NEW JERSEY CONSTRUCTION CONFERENCE – INSURANCE COVERAGE

DELAYS AND DISPUTES

“ADDITIONAL INSURED ISSUES IN THE CONSTRUCTION INDUSTRY”

Adam M. Smith, Esq.September 16, 2014

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I. INTRODUCTION

The standard Commercial General Liability ("CGL") policy often insures more

than one person or entity. First, it covers the "named insured," that being the person or

entity listed as such in the policy declarations. Second, the CGL policy covers other

persons or entities not specifically identified by name in the policy but who fall within the

scope of the policy's omnibus, or "Who is an Insured," clause. Those persons or

entities are "insureds" under the policy. For example, in the commercial context,

insureds under the "Who is an Insured" provision may include (I) partners, (2) members

or managers of a limited liability company, or (3) company officers and directors acting

within the scope of their duties as such. Finally, a named insured may add a person or

entity to the named insured's CGL policy by endorsement that amends the "Who is an

Insured" provision of the policy.

Additional insured issues commonly arise in cases involving construction

contracts, where landowners want to shift the risk of loss to the contractors they hire.

Those contractors, in turn, want to shift the risk to subcontractors. To accomplish that,

each party to a construction contract typically requires that those below it name it as an

additional insured on its CGL policies. Moreover, a construction contract ordinarily will

contain an indemnity and hold harmless clause, obligating the contractor or

subcontractor to indemnify and (usually) defend the owner or contractor for losses.

When a person injured on a construction site sues the landowner, the general

contractor and various subcontractors, the defense of the suit is tendered to the

subcontractor pursuant to the contract. If the subcontractor has failed to procure

insurance pursuant to the contract, the contractor generally will cross-claim against the

subcontractor for breach of contract. In addition, the contractor often will institute a

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third-party declaratory judgment action against the subcontractor's liability insurer,

claiming entitlement to coverage by virtue of the subcontractor's contractual promise to

purchase insurance. Finally, the subcontractor also may make a claim against its

insurer not only for the injured plaintiff's suit, but for the cross-claim instituted by the

contractor. The many coverage issues raised by this tripartite relationship (e.g.,

contractor/subcontractor/owner or owner/contractor/insurer) are discussed below in

Section IV.

Once litigation is instituted, resolution of these issues associated with additional

insured coverage usually boils down to policy interpretation. As a general matter, the

New Jersey courts will resolve any doubts about the existence of coverage in favor of

the insured. Mazzilli v. Accident & Cas. Ins. Co., 35 N.J. 1, 8 (1961). That is

particularly true in cases involving whether and to what extent persons or entities other

than the named insured are included within the protection afforded by the policy. In

those cases, the New Jersey courts take a broad and liberal view of provisions relating

to the inclusion of persons/entities other than the named insured within the scope of the

policy coverage. Ibid.; see also Ohio Cas. Ins. Co. v. Flanagin, 44 N.J. 504, 513-14

(1965) (citing Mazzilli); Scott v. Salerno, 297 N.J. Super. 437, 444-45 (App. Div.), certif.

denied 149 N.J. 409 (1997) (declaring that in search for probable intent of parties, broad

and liberal view should be taken where policy provision relates to inclusion of persons

other than named insured within protection afforded (citing Mazzilli)); Consolidated Mut.

Ins. Co. v. Security Ins. Co., 97 N.J. Super. 528, 531 (Ch. Div. 1967) (noting that where

policy provision relates to inclusion of persons other than named insured, broad and

liberal view taken of coverage extended (citing Flanagin)). Those principles of

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construction underlie and help shape the New Jersey decisions addressing coverage for

putative additional insureds.

II. DISTINCTIONS BETWEEN ADDITIONAL AND NAMED INSUREDS

The named insured is separate and distinct from an additional insured. The

standard [SO CGL form distinguishes between "you" and "your," defined as the named

insured shown in the declarations, and "insured," meaning any person qualifying as an

insured under the "Who is an Insured" provision of the policy. The preamble

paragraphs of a policy commonly state:

Throughout this policy the words "you" and "your" refer to the Named Insured shown in the Declarations....The words "we," "us" and "our" refer to the company providing this insurance.

