Additional Insureds and Claims “Arising out of” the Named Insured’s Negligence
The Insurer’s Duty to Defend Additional Insureds for Claims “Arising out of” the Named Insured’s Negligence.
I. Introduction
This discussion reviews of the law in the State of Illinois in regards to blanket additional insured endorsements within Commercial General Liability policies (“CGL”) that add a person or entity as an additional insured where required by written contract. In particular, whether liability for the negligence of an additional insured can be reduced through the use of various restrictions within endorsements issued by the insurer. It is possible to substantially reduce the potential exposure of an insurer for the negligence of an additional insured, or even to completely eliminate all exposure for the negligence of an additional insured but, doing so may expose the named insured to a breach of contract claim.
II. The Additional Insured Relationship
In general, an additional insured arises from a contractual relationship wherein a party requires a Named Insured to add the party as an insured to the Named Insured’s CGL policy. The very nature of an additional insured endorsement is to provide insurance coverage to an additional person not identified as a Named Insured under CGL policy.
As a result, restrictions on the insurance coverage provided to the additionally insured person may potentially run counter to the contractual relationship between the Named Insured and the additional insured. Courts have reviewed these and other factors during their interpretation of various provisions. In general, courts have upheld additional insured endorsements as written so long as they do not violate public policy.
III. The Typical Additional Insured Endorsement
Many insurers use the following language in the additional insured endorsement found in its Commercial General Liability Coverage Form:
WHO IS AN INSURED is amended to include as an insured any person or organization with whom you agreed, because of a written contract, agreement or permit, to provide insurance such as is afforded under this Coverage Part, but only with respect to: (1) Your operations, “your work,” “your product,” or premises owned or used by you; …
This provision is common within CGL policies and a similar provision was reviewed by the court in J.A. Jones Construction Co. v. Hartford Fire Insurance Co., 645 N.E.2d 980 (Ill. Ct. App. 1995), and U.S. Fire Insurance Co. v. Aetna Life & Casualty, 684 N.E.2d 956 (Ill. Ct. App., 1997). In J.A. Jones, Jones Construction Company was the general contractor for a construction project and Jones entered into a subcontract with PPG Industries, Inc. Defendant Hartford Fire Insurance Company provided insurance to the subcontractor, and the insurance policy named Jones as an additional insured, “but only with respect to your operations, ‘your work’ or facilities owned or used by you.” One of the subcontractor’s employees was injured while working at the construction site and sued Jones for negligence. The subcontractor’s insurer was held to have a duty to defend in the lawsuit filed by the subcontractor’s employee.
The court rejected the argument by the subcontractor’s insurer that the endorsement limited coverage to injuries attributable to the subcontractor’s negligence. Importantly, the court noted that there was no dispute that the subcontractor’s employee, when injured, was an employee of the subcontractor performing work the subcontractor had contracted to do. The Jones court persisted with the generally accepted broad construction of these endorsements.
In U.S. Fire, U.S. Fire’s policy named Gateway (subcontractor) as the insured. In an endorsement to this policy, defendants (including the Owner and General Contractor) were additional insureds “but only with respect to acts or omissions of the named insured, Gateway, in connection with the named insured’s operations at the applicable location designated.”
Gateway’s employee was injured at the designated jobsite, Argonne, when he tripped on a conduit protruding from a concrete slab. The Court ruled that a comparison of the allegations in the complaint and the endorsement raised the potential for coverage and that some “potential for coverage” was all that was necessary to trigger U.S. Fire’s duty to defend. Specifically, the court emphasized that the injured Plaintiff was an employee of the named insured and was performing tasks required of him “in connection with the named insured’s operations.” Thereby concluding the additional insured’s liability could potentially have arisen from an act or omission of the named insured, whether or not the act or omission rises to the level of negligence. Such a possibility was sufficient to trigger the duty to defend the additional insured.
Implicit in the holdings of the above‑referenced Illinois cases is a recognition that there must be “some” actual nexus to the Named Insured’s work for coverage to extend to the additional insured – even under the more broadly construed endorsements. See generally Couch on Insurance, Sec. 44:338 (Second Ed., 1963) (“a contract of contractor’s liability insurance will generally require that the harm be work related or otherwise specify that there be some causal relationship between the nature of the contractor’s [insureds] activity and the harm which is sustained.”)
