Additional insured coverage in construction projects is one of the most vexing issues facing insurance coverage lawyers. Add to the complexity a priority dispute between primary and excess insurers and you have a recipe for complex coverage litigation. Recently, the Fourth Circuit tackled these issues in the North Carolina case, Continental Casualty Company v. Amerisure Insurance Company, 886 F.3d 366 (4th Cir. 2018). The end result was not a good one for Amerisure. Amerisure, with its primary policy, got it wrong on the duty to defend additional insureds and with its excess policy, also got it wrong on the duty to indemnify. Continental obtained a judgment for over $2.3 million.
In Continental, the general contractor building a hospital near Charlotte, North Carolina entered into a subcontract with a supplier/builder of the steel infrastructure. This first-tier subcontractor in turn entered into a subcontract with an erector of the steel structure, a second-tier subcontractor. During his work on the project, Dustin Miller, an employee of the second-tier subcontractor, suffered severe injuries when he tripped and fell 30 feet to the ground after his safety cable broke. At the time of the accident, the second-tier subcontractor held both commercial general liability (“CGL”) and umbrella insurance policies issued by Amerisure (the “Amerisure policies”). As required by the subcontract between first-tier and second-tier subcontractors, the Amerisure policies included the general contractor and first-tier subcontractor as “additional insureds” and provided minimum coverage limits of $2.0 million. The CGL policy provided a limit of liability of $1,000,000 per occurrence and the umbrella policy provided an additional $5,000,000 per occurrence. Additionally, the subcontract between first-tier and second-tier subcontractor stated “the insurance required of [second-tier subcontractor] must be primary and noncontributory with [first-tier subcontractor’s] Insurance program.” (Emphasis added).
In addition to its “additional insured” status under Amerisure’s policies, first-tier subcontractor held its own CGL policy issued by Continental, which included an “additional insured” endorsement covering the general contractor. The general contractor also was insured under the hospital’s “rolling owner controlled insurance program” (“ROCIP”), which provided coverage under policies issued by a separate provider. Although the terms of the ROCIP required participation by all tiers of contractors, participation was not automatic, and the general contractor did not enroll either the first-tier or second-tier subcontractor in the ROCIP. Instead, as required by an additional provision of the ROCIP, these unenrolled subcontractors maintained their own insurance coverage as previously described.
As a result of the accident, Miller sued the general contractor and first-tier subcontractor for: failure to provide a safe work environment; failure to ensure that their subcontractors followed certain safety measures; failure to properly inspect certain safety features; failure to control and supervise the workplace; and failure to warn subcontractors about the lack of safety measures. Continental agreed to provide a defense to the first-tier subcontractor and the general contractor under a reservation of rights, but Amerisure declined to provide a defense, asserting coverage was barred pursuant to a controlled insurance program exclusion (“CIP exclusion”) in the Amerisure policies.
Declaratory Judgment Action
After settling the action for $1.7 million, Continental filed this declaratory judgment action in the United States District Court for the Western District of North Carolina, seeking a declaration that Amerisure be required to reimburse Continental for the entire settlement and for all of Continental’s defense costs. On motions for summary judgment, the district court held that Amerisure had breached its duty to defend the underlying action and that, under the terms of Amerisure’s policies, Amerisure was liable to reimburse Continental for the $1.7 million settlement. Finding “[e]quity dictates that the defense costs be shared equally among the two insurers,” the court ordered Amerisure to reimburse Continental for half the associated costs and fees.
Issue #1: Controlled Insurance Program Exclusion
On appeal, the first issue addressed by the Fourth Circuit was whether the CIP exclusion in the Amerisure policies excused it from defending the underlying action. The exclusion states, “This insurance does not apply to ‘bodily injury’ ... arising out of ... [second-tier subcontractor’s] ongoing operations ... if such operations were at any time included within a ‘controlled insurance program’ for a construction project in which [second-tier subcontractor] [is] or [was] involved.” The Fourth Circuit focused on whether the “arising out of” condition was met. Under North Carolina law, courts must strictly construe the phrase “arising out of” when that phrase appears in a policy exclusion. Thus, coverage will not be denied where there is more than one cause of an injury and only one cause is excluded. Under the plain language of the CIP exclusion, only injuries arising from second-tier subcontractor’s operations were excluded, but injuries allegedly arising out of the operations of the general contractor or first-tier subcontractor were not excluded. At the time of Miller’s accident, he unquestionably was performing work for his employer while installing metal decking. However, Miller’s complaint alleged more than one potential cause of his injuries. Numerous allegations in his complaint rested on the failures of general contractor and first-tier subcontractor with respect to their supervisory role over second-tier subcontactor’s operations and safety procedures. Miller also alleged that general contractor and first-tier subcontractor, independently from second-tier subcontactor, failed to provide adequate safety equipment and procedures, causing Miller’s injuries. Regardless of the actual cause of those injuries, at the time Amerisure refused to defend the action, the allegations presented a distinct possibility that Miller’s injuries arose from the operations of the other contractors. Because Miller’s injuries arguably “arose out of” operations other than those conducted exclusively by second-tier subcontactor, the condition of the CIP exclusion was not satisfied. Therefore, the district court did not err in concluding Amerisure breached its duty to defend against the underlying personal injury action.