The word "insured" means any person or organizationqualifying as such under SECTION C – WHO IS AN INSURED (SECTION II).

This latter category would, of course, include any additional insureds added by

endorsement because the endorsement amends the "Who is an Insured" provision.

The use of "you" and "your" language in the CGL policy can be determinative not

only of whether a person or entity is an insured under the policy but also of the scope of

coverage under the policy. For example, the "Who is an Insured" provision in the ISO

CGL, form includes as an "insured" "[a]ny person (other than your 'employee or any

organization while acting as your real-estate manager." See First National Bank v.

Motor Club of America Insurance Co., 310 N.J. Super. 1, 3 (App. Div. 1997).

Therefore, only the real estate manager of the named insured could be entitled to

coverage under this provision. In the landlord/tenant context, a tenant's CGL policy

containing this provision would not cover the landlord's real estate manager even

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though the landlord may be an additional (not named) insured under the policy.

The CGL "you" and "your" language also can affect the scope of coverage under

the policy. For example, the CGL policy typically excludes coverage for liability

assumed by an "insured" in a contract or agreement. One exception to this exclusion is

liability assumed by an insured under an "insured contract." The definition of insured

contract includes, among other things, "[t]hat part of any other contract or agreement

pertaining to your business...under which you assume the tort liability of another party to

pay for 'bodily injury' or 'property damage' to a third person or organization." Thus, the

named insured has contractual liability coverage for any contract or agreement

pertaining to its business that contains a standard "hold harmless" clause by virtue of

this exception to the exclusion. Any other "insured" does not get the benefit of this

exception.

New Jersey courts have addressed this distinction primarily in cases involving

automobile policies. Under those policies, the courts generally have taken a broad and

expansive view of "you" and "your" to maximize coverage in permissive-user cases.

See Martusus v. Tartamosa, 150 N.J. 148, 157-59 (1997). In Martusus, the court relied

primarily on the statutory scheme for automobile insurance and the strong public policy

in New Jersey of protecting innocent victims, id. at 157, and "ensur[ing] the collectability

of damages wrongfully inflicted in the operation of motor vehicles." Id. at 158

(quotations omitted). The Appellate Division has, however, taken a more restrictive

view on occasion. See Pawlick v. New Jersey Automobile Full Ins. Underwriting Ass'n,

284 N.J. Super. 629, 638-39 (App. Div. 1995); Royal Ins. Co. v. Rutgers Cas. Ins. Co.,

271 N.J. Super. 409, 416-17 (App. Div. 1994).

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Along with greater benefits, the named insured accepts greater burdens, like

being subject to more exclusions than an additional insured. See Douglas R.

Richmond, The Additional Problems of Additional Insureds, 33 Tort. & Ins. L.J. 945

(1998). Nevertheless, the additional insured generally should have no greater rights

under a policy than the named insured. Id. at 946. Thus, an additional insured cannot

avoid the application of a policy deductible or self-insured retention by virtue of its status

as an additional (and not named) insured. See id. at 948.

It is, of course, permissible to draw a distinction between a named and an

additional insured in an insurance policy. See Pawlick, supra, 284 N.J. Super. at 635-

39 (recognizing that insurance policy cancellation notification provision of N.J.S.A.

Section 17:29C-10 draws distinction between named insured and additional insured and

that cancellation under statute is effective when notice given to named but not additional

insured); Franklin Mut. Ins. Co. v. Security Indem. Ins. Co., 275 N.J. Super. 335, 340-41

(App. Div.), certif. denied 139 N.J. 185 (1994) (recognizing validity of endorsement

restricting additional insured status to claims arising out of leased premises).

This distinction between named insureds and additional insureds – that the

former enjoy greater coverage – is logical because additional insureds typically do not

directly pay premiums for coverage they receive under the named insured's policy. The

additional insured's consideration is its performance under its contract or lease with the

named insured. In fact, in most cases, the named insured actually pays an additional

premium for the additional insured coverage.