IV. Alternative Additional Insured Endorsements: Broad Construction
In Illinois, a duty to defend exists where the underlying complaint alleges facts that are potentially within the policy coverage. United States Fidelity & Guar. Co. v. Wilkin Insulation Co., 550 N.E.2d 1032, 1035 (Ill. App. Ct. 1990), aff’d 578 N.E.2d 926, 930 (Ill. 1991); Matsushita Elec. Corp. of Am. v. Home Indem. Co., 907 F. Supp. 1193, 1197 (N.D. Ill. 1995). Potentiality of coverage is determined by comparing the allegations of the complaint with the terms of the insurance policy. Lapham-Hickey Steel Corp. v. Protection Mut. Ins. Co., 655 N.E.2d 842, 847 (Ill. 1995); Shell Oil Co. v. AC&S, Inc., 649 N.E.2d 946, 950 (Ill. App. Ct. 1995). If an additional insured endorsement provides for the potential that an additional insured is covered, the insurer will be required to provide a defense. The most common endorsements in use today come from the Insurance Service Office (“ISO”).
A. “Arising out of” the Insured’s Work or Operations
WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule as an insured but only with respect to liability arising out of your operations or premises owned by or rented to you. ISO CG 20 26 11 85.
The phrase “arising out of” has repeatedly been recognized by Illinois courts as being both broad and vague. See Sportmart v. Daisy Mfg. Co., 268 Ill. App. 3d 974, 645 N.E.2d 360 (1st Dist. 1994), where the court stated that “arising out of” is synonymous with the terms “connected with,” “incidental to,” “originating from,” “growing out of,” and “flowing from.”
Illinois courts generally take a broad “but for” causal view to ascertain whether an injury was sufficiently connected to the insured’s operations. Interpreting the phrase in the context of additional insured endorsements similar or identical to the one cited above, courts have concluded that an additional insured’s liability arises out of the Named Insured’s work if there is any causal relationship or nexus between the Named Insured’s work and the additional insured’s liability. Liberty Mutual, 301 Ill. App. 3d at 54, 703 N.E.2d at 442; Maryland Casualty, 126 Ill. App. 3d at 154, 466 N.E.2d at 1094. Proximate cause is not necessary; “but for” causation is enough. Liberty Mutual, 301 Ill. App. 3d at 50, 703 N.E.2d at 440.
One of the early court decisions from a Illinois court interpreting the phrase “arising out of,” was Maryland Casualty Co. v. Chicago & North Western Transportation Co., 126 Ill. App. 3d 150, 466 N.E.2d 1091 (1st Dist. 1984). In Maryland Casualty, an employee of a newsstand was injured in an attack and filed suit against Chicago and North Western (“C&NW”), alleging that the company was negligent. The employee did not allege any negligence on the part of the newsstand/named insured. C&NW tendered its defense to the newsstand’s insurer, which had issued an additional insured endorsement purporting to cover C&NW, “but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises designated below leased to the named insured.” The court found that the injuries sustained by the newsstand employee arose from the operation and use of the leased premises, since that employee would not have been attacked “but for” her employment on those premises, and that the policy must be reasonably construed to “cover any risks attendant upon [the employee’s] presence” resulting from the additional insured’s own negligence. Id., 466 N.E.2d at 1095.
This same broad reasoning was applied again in the context of an additional insured endorsement similar to the one at issue here in Shell Oil Co. v. A C & S, Inc., 271 Ill. App. 3d 898, 649 N.E.2d 946 (5th Dist. 1995). In Shell Oil, an employee of a subcontractor brought suit against a general contractor after injuring himself while walking back to his work trailer. The subcontractor’s insurer claimed that it had no duty to defend because the injuries to the employee did not “arise out of operations performed for the owner and contractor,” as required by the additional insured endorsement to the policy. The court held that the employee’s injuries “arose out of his employment and his employer’s presence on the insured’s premises.” It again noted the Illinois common law rule that “but for” his employment and his employer’s presence on the insured’s premises, the employee’s injuries would not have occurred. The employer’s presence alone was enough to make the additional insured endorsement applicable.
Similarly, in Liberty Mutual Ins. Co. v. Westfield Ins. Co., 301 Ill. App. 3d 49, 54, 703 N.E.2d 439, 443 (1st Dist. 1998) a subcontractor’s employee was injured at the general contractor’s work site. He sued the contractor and received a settlement from the contractor’s insurer, which then sought contribution from the subcontractor’s insurer. The basis of that suit was the subcontractor’s policy’s “additional insured endorsement.” The court found that, because the employee sustained injuries while working for the subcontractor at the general contractor’s work site, the general contractor’s (i.e., additional insured’s) liability arose out of the subcontractor’s (i.e., named insured’s) work as a matter of law. According to the court, the “arising out of” language was “broad and vague and must be liberally construed in favor of the insured; accordingly, ‘but for’ causation, not necessarily proximate cause, satisfies this language.” 301 Ill. App. 3d at 54, 703 N.E.2d at 442.
