The New York Court of Appeals recently held that a general contractor’s liability does not need to be established prior to receiving a defense as an additional insured under a subcontractor’s commercial general liability contract. The Court also held that the priority of coverage between the general contractor’s and subcontractor’s insurance could not be determined because the record did not contain copies of the general contractor’s insurance contracts. BP Air Conditioning Corp. v. One Beacon Ins. Group, No. 93 (N.Y. June 27, 2007).
Factual and Procedural Background
BP Air Conditioning Corporation (BP) provided heating and ventilation work at the World Trade Center. BP subcontracted steam-fitting work to Alfa Piping Corp (Alfa). In Alfa’s purchase order with BP, Alfa agreed to name BP as an additional insured. Another subcontractor’s employee allegedly was injured as a result of Alfa’s work and the employee sued BP. BP sought coverage for the lawsuit as an additional insured under Alfa’s commercial general liability contract.
One Beacon Insurance Group (One Beacon) insured Alfa. One Beacon’s insurance contract provided “additional insured” coverage to “any person or organization for whom you are performing operations when you and such person or organization have agreed in writing that such . . . organization be added as an additional insured. . . . Such person or organization is an additional insured only with respect to liability arising out of your ongoing operations for that insured. . . .” One Beacon declined a duty to defend BP.
BP sought declaratory relief against One Beacon and moved for summary judgment. One Beacon argued that BP was not entitled to a defense as an additional insured unless it was established that the employee’s injuries arose out of Alfa’s work, and that if One Beacon owed a defense, the court would need to decide the priority of defense costs payments between Alfa’s coverage and BP’s own coverage. The trial court granted summary judgment to BP, holding that One Beacon was required to defend BP under the additional insured coverage. The trial court also held that it could not determine the priority of payment because it did not have copies of other relevant insurance contracts.
On appeal, the intermediate appellate court agreed with the trial court’s decision that BP was an additional insured but modified the trial court’s order to hold that One Beacon’s coverage was primary and BP’s own coverage was excess.
Two justices dissented. The dissenting justices argued that under the holding in AIU Insurance Co. v. American Motorists Insurance Co., 292 A.D.2d 277 (N.Y. App. Div. 2006), BP was not entitled to additional insured coverage because the additional insured endorsement “creates a condition precedent to triggering of additional insured coverage . . . it must be shown that the [cause of the injured employee’s] . . . slip and fall emanated . . . from Alfa’s work.” The dissenting justices also argued that because BP’s liability must be established first, the court should not reach the issue of the priority of the coverage. The intermediate appellate court certified its decision to the New York Court of Appeals.
The New York Court of Appeals agreed with the trial court’s initial order that BP was an additional insured and that the priority of coverage could not be determined because other relevant insurance contracts were not in the record. Additional Insured Coverage One Beacon argued that BP was not entitled to additional insured coverage. One Beacon argued that an additional insured’s liability must be established before it may receive a defense because the additional insured endorsement referred to “liability arising out of [Alfa’s] ongoing operations performed for [the additional insured].”
The Court disagreed. The Court explained that it previously held that an additional insured is a “recognized term in insurance contracts . . . [and that] the well-understood meaning of the term is an entity enjoying the same protection as the named insured.” (quoting Pecker Iron Works of N.Y. v. Travelers Ins. Co., 99 N.Y.2d 391, 393 (N.Y. 2003)).
Thus, the standard for deciding whether an additional insured is entitled to a defense is the same standard that is used to determine if a named insured is entitled to a defense. The Court stated that the additional insured endorsement’s reference to “liability” does not affect “the standard under which a duty to defend is determined.” The Court also stated that the intermediate appellate court’s reliance on AIU Insurance v. American Motorists Insurance Company for the proposition that liability must be determined before an additional insured is entitled to a defense was “misplaced.”
The Court explained that the allegations against Alfa—that Alfa engaged in construction work, that Alfa breached its duty to keep the work site safe, and that the breach caused injuries—formed a “factual and legal basis” on which One Beacon might eventually be obligated to indemnify BP. Based on this, the Court concluded that “there is a possibility that [the injured employee’s] injuries ‘ar[ose] out of [Alfa’s] ongoing operations performed for [BP],” which triggered One Beacon’s defense obligation.
The Court also explained that it previously held that “‘the reasonable expectation and purpose of the ordinary business [person] when making an ordinary business contract’ will be considered in construing a contract.” (citation omitted). BP’s reasonable expectation when it forwarded the purchase order to Alfa requiring Alfa to name BP as an additional insured was that BP “wanted protection from lawsuits arising out of Alfa’s work - litigation insurance.” The Court reasoned that “[d]enying BP a defense in the underlying matter would rewrite the policy without regard to BP’s reasonable expectations as expressed in the purchase order, and provide a windfall for One Beacon.”
Priority Of Coverage
The Court held that the priority of coverage could not be determined because “none of the other insurance carriers are parties to this declaratory judgment action and no other relevant policies have been submitted.” Thus, the Court modified the intermediate appellate court’s opinion by reinstating the trial court’s order on the priority of coverage.
This decision establishes that in New York the standard for determining whether a defense is owed to an additional insured is the same as the standard for a named insured, viz., the duty to defend is determined by the allegations of the complaint, regardless of the allegations’ truth or falsity. It clarifies that an additional insured’s liability need not be established to determine if a defense is owed. To the extent that parties to an insurance contract in New York wish to have a different standard apply to “additional insureds” they should provide explicit contract terms to that effect. It highlights the importance of identifying all insurance contracts that may cover an additional insured so that priority of coverage among those contracts may be decided.