III. THE SCOPE OF COVERAGE FOR ADDITIONAL INSUREDS

Typically, a property owner or builder/contractor that is a party to a lease or

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construction contract requires that it be named as an additional insured on its lessee's,

contractor's or subcontractor's CGL policy. The lessee/contractor/subcontractor (i.e.,

named insured) then should purchase an additional insured endorsement for its CGL

policy covering the property owner or builder/contractor. If the named insured breaches

the promise to obtain insurance, it should be liable for all resulting damages pursuant to

general contract law, which may "equal[] the amount due under the policy provided it

had been obtained." See Robinson v. Janay, 105 N.J. Super. 585, 591 (App. Div.),

certif. denied 54 N.J. 508 (1969); see also Carvalho v. Toll Bros. and Developers, 278

N.J. Super. 451, 466 (App. Div. 1995), aff’d 143 N.J. 565 (1996) (finding breach of

contract "by failing to name Bergman as an additional insured"); Cromartie v. Carteret

Sav. & Loan, 277 N.J. Super. 88, 98-99, 108 (App. Div. 1994) (finding damages for

breach of contract to maintain fire insurance to be "amount that they would have been

entitled to receive under their fire insurance policy"); Antenucci v. Mr. Nick's Men's

Sportswear, 212 N.J. Super. 124,130-31 (App. Div. 1986) (finding tenant liable to

landlord for failing to provide contract for insurance). Insurance coverage generally

does not exist under a CGL policy for that breach. See infra, at 25-34.

If the named insured procures the additional coverage as promised, then the

property owner or builder/contractor (i.e., additional insured) has a second line of

coverage (in addition to its own) to pursue in the event of loss. Because the additional

insured may be entitled to coverage under two policies for the same loss, disputes often

occur between the additional insured's own carrier and the named insured's carrier,

which issued an additional insured endorsement on behalf of the additional insured,

over which carrier provides the primary coverage.

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A. ADDITIONAL INSURED COVERAGE FOR OWNERS/CONTRACTORS

A typical additional insured endorsement for owners or contractors provides that

"WHO IS AN INSURED (Section II) is amended to include as an insured the person or

organization shown in the Schedule, but only with respect to liability arising out of 'your

work' for that insured by or for you." See County of Hudson v. Selective Insurance Co.,

332 N.J. Super. 107, 112 (App. Div. 2000). As with the endorsement in the landlord/

tenant context, this endorsement limits coverage for the additional insured to liability

"arising out of the named insured's work. Thus, coverage will turn on whether the

additional insured's liability arises out of the named insured's work.

Not surprisingly, the courts have employed the same analysis in the construction

context as in the landlord/tenant context. See County of Hudson, supra, 332 N.J.

Super. at 114-15 (citing Franklin and Harrah's, among others). In County of Hudson, the

County contracted with Malpere Enterprises, Inc. ("Malpere"), as general contractor, to

perform work at the William Brennan Courthouse in Jersey City. ld. at 110. The

contract obligated Malpere to name the County as an additional insured on Malpere's

liability policy, and it did so. See ibid. The policy issued to Malpere included the

additional insured endorsement quoted above. Id. at 112.

Prior to commencement of work on the courthouse, an employee of a

subcontractor was injured while at the courthouse seeking information to prepare a bid.

Id. at 110. The employee sued the County, which sought coverage from Malpere's

insurer. Ibid. The insurer denied coverage on the ground that the employee was not

engaged in Malpere's work when he was injured. Ibid.

In reversing the trial court's judgment in favor of the insurer, the Appellate

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Division interpreted the phrase "arising out of “your work” as a matter of first impression.

Id. at 114. It concluded that the phrase meant "originating from" or "growing out of

Malpere's work, applying the analysis employed in Franklin and Harrah's. See id. at

115. In determining whether the occurrence giving rise to the County's liability arose out

of Malpere's work, the court concluded that the word "work" was ambiguous because it

was capable of more than one meaning. Ibid. Moreover, the court determined that the

use of the term "operations" in the definition of "your work" meant that the endorsement

encompassed more than just Malpere's physical work, but included administrative work

such as a subcontractor visiting the site to obtain information to bid the job. Ibid.

