on policy limits for one insured when a settlement is reached on behalf of another insured was squarely before the Fifth Circuit in Travelers Indemnity Co. v. Citgo Petroleum Corp.³⁵ Damages were sought in an underlying tort action relating to a collision between an automobile and a Wright Petroleum ("Wright") tanker truck carrying petroleum products for Citgo Petroleum Corporation and Citgo Refining & Chemicals, Inc. (collectively "Citgo") and other oil companies.³⁶ Only Wright was named as a defendant in the initial complaint, not Citgo.³⁷ On August 30, 1993, the plaintiffs made a settlement demand, which was...