Where a Lease Did Not Require the Additional Insured Coverage in the Lessee’s Policy To Be Primary, the Additional Insured Coverage Is Excess Over The Lessor’s Own Fronting Policy.
Businesses frequently seek to shift the risk of liability by including in contracts a requirement that they be named as an additional insured on the other party’s liability insurance policy. The road from contract negotiation to insurance payment, however, is a bumpy one. Key hurdles to coverage are the following:
- Does the contract include the right language?
- Has an additional insured endorsement been requested, or does the policy have a blanket additional insured clause?
- Does the policy’s additional insured language encompass the claim against the additional insured?
- Does the additional insured coverage line up as desired with the additional insured’s own insurance?
A recent federal court decision maps out this road in detail. In Scottsdale Insurance Company v. United Rentals (North America), Inc., United States District Court for the District of Massachusetts, Civil Action No. 13-12824-DPW (Memorandum and Order, March 30, 2018). In that case, a few words missing from the lease between the businesses cost the additional insured much if not all of its indemnity coverage under the other party’s insurance policy.
United leased a lift to Gomes Services under a contract that required Gomes to maintain liability insurance and, when requested, to supply proof of insurance naming United as an additional insured. In a prior decision in the same case, the court held that this language, while clumsy, was sufficient to require Gomes to add United to its policy as an additional insured. Because Gomes’ policy with Scottsdale included a blanket additional insured endorsement, amending the policy to include as an additional insured any person Gomes was required to add as an additional insured under a written contract United was an additional insured on the Scottsdale policy. The prior decision concluded that, because United’s own policy did not require its insurer to defend United, Scottsdale had a duty to defend United against a suit by a person who was struck and injured by the lift.
Three years later, after the underlying tort case settled, Scottsdale and United returned to the court for a ruling on the duty to indemnify. Two issues were in dispute:
- Does the Additional Insured Coverage Apply Only to Vicarious Liability?
First, the court addressed United’s and Scottsdale’s conflicting interpretations of the limiting language in Scottsdale’s additional insured endorsement. The endorsement stated that the additional insured coverage applied “only with respect to liability for bodily injury . . . caused, in whole or in part, by . . . [Gomes’] acts or omissions.” Was it United’s liability that must be caused by Gomes’ acts, as Scottsdale argued, meaning that the additional insured was only covered for vicarious liability? Or was it the claimant’s injury that must be caused by Gomes’ acts, as United asserted, meaning that United’s liability for its own negligence was covered, as long as Gomes’ conduct was a proximate cause of the injuries (a fact which no one disputed). The court ruled in favor of United, observing that if Scottsdale had intended to limit the additional insured coverage to vicarious liability, it could have said so directly. The court also noted that the limiting clause’s “in whole or in part” language was inconsistent with the interpretation that the clause applied only to vicarious liability, which is “an all or nothing proposition.”
- Is the Additional Insured Coverage Primary?
This brings us to the last bump in the road: how did the Scottsdale policy’s indemnification obligation interface with United’s own liability coverage? The Scottsdale policy stated that the additional insured coverage was excess over any other valid and collectible insurance, unless a written agreement required it to be primary. United’s own policy stated that it was excess over any other primary insurance for which United has been added as an additional insured, but was otherwise primary.
United’s contract with Gomes required United to be named as an additional insured on Gomes’ policy, but did not require Gomes’ policy to be primary. Therefore, under the policy’s respective “other insurance” provisions, the Scottsdale policy was excess, and United’s own insurance was primary. The court also rejected United’s argument that, because United’s own policy was a fronting policy (with $2 million limits and a $2 million deductible), it did not constitute “other valid and collectible insurance.” The result: United was on the hook for the first $2 million in indemnity.
So, as it turns out, United was tripped up by the very first step in the process. If its contract with Gomes had specified that Gomes was required to name it as an additional insured on a primary basis, then United’s fronting policy would have been excess, and Gomes’ insurer would have provided primary coverage for United.
A Few Observations:
- The contract providing for additional insured coverage should specify that the additional insured coverage must be primary. Specifying that the additional insured coverage must be “primary and non-contributory” may help in some circumstances to avoid a determination that the insured’s own policy shares the risk with the additional insured coverage.
- Most of the time, contracting parties rely on certificates of insurance to confirm additional insured status. As this case illustrates, you can’t know what protection you really have without reading the policy. This doesn’t happen very often before there is a claim. At a minimum, a review of the additional insured endorsement at the time of contracting will be well worth the effort.
- The 2013 revisions to the ISO (Insurance Services Office) additional insured endorsements create another set of issues not discussed in this case (the policies at issue preceded the revisions). These endorsements provide that the scope of the additional insured coverage is no broader than what is required by the insured’s contract with the additional insured. Also, these endorsements state that the limit of the additional insured coverage is the policy limit or the amount of insurance required in the contract, whichever is less. It therefore is critical that the contract clearly describes the scope of the desired coverage. The additional insured will also want to determine what limits of liability the contracting party carries, so as not to contract for a lower limit when more coverage otherwise would be available.