Accordingly, the court held that the employee's .`presence at the worksite, and the

ensuing accident, was sufficiently connected to Malpere's 'work' for the County to

constitute a 'substantial nexus' between the contract and the contractor's 'work'

requiring [Malpere's insurer] to cover the loss." Id. at 117.

County of Hudson is the seminal additional insured coverage case in the

construction context for additional insured endorsements utilizing the “arising out of”

language.

In 2004, ISO promulgated new additional insured forms that attempted to narrow

the scope of coverage offered to an additional insured by changing the “arising out of”

language to “caused, in whole or in part, by.” Typically, these endorsements provide

that they apply only to bodily injury or property damage caused, in whole or in part, by

the named insured’s acts or omissions or the acts or omissions of those acting on

named insured’s behalf.

Additional insured endorsements containing the “caused in whole in part”

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language have been not been addressed in a published decision in New Jersey. One

was addressed in the unpublished decision in Schafer v. Paragano, 2010 N.J. Super.

Unpub. LEXIS 356 (App. Div. Feb. 24, 2010), certif. denied, 202 N.J. 45 (2010).

Schafer, a per curiam opinion, reversed an Order of the trial court that directed the third-

party defendant, Harleysville Insurance Company, to provide a defense and

indemnification to the third-party plaintiff, Paragano Custom Building, Inc. (“Paragano”),

the general contractor. Id. slip op. at 2. The Supreme Court subsequently denied the

petition for certification.

Paragano sought additional-insured coverage under its subcontractor, K&D

Builders’ (“K&D”) policy for bodily injury sustained by the plaintiff, an employee of K&D.

Id. slip op. at 2. The policy at issue provided that Paragano was covered “only with

respect to liability . . . caused, in whole or in part, by [K&D’s] acts or omissions; or . . .

[t]he acts or omissions of those acting on [K&D’s] behalf . . . .” Id. at 6. There, the

plaintiff fell from a ladder that he had placed on a scaffold erected by Paragano. Id. at

2-3. Prior to trial the case settled. Paragano’s insurer as well as Harleysville each paid

the same amount to the plaintiff’s estate. The parties agreed that the total settlement

paid represented “the full, net value of the underlying action…taking into account the

comparative negligence of [the plaintiff.]” The insurers also agreed that there was no

evidence or claim that any act or omission of K&D caused the plaintiff’s accident in

whole or in part.

In reversing the trial court, the Appellate Division ruled that the policy did not

provide coverage for Paragano’s own acts or omissions. Id. at 6-7. The court stated

that by its very terms, the policy issued to K&D simply did not cover Paragano for

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Paragano’s own acts of negligence. Rather, the policy provided that Paragano was

covered “only with respect to liability . . . caused, in whole or in part,” by K&D’s acts or

omissions; or the acts or omissions of those acting on K&D’s behalf.

The Court perceived no ambiguity. It held that “the words of the policy are clear

in providing coverage to Paragano only for liability that is caused in whole or in part by

the acts or omissions of K&D. The policy does not provide coverage for liability caused

by Paragano’s own acts or omissions.” The Court added that while the endorsement

provided coverage for a claim asserted against Paragano for vicarious liability, it did not

provide coverage for a claim against Paragano for its own direct negligence. It

concluded that “coverage for such claims rests with Paragano’s own liability insurer, not

K&D’s.” This, however, appears to be the minority view.

Nationwide, the above endorsement has been found to trigger a duty to defend

where the named insured is named in the complaint and is alleged to be negligent.1

See Penn Nat’l Mut. Cas. Ins. Co. v. ISPCO Steel, 2008 U.S. Dist. LEXIS 20246 (S.D.

Ala.) (noting that the insurer after investigation reversed its denial of additional insured

coverage when the defendants in the underlying action accused plaintiff of contributory

negligence and the policy extended such coverage with respect to liability caused in

whole or in part by plaintiff employer’s acts or omissions or those acting on the

employer’s behalf); Town of Plainfield v. Select Energy Contracting, Inc., 2007 Conn.