The phrase “arising out of” has also been broadly construed in product-related cases involving vendor’s endorsements. For example, in Sportmart v. Daisy Mfg. Co., 268 Ill. App. 3d 974, 645 N.E.2d 360 (1st Dist. 1994), Continental Casualty denied coverage to Sportmart under a vendor’s endorsement contained in a policy issued to Daisy. Daisy manufactured “BB” guns and the ammunition used in them. Sportmart operated a retail sporting goods store that sold Daisy products. A lawsuit was filed against Sportmart on behalf of a boy who had been injured when a pellet manufactured by Daisy and purchased from Sportmart ricocheted off of a light pole and hit his eye. The complaint alleged that Sportmart was negligent in selling ammunition to a minor. Continental Casualty denied coverage under the vendor’s endorsement on the Daisy policy because the underlying complaint did not allege that the ammunition was defective. The court held that the underlying complaint alleged bodily injury “arising out of” Daisy’s product because the minor would not have been injured “but for” his use of the pellet. Therefore, there was a duty to defend Sportmart under the vendor’s endorsement.
The additional insured endorsement does not require the additional insured’s liability to arise solely out of the Named Insured’s fault or negligence. It simply requires that the additional insured’s liability arise out of the Named Insured’s “work,” including work done for the Named Insured by subcontractors hired by the Named Insured. As a result, courts have consistently held that an additional insured is covered under the “arising out of ” language of an additional insured endorsement even when the underlying lawsuit alleges fault on the part of the additional insured. See Casualty Ins. Co. v. Northbrook Property & Casualty Co., 150 Ill. App. 3d 472, 476, 501 N.E.2d 812, 815 (1st Dist. 1986) (additional insured endorsement provides coverage for liability arising out of operations, with no reference to Named Insured’s fault; thus, there is no need to apportion negligence to the Named Insured to bring additional insured within coverage).
In Matsushita Elec. Corp. of Am. v. Home Indem. Co., 907 F. Supp. 1193, 1197 (N.D. Ill. 1995), the court held that a collapse arose out of the subcontractor’s installation of exterior walls. Matsushita, 907 F. Supp. at 1197. The subcontractor, who was responsible for erecting the exterior walls, procured an OCP policy providing coverage for injuries arising out of the work it performed for the contractor. The plaintiff alleged, in his amended complaint, that the contractor was negligent in allowing an interior block wall to collapse by failing to brace the wall until the exterior walls were complete. Refusing to defend, the insurer argued that the complaint failed to establish the exterior walls as the cause of the accident. Finding a duty to defend did exist, the court reasoned that the allegation concerning the interior block wall collapse flowed directly from the subcontractor’s construction of the exterior walls. Id. Further, the court noted that the insurer learned during discovery of the plaintiff’s contention that the interior wall collapsed because the exterior wall was not complete. Id. Therefore, given these specific references, the court concluded that the insurer knew or should have known that the claim arose out of the subcontractor’s work. Id.
In Schal Bovis v. Casualty Insurance Co., 315 Ill.App.3d 353, 732 N.E.2d 1179 (1st Dist. 2000), the court ruled that where a policy covered any person or organization “but only with respect to liability arising out of Chicago Forming’s work,” a duty to defend was triggered by allegations that the injury suffered occurred in connection with work which was supervised by Chicago Forming.
The “arising out of” language is the most prevalent language found within additional insured endorsements and is the most broadly construed language by Illinois Courts. Inclusion of this language within an endorsement without further restriction subjects the insurer to a potential tender from an additional insured in any situation wherein the Named Insured had any connection or nexus with the project.
B. Liability Arising out of the Insured’s “Ongoing Operations”
WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization for whom you are preforming operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability arising out of your ongoing operations performed for that insured. A person’s or organizations status as an insured under this endorsement ends when your operations for that Insured are completed. ISO 20 33 03 97
This endorsement attempts to restrict the coverage available to an additional insured to only that liability that comes from the work of the Named Insured, while that work is being performed. This limitation, if effective, would limit coverage to situations where an injury occurred while the Named Insured was actually working and only those injuries that occurred directly as a result of the Named Insured’s work. The terms within this endorsement were not defined by an Illinois court prior to its use. Therefore, the courts were required to apply meaning to the undefined term “ongoing operations.”