Issue #2: Priority and Additional Insureds
Given Amerisure’s breach of the duty to defend, the second issue before the Fourth Circuit was whether Amerisure was liable to reimburse Continental for the full $1.7 million settlement. Amerisure argued its coverage was capped at the $1.0 million limit of the CGL policy and did not reach the umbrella layer. The court disagreed.
For starters, the court rejected the argument that the second-tier subcontractor did not agree to extend the umbrella coverage to the additional insureds (i.e. general contractor and first-tier subcontractor). Simply put, the Amerisure CGL policy provided that any “additional insured” under the policy, namely, the general contractor and first-tier subcontractor, were “automatically” insureds under the umbrella policy. Plus, the Amerisure umbrella policy stated: “We will have the right and duty to defend the insured against any ‘suit’ seeking damages for such ‘bodily injury’ ... when the ‘underlying insurance’ does not provide coverage or the limits of the ‘underlying insurance’ have been exhausted.” This language plainly meant (1) coverage was triggered when the Amerisure CGL policy limit had been exhausted and (2) because the settlement amount of the action exceeded the $1,000,000 limit in the Amerisure CGL policy, the umbrella coverage necessarily was triggered. The court further rejected Amerisure’s argument that its coverage was capped at the CGL policy’s $1.0 million limit. The court pointed to the umbrella policy language that “the most we will pay on behalf of the additional insured is the amount of insurance required by the contract, less any amounts payable by the underlying insurance.” In support of this rejection, the court focused on the subcontract between the first-tier and second-tier subcontractors, which plainly required the second-tier subcontractor to obtain $1.0 million in CGL coverage and an additional $1.0 million in umbrella coverage. The subcontract also stated that first-tier and second-tier subcontractors “shall be named as additional insureds on” the CGL policy of second-tier subcontractor and plainly required that second-tier subcontractor obtain $2.0 million in “minimum” CGL and umbrella coverage “with additional insured endorsement.”
The court also rejected Amerisure’s argument that Continential’s CGL policy took priority over the umbrella policy of Amerisure based on the “other insurance” provisions of both policies. In other words, Amerisure believed the Continental CGL policy should be triggered before the Amerisure umbrella policy was triggered. The “other insurance” provision of the Continental CGL policy stated: “If other valid [ ] insurance is available to [first-tier and second-tier subcontractor] for a loss we cover ... our obligations are limited as follows: [ ] Primary Insurance—This insurance is primary except when ... [t]his insurance is excess over: [a]ny other primary insurance available to you.” On the other hand, the Amerisure umbrella policy’s “other insurance” provision stated that the policy was “excess over ... any other insurance whether primary [or] excess.” The court noted that the Amerisure umbrella policy coverage was triggered when the limit of the “underlying insurance” was exhausted and only the Amerisure CGL policy was listed as “underlying insurance” in the policy declarations. Moreover, any ambiguity arising from consideration of the “other insurance” provisions is resolved by the terms of the subcontract between first-tier and second-tier subcontractor, which required Amerisure’s policies to be “primary and non-contributory” to all other insurance provided to first-tier subcontractor, including the Continental CGL policy. The court noted that the Amerisure policies plainly refer to and incorporate the terms of the subcontract in several respects. Thus, the court held that the Amerisure umbrella policy coverage was triggered immediately upon the exhaustion of the Amerisure CGL policy and that the Continental CGL policy did not take priority over that umbrella policy.
Issue #3: Defense Costs
The third and final issue addressed by the Fourth Circuit again arose because of Amerisure’s breach of the duty to defend, namely, whether Amerisure was required to reimburse Continental for the full amount of the costs and fees incurred by Continental ($660,700) in defending the Miller action. The court held yes, reversing the district court. Key to the Fourth Circuit’s holding was the Amerisure CGL policy language that coverage afforded to an additional insured shall be “primary and without contribution” from the additional insured’s own insurance. Further, under Continental’s CGL policy, “[w]hen this insurance is excess, we will have no duty ... to defend the insured against any ‘suit’ if any other insurer has a duty to defend the insured against that ‘suit.’” Thus, Continental’s CGL policy establishes that Amerisure’s CGL policy was “primary” to Continental’s “excess” CGL policy. In other words, Continental did not have an independent duty to defend.
There are three takeaways from this decision. First, North Carolina strictly construes the “arising out of” wording in policy exclusions, which tends to weaken the exclusions. Not many other states follow such a rule. Second, where a contract requires one party to provide additional insured coverage for the other party, courts give great weight to the terms of that contract when assessing the extent and scope of additional insured coverage provided by the insurance policy itself. This clearly applies to a contract that requires such coverage to be “primary and non-contributory” in relation to coverage under another policy. Third, where one insurer provides a defense to an insured that another insurer should have provided, there is a risk the court will require the latter to pay all legal costs and expenses incurred by the former in the defense of the insured. This can happen particularly when, as in this Continental case, the latter insurer was required to provide “primary and non-contributory” coverage for additional insureds..