Super. LEXIS 2923 (granting summary judgment in favor of Zurich when it properly

denied coverage under its policy that provided additional insured coverage but only with

1 In the past, we have successfully argued on behalf of Zurich that the “caused, in whole or in part” language in the endorsement gives rise to an insurer’s duty to defend when the allegations of a pleading allege negligence against the named insured or comparative negligence against the named insured’s employee. See Joan Sacks, et al. v. Sweetwater Construction Corp., et al., Zurich Claim No. 9530037298-001 (outlined in attached chart).

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respect to liability for personal injury caused, in whole or in part, by the named insured’s

acts or omissions where the underlying plaintiff at no time alleged that the named

insured was involved in the underlying tort); Am. Empire Surplus Lines Ins. Co. v. Crum

& Forster, 2006 U.S. Dist. LEXIS 33556 (S.D. Tx. 2006) (concluding that an additional

insured is entitled to a defense under the policy if the operative pleading in the

underlying action alleges a claim against the general contractor on some conduct by the

sub-contractor despite allegations of some wrongful act or omission of the general

contractor); The Clark Construction Group, Inc. v. Modern Mosaic Ltd., 2000 U.S. Dist.

LEXIS 22922 (D. Md. 2000) aff’d, 2001 U.S. App. LEXIS 22432 (4th Cir. 2001) (an

allegation of contributory negligence asserted against the plaintiff/subcontractor’s

employee can trigger a defense obligation under an additional insured endorsement that

limits coverage to acts or omissions caused in whole or in part by the subcontractor’s

employee).

In American Empire, supra, the court stated that the “in whole or in part” phrase

focused on whether the named insured was partially or wholly responsible for the

plaintiff’s death and the additional insured’s liability for same. The court rejected the

argument that the endorsement was limited to when the additional insured is alleged to

be vicariously liable for the acts or omissions of the named insured. Specifically, the

court stated that if the insurer wanted to limit the coverage to vicarious liability, it was

free to draft an endorsement that specifically limited the coverage. Id. at *24-25.

Having not done so, the insurer could not read into a clause an unstated limitation that

barred coverage.

More recently, a federal district court in New Hampshire reviewed the few cases

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analyzing the phrase “caused, in whole or in part” set forth in an additional insured

endorsement. The federal district court agreed with those courts that have interpreted

the phrase “caused, in whole or in part” to mean that coverage extends to the additional

insured when the occurrence is attributable in part to acts or omissions of both the

named insured and the additional insured. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v.

NGM Ins. Co., 2011 U.S. Dist. LEXIS 147266 (D.N.H. Dec. 21, 2011) *11-12 (citations

omitted.)

In Dale Corp. v. Cumberland Mut. Fire Ins. Co., 2010 U.S. Dist. LEXIS 127126

(E.D. Pa. Nov. 30, 2010), the court addressed the additional insured endorsement at

issue. Dale involved a construction site accident where Nesmith was required to name

Dale as an additional insured. Dale was sued by another contractor’s employee when

the employee used, without permission, equipment owned by Nesmith. Although the

plaintiff initially filed suit against Dale, it later amended its complaint to name Nesmith.

Dale sent a demand for coverage to Nesmith’s insurer, Cumberland Mutual.

Cumberland denied the demand arguing that the “caused, in whole or in part by”

language means that Nesmith’s acts or omissions had to be the proximate cause of

plaintiff’s injuries. Alternatively, Dale contended that it meant that Nesmith’s acts or

omissions need only have been the “but for” cause of the plaintiff’s injuries. Id. at *12.

The court stated that no Pennsylvania court had interpreted the additional

insured endorsement. The court noted that ISO had introduced the revised version of

this additional insured endorsement in response to courts’ interpretation of its prior

versions. The court further noted that ISO eliminated the “arising out of” language and

“specifically excluded injury…arising out of the sole negligence of the additional

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insured.” Id. at 16. ISO hoped that by substituting “caused by” for “arising out of,” a

narrower coverage would be afforded to the additional insured for liability arising out of

the named insured’s acts or omissions; not simply the named insured’s operations.