Illinois courts give undefined terms in an insurance policy their plain and ordinary meaning. Outboard Marine Corp. v. Liberty Mutual Ins. Co., 154 Ill.2d 90, 607 N.E.2d 1204 (1992). In ascertaining the plain and ordinary meaning of words, courts often consult dictionaries. People ex rel. Daley v. Datacom Systems Corp., 146 Ill.2d 1, 585 N.E.2d 51 (1991). Webster defines “operations” as “performance of practical work” or “a business transaction.” (Webster’s Ninth New Collegiate Dictionary, Merriam-Webster Inc, Springfield, MA 1987).
Due to the intertwined definitions of the terms “work” and “operation”, Illinois courts have declined to find a distinction between liability “arising out of your work”, and liability arising out of your “ongoing operations.” In fact, the following additional insured endorsements were found to be similar enough so as to require the same ‘but for’ analysis: “for all claims arising out of or occurring in connection with the execution of work,” “but only with respect to liability arising out of ‘your work’ for that insured by or for you,” and “with respect to liability arising out of ongoing operations” See American States Ins. Co. v. Liberty Mutual Ins. Co., 291 Ill. App. 3d 336, 683 N.E.2d 510 (1st Dist., 1997); Korte Construction Co. v. American States Ins., 322 Ill. App. 3d 451; 750 N.E. 2d 764 (5th Dist. 2001).
The interpretation of an additional insured provision which would have the appearance of restricting coverage to “ongoing operations” does not in fact change the result when compared to the “arising out of” language. The term “arising out of” is interpreted the same as the attempted restrictive term, “ongoing operations.” With either provision, the insurer will be required to provide a defense to the additional insured if the Named Insured was present and had a connection or nexus with the project giving rise to the injury.
V. Alternative Additional Insured Endorsements: Narrow Construction
A. Solely as a Result of Some Act or Omission
WHO IS AN INSURED is amended to include as an insured the person or organization named above but only with respect to liability incurred solely as a result of some act or omission of the named insured.
As with “ongoing operations,” this provision attempts to restrict the coverage available for the additional insured to only the negligence of the Named Insured by restricting the grant of coverage to only the acts of the Named Insured. This is an attempt to remove coverage under the CGL policy for the negligence of the additional insured and it has met with some success.
In Village of Hoffman Estates v. Cincinnati Ins. Co., the First District found the preceding additional insured endorsement to be plain and unambiguous, specifically holding that the term “solely” implies exclusively or entirely, and that by the express terms of the endorsement, the named insured’s acts or omissions must be the sole grounds for alleging liability for coverage to apply. Id. 283 Ill. App. 3d 1011, 670 N.E.2d 874 (1st Dist. 1996).
In Hoffman Estates, a policy was issued to a general contractor with an additional insured endorsement adding the Village of Hoffman Estates as an additional insured. The underlying complaint alleged liability directly against both the contractor and the Village. The court held that because the Complaint was not based solely on the acts of the named insured, the explicit terms of the endorsement were not met. Id. 283 Ill. App. 3d at 1014.
The inclusion of the term requiring that liability be “incurred solely as a result of some act or omission of the Named Insured” does offer some limiting effect to the duty of the insurer to provide a defense to the additional insured. With the inclusion of this provision, a duty to defend will arise when the complaint alleges negligence based solely on the acts of the Named Insured. This provision often includes a statement that the negligence must be “imputed” to the insured. Hoffman Estates is the only Illinois decision to address this language.
B. Liability only for “Imputed” Conduct.
WHO IS AN INSURED … The coverage afforded to the Additional Insured is solely limited to liability specifically resulting from the conduct of the Named insured which may be imputed to the Additional Insured. … This endorsement provides no coverage to the Additional Insured for liability arising out of the claimed negligence of the Additional Insured, other than which may be imputed to the Additional Insured by virtue of the conduct of the Named Insured.
This provision is another attempt to repeat the effect of the “solely as a result” language discussed above. This provision includes a grant of coverage that contains a restriction so that insurance is provided to the additional insured but is “solely limited to liability specifically resulting from the conduct of the Named Insured.” The endorsement further defines the grant of coverage and states that there is no coverage for the additional insured’s negligence. This provision has met with slightly more success in Illinois courts.
