Separation of Insureds v. Exclusions

Many commercial general liability (“CGL”) policies provide coverage for multiple insureds. Accordingly, when one of the insureds under the policy engages in excluded conduct, coverage issues may arise concerning whether the relevant coverage exclusion applies to innocent insureds who did not engage in that conduct. To make matters even more interesting, most CGL policies contain a Separation of Insureds provision that provides each insured with separate coverage—as if each were separately insured with a distinct policy, subject to the policy’s liability limits. Not surprisingly, innocent insureds who may be excluded from coverage because of the actions of another insured utilize the Separation of Insureds clause to argue that they should be afforded coverage.

Read in conjunction, however, the exclusion and Separation of Insureds provisions create interplay and, as a result, coverage depends in many circumstances on the language within the exclusion. For example, a majority of courts have held that the Separation of Insured provision does not provide coverage to an innocent insured when the exclusion applies to the conduct of “any insured”—as opposed to “an” insured or “the” insured. Such was the case in Barba v. Allianz Global Risks U.S. Ins. Co., 2016 WL 6236324 (S.D.N.Y. October 25, 2016), where the United States District Court for the Southern District of New York upheld an insurer’s disclaimer of coverage to an aircraft owner and its president based on the owned aircraft exclusion in an Aviation CGL policy.

Barba v. Allianz Global Risks U.S. Ins. Co.

In Barba, the Plaintiff (“Barba”) was injured in a helicopter crash after the pilot was allegedly reckless and lost control. The helicopter was leased and operated by Sky Blue helicopter, Inc. (“Sky Blue”). Accordingly, Barba brought a personal injury lawsuit against Pollux Aviation, Inc. (the owner and lessor of the helicopter) and Pollux’s president, Larry T. Larrivee (“Larrivee”). Barba's lawsuit alleged that Pollux and Larrivee were negligent in entrusting the helicopter to Sky Blue because the pilot had a history of prior helicopter crashes. Furthermore, Barba alleged that Pollux and Larrivee were vicariously liable for the pilot’s negligence and recklessness.

Pollux and Larrivee had obtained an Aviation CGL policy from Allianz, which covered the time period when the accident occurred. Notably, the policy contained an applicable exclusion and a Separation of Insureds provision. The exclusion stated: “. . . [t]his exclusion applies even if the claims against any insured allege negligence or other wrong doing . . . if the occurrence which caused the Bodily Injury or Property Damage involved the . . . use or entrustment to others of any aircraft . . . that is owned or operated by or leased, rented, or loaned to any insured.” (emphasis added). The Separation of insureds provision provided that: “[t]his insurance afforded under the liability coverage applies separately to each Insured against whom a claim is made or suit is brought . . . .”

Relying on the exclusion, Allianz disclaimed coverage to Pollux and Larrivee for liability arising out of the helicopter crash. Barba, Pollux, and Larrivee subsequently entered into a settlement agreement that included a judgment of $1 million for Barba and assigned Pollux and Larivee’s rights against Allianz to Barba. Barba also agreed not to take any action to collect the judgment against Pollux and Larrivee but instead to recover the judgment solely and exclusively against Allianz.

Barba then brought suit against Allianz in New York federal court alleging, among other things, breach of contract/wrongful denial of coverage. Allianz moved to dismiss, arguing that it did not owe coverage to Pollux and Larrivee in connection with the helicopter crash because any liability arising out of the use of the helicopter fell under the exclusion, thus, Allianz was relieved of any obligations to defend and indemnify.

To determine the issue, the court first looked to the language of the policy. The court observed that the exclusion precluded coverage for injury arising out of the use of aircraft owned by “any insured.” Furthermore, the court noted that the exclusion applied even if the claims against the Insured alleged negligence based on the Insured’s entrustment of the helicopter to others. Thus, the Court found that Pollux fell squarely within the exclusion because it owned the aircraft that was entrusted the helicopter to Sky Blue and that the exclusion also applied to Larrivee because it excluded injury arising from the entrustment of the aircraft by “any insured”—in this case, Pollux.

While Barba admitted that the exclusion applied to Pollux, Barba argued that the Separation of Insureds provision rendered the exclusion’s “any insured” clause ambiguous and should not exclude her claims against Larrivee. Barba argued that the exclusion could be read either: (1) to exclude coverage to both insureds; or (2) only the owner-insured (Pollux).

In response, the court examined the interplay between the two provisions. The court found that the phrase “any insured” specifically and “unavoidably highlights that the application of the exclusion to either insured (Pollux or Larrivee) precludes coverage under the policy for the other.” Additionally, the court noted that a majority of jurisdictions have found that the existence of a severability clause does not affect a clearly worded exclusion, and that the phrase “any insured” specifically applies the exclusion to preclude coverage to either insured. In that regard, the court further noted that “the overwhelming majority of courts to consider such an exclusion have held it unambiguous, and binding, even in the presence of a Separation of Insureds clause.”

Barba argued that the court’s interpretation of the policy would render the Separation of Insureds clause meaningless. The court disagreed, however, and reasoned that the clause would not exclude coverage to an insured where the exclusion applied to “the” insured or “an” insured, as opposed to “any” insured. Thus, the court held that the exclusion clause was not ambiguous and that it precluded both Pollux and Larrivee from receiving coverage.

Conclusion

The Barba decision is one of the few addressing the interplay of the Separation of Insureds provision with an aircraft exclusion in an Aviation CGL policy. Importantly, while Barba states the majority view on the issue, there are notable exceptions—including in California and Florida.

Nevertheless, despite the case’s unique circumstances, it also has implications in the context of similarly worded exclusions in homeowners policies and other types of general liability policies. Insurers should therefore be aware of how the exclusion and Separation of Insureds provisions are read in conjunction and should contract accordingly.

With thanks to legal intern Derek Prevete for his assistance.