According to ISO, “the absence of fault on behalf of the named insured results in a

finding of no coverage for the additional insured.” The court concluded that this history

“significantly undercut[ ] Dale’s argument that a simple ‘but for’ test is what was

intended…[by] the words ‘caused by’…” Id. at *17. The court went on to further cite an

ABA Forum article on the new additional insured endorsement. According to the

commentator “[t]he only allegations that would fall clearly outside the coverage

provisions of the new additional insured endorsements, however, would be explicit

allegations of the additional insured’s sole fault. Id. at *21, n.6.

Thus, the court concluded that the drafter’s history supported a conclusion that

“the additional insured provision requires a showing that Nesmith’s acts or omissions

were a proximate cause of [plaintiff’s] injuries to trigger the policy coverage.” Id. at *21.2

(Emphasis added.)

B. OTHER INSURANCE

The determination of whether a person or entity is entitled to additional insured

coverage does not necessarily end the coverage analysis because that person or entity

often has its own coverage. Thus, two (or more) carriers potentially are insurers of the

same risk. The question then becomes how to apportion the loss. The answer requires

2 The federal court in Dale found that Cumberland had no duty to defend based on the posture of the pleadings. The initial complaint did not trigger Cumberland’s duty to defend as it was filed solely against Dale and there was no allegation that Nesmith was at fault. The third-party complaint did not trigger Cumberland’s duty to defend because that pleading contained only the allegations of the putative additional insured, not the underlying plaintiff. Finally, the second complaint did not trigger Cumberland’s duty to defend because Dale was not named in the second complaint.

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an analysis of the "other insurance" clauses in each of the concurrent policies.

Most policies contain such clauses to address how the policy will be interpreted

in the event that more than one insurance contract applies. Those provisions attempt to

limit the application of the given policy, and at time attempt to eliminate the insurance

altogether. G. Kenny, F. Lanai, N.J. Insurance Law § 2.18 at 57 (2000). There are

generally three types of other insurance clauses: (a) "pro rata" clauses, (b) "escape"

clauses, and (c) "excess" clauses. See id. at 58; see also Owens-Illinois, Inc. v. United

Ins. Co., 138 N.J. 437, 470 (1994) (quoting 3 Rowland 1-1, Long, The Law of Liability

Insurance § 22.01 (1992) (identifying three types of clauses and addressing their

application)). Whether a policy is primary or excess, or provides concurrent insurance,

and the extent to which is must contribute to a loss is governed by these "other

insurance" clauses. Royal Ins. Co. v. Rutgers Cas. Ins. Co., 271 N.J. Super. 409, 415

(App. Div. 1994); American Home Assurance Co. v. Hartford Ins. Co., 190 N.J. Super.

477, 489 (App. Div 1983); Selected Risks Ins. Co. v. Nationwide Ins. Co., 133 N.J.

Super. 205, 212 (App. Div. 1975).

A pro rata clause calls for the insurer to pay its pro rata share of a less in

proportion to the aggregate limits of other existing insurance. A typical pro rata clause

states:

If the insured has other insurance against a loss covered by this policy the company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability stated in the declarations bears to the total applicable limit of liability of all valid and collectible insurance against such loss.

[Atlantic Mut. Ins. Co. v. Continental Nat. Am. Ins, Co.,123 N.J. Super. 241, 244 (Law Div. 1973).]

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An excess clause typically provides that a policy is excess if "any other valid and

collectible insurance" is available. See Avemco Ins. Co. v. U.S. Fire Ins. Co., 212 N.J.

Super. 38, 47 (App. Div. 1986); see also Atlantic Mutual, supra, 123 N.J. Super. at 245

(addressing excess clause providing that "policy is in excess of all other valid and

collectible insurance"). An escape clause provides that an insurer is absolved of all

liability if other coverage is available. See Childs v. New Jersey Mfrs. Ins. Co., 109 N.J.