In American Country Insurance Co. v. Kraemer Brothers, Inc., the First District first addressed the additional insured endorsement above, specifically restricting the coverage afforded to the additional insured to only liability resulting from the conduct of the Named Insured which may be imputed to the additional insured. Id. 298 Ill.App.3d 805, 699 N.E.2d 1056 (1st Dist. 1999). In Kraemer, American Country Insurance Company issued a CGL policy to subcontractor, D.H. Johnson Construction Company. Kraemer, a general contractor, was added as an additional insured with the limited endorsement cited above. An employee of D.H. Johnson was injured when he slipped and fell on an unnatural accumulation of snow and ice while working on Kraemer’s project. When Johnson’s employee filed the complaint, he alleged that Kraemer (the additional insured) was negligent in its maintenance and supervision of the construction project, but his complaint never named Johnson (the named insured) as a defendant. Kraemer subsequently filed a third-party complaint for contribution against Johnson alleging that Johnson was negligent in its maintenance and supervision of the project.
The court ruled that Kraemer breached a provision of the policy and was not entitled to a defense, subsequently finding it was not necessary to address the issue of whether the named insured had a duty to defend that additional insured. However, in dicta, the Court stated “the allegations in the complaint and third-party complaint are not within the scope of coverage.” Id. 298 Ill.App.3d at 814.
The first district subsequently affirmed this argument in American Country Ins. Co. v. Cline, holding that this additional insured endorsement is neither illusory nor void against public policy and under this endorsement the named insurer has no duty to defend the additional insured where liability is alleged solely against the additional insured. The court decided to follow the dicta in Kraemer, noting, “it makes sense that the additional insureds would only receive coverage for a narrow class of claims, such as those arising in strict liability.” This limitation on coverage recognizes that businesses in the construction industry carry coverage liability arising out of their own work, and assumed that additional insured would have their own general liability coverage. Id. 309 Ill. App. 3d 501, 722 N.E.2d 755 (1st Dist. 1999).
After examining the facts surrounding the purchase of the insurance, the court in Cline, held that coverage was sufficiently limited for several reasons: (1) it makes sense that the additional insureds would only receive coverage for a narrow class of claims where they received a number of “blanket” additional insurance endorsements for a single $150 premium; (2) The named insured never agreed to cover new risks arising from the work of the additional insureds; (3) the endorsement was filed with the Director of Insurance and was not rejected. For the these reasons, the court held there was no duty to defend where the Plaintiff’s complaint did not allege any negligence on the part of the named insured, much less negligence that could be imputed to the additional insured. This decision is somewhat questionable due to the extensive recital of facts made by the court. If an Illinois court were presented with this same additional insured language without the support of similar facts, a court may be inclined to hold that it is not insurance after all and find the endorsement unenforceable. This situation has not yet been examined by Illinois courts and remains unanswered.
As an example of courts pulling back from the very restrictive “imputed liability” endorsement, the Northern District of Illinois distinguished the phrase “other than which may be imputed to the Additional Insured” from the phrase “but only if they are liable for your conduct.” The court found the “liable for your conduct” phrase to be an ambiguous phrase, thus resolving the ambiguity in favor of the insured and granting coverage. Great West Casualty v. Marathon Oil Co., 2001 WL 103426 (N.D.Ill. 2001).
VI. Exclusions for the Negligence of the Additional Insured
Within several ISO additional insured forms, the negligence of the additional insured is limited to some extent. On one end of the spectrum is ISO 20 28 11 85 which additionally insures lessors of equipment. This endorsement contains an exclusion for the coverage of the additional insured that provides as follows:
This insurance does not apply:
1. To any “occurrence” which takes place after the equipment lease expires;
2. To “bodily injury” or “property damage” arising out of the sole negligence of the person or organization shown in the Schedule.
Pursuant to this provision the coverage granted by the endorsement does not apply to bodily injury or property damages that arise out of the sole negligence of the additional insured. “Sole negligence” has been interpreted as
VII. Considerations of the Named Insured
While it is possible to limit the additional insured endorsement so as to restrict the instances in which the additional insured will be granted coverage, the considerations of the insured must be reviewed. Often, the insured is a subcontractor required to additionally insure the general contractor. The contract between the subcontractor and contractor may require that the subcontractor name the general contractor under its liability policy and that the liability policy be primary and non-contributory. By incorporating the most restrictive language within the additional insured endorsements, the insured is potentially exposed to a breach of contract claim from the general contractor for failure to procure insurance as required by the contract.
VIII. Summary
After reviewing the spectrum of Illinois cases addressing various additional insured endorsements, the most restrictive endorsement in terms of limiting liability of the Named Insured reads in part “The coverage afforded to the Additional Insured is limited to liability solely resulting from the conduct of the Named Insured which may be imputed to the Additional Insured.”
The least restrictive language is the “arising out of” broad language requiring only a factual nexus between the Named Insured and the injury. That nexus is satisfied through a “but for” test wherein “but for” the presence of the Named Insured at the accident location, the accident would not of happened.