Super. 441, 448 (App. Div. 1985), rev’d on other grounds, 108 N.J. 506 (1987).

Conversely, an excess-escape clause provides that the insurer is liable for that amount

of a loss exceeding other available coverage and that the insurer is not liable when

other insurance has limits equal to its own. Ibid.

If concurrent policies contain non-contradictory "other insurance" clauses, New

Jersey courts will normally follow and apply the specific language in each. Cf. Royal,

supra, 271 N.J. Super. at 416 (holding "other insurance" clause clear, unambiguous and

enforceable). For example, if one policy contains a "pro rata" clause and the other an

"excess" clause, the courts will treat the "pro rata" clause as primary and the "excess"

clause as secondary. Cosmopolitan Mut. Ins. Co. v. Continental Cas. Co., 28 N.J. 554,

561-62 (1959); Harleysville Ins. Co. v. Crum & Forster Personal Ins., 246 N.J. Super.

503, 508-09 (App. Div. 1990); Avemco Ins. Co., supra, 212 N.J. Super. at 47. Where

the "other insurance" clauses conflict (i.e., are the same), the courts will disregard them

as being "mutually repugnant," thereby requiring a sharing of the loss. Cosmopolitan,

supra, 28 N.J. at 562; see also American Nurses Ass'n v. Passaic Gen. Hosp., 98 N.J.

83, 91 (1984) (following Cosmopolitan); Selected Risks, supra, 133 N.J. Super. at 212

(observing that two policies with pro rata clauses are both primary and concurrent for a

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share of the loss); Prudential Property & Cas. Ins. Co. v. New Hampshire Ins. Co., 164

N.J. Super. 184, 190 (Law Div. 1978) (citing Cosmopolitan).

Consideration also should be given to whether self-insured retentions or

deductibles (as opposed to insurance policies) qualify as "other insurance" that must

contribute to a loss. In the continuous injury context, the Supreme Court has held that

where multiple policy years are triggered, it is reasonable to expect a policyholder to

share in loss allocation for those triggered years in which the policyholder decided to

assume or retain the risk. Owens-Illinois, supra, 138 N.J. at 479. In cases involving

concurrent coverage, the court has reached a seemingly different conclusion. In

American Nurses, the court held that an insured's obligation to pay a deductible or self-

insured sum did not constitute "other insurance" triggering a policy's "excess" other-

insurance clause. See American Nurses, supra, 98 N.J. at 88. Relying on the

"reasonable expectations" doctrine, the court rejected the insurer's interpretation, which

would have resulted in the insured funding the deductible before two excess policies

could be called on to pay. Id. at 88-90.

Notwithstanding the American Nurses opinion, self-insured retentions and

deductibles can sometimes be called on to contribute to a loss. Thus, the mere fact that

a policyholder is self-insured does not necessarily mean there is no "other insurance."

C. THE EFFECT OF CERTIFICATES OF INSURANCE

Written contracts pursuant to which one party agrees to procure insurance for

another usually also obligate the procuring party to obtain certificates of insurance to

reflect the addition. To accomplish that, the named insured ordinarily turns to its broker

to obtain the certificate. Many times, however, certificates are issued that purport to

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add parties to policies when no change to the policy has been made. The question then

becomes what the effect is of the certificate on the scope of coverage.

As a general matter, the New Jersey courts have recognized that a certificate of

insurance is not a contract of insurance but merely is evidence that a contract has been

issued. See Wells v. Wilbur B. Driver Co., 121 N.J. Super. 185, 197 (Law Div 1972);

13A Appleman, Insurance § 7530 (1976 & Supp. 1998). Thus, a certificate of

insurance, standing alone, should not be sufficient to create coverage for an additional

insured.

In New York, the Appellate Division has held that a "certificate is insufficient, by

itself, to establish that the plaintiff was insured." American Ref-Fuel Company v.

Resource Recycling, Inc., 671 N.Y.S.2d 93, 96 (2d Dept. 1998). There, plaintiff had

entered a contract with Resource Recycling, Inc. ("Resource"). Id. at 95. Resource in

turn entered a subcontract pursuant to which the subcontractor was obligated to

purchase a policy that named plaintiff as an additional insured. Ibid. The subcontractor

requested that its broker add the plaintiff as an additional insured to its policy, and the

broker issued a certificate of insurance to that effect. Id. at 95-96. Nevertheless,

plaintiff never actually was named as an additional insured under the subcontractor's

policy. Id. at 96.

The court noted initially that the certificate at issue "recited that it was 'a matter of

information only and confer(red) no rights upon' the plaintiff." Ibid.; see also SLA

Property Management v. Angelina Casualty Co., 856 F.2d 69, 73 n.6 (8th Cir. 1988);

TayIor v. Kinsella, 742 F.2d 709, 711 (2d Cir. 1984); ACORD Certificate of Liability

Insurance. Because the subcontractor's policies "conclusively establish that the plaintiff

- 18 -

was never named as an additional insured," the subcontractor's insurer was not

obligated to defend and indemnify the plaintiff. Resource Recycling, supra, 671

N.Y.S.2d at 96; see also Taylor, supra, 742 F.2d at 711 (pointing out that where

certificate states it is subject to terms of policy, policy controls).

The plaintiff in Resource Recycling also argued that the insurer should be

estopped from denying coverage by virtue of the issuance of a certificate of insurance

naming it as an additional insured. 671 N.Y.S.2d at 96. The court flatly rejected that

contention, even assuming the broker was the insurer's agent, noting that "the doctrine

of estoppel may not be invoked to create coverage where none exists under the policy."

Ibid. In other words, because plaintiff was not added as an insured – i.e., no coverage

existed under the policy for plaintiff -- plaintiff could not create coverage by virtue of the

doctrine of estoppel.

No New Jersey published decision has directly addressed whether a certificate of

insurance alone can establish that a person or entity is an insured under a general

liability policy. The courts have, however, recognized that "equitable estoppel is

available, under appropriate circumstances, to bring within insurance coverage risks or

perils which are not provided for in the policy or which are expressly excluded." Harr v.

Allstate Ins. Co., 54 N.J. 287, 307 (1969). The Harr court held:

[W]here an insurer or its agent misrepresents, even though innocently, the coverage of an insurance contract, or the exclusions therefrom, to an insured before or at the inception of the contract, and the insured reasonably relies thereupon to his ultimate detriment, the insurer is estopped to deny coverage after a loss on a risk or from a peril actually not covered by the terms of the policy.

[Id. at 307-08.]

- 19 -

This holding can bear on coverage made by additional insureds. A short

hypothetical is illustrative. In many cases, insureds secure additional insured coverage

and certificates of insurance from their brokers by way of a simple phone call. Suppose

the broker performs no due diligence and, as in Resource Recycling, issues a certificate

of insurance identifying the additional insured without notifying the insurer. In New

Jersey, can the insurer be equitably estopped under Harr by virtue of the broker's

conduct?

As a matter of elementary agency law, the negligence of an employee-agent is imputable to the employer-principal, who must answer for it....Ordinarily, however, and absent special circumstances, the negligence of a non-employee agent, an independent contractor, is not imputed to the principal. And it has long been recognized that this non-imputation applies in the case of an independent broker placing insurance for a client with an insurance company.

[Johnson v. Mac Milian, 233 N.J. Super. 56, 61-62 (App.Div.) (citations omitted), summarily remanded on other

grounds, 118 N.J. 199 (1989).]

In Johnson, the court noted that the broker/agent's status there was a hybrid one

because although the agency agreement declared that the broker/agent was an

independent contractor, the agreement also specified certain acts for which the insurer

accepted responsibility. Id. at 62. Thus, the court held that when the broker/agent

acted within the scope of authority outlined by the terms of the agency agreement, its

acts were imputed to the insurer. Id. at 62-63.

Like the agreement in Johnson, many agency agreements expressly state that

the agent is an independent contractor. The agreements nevertheless grant certain

authority to the agent, including the authority to bind coverage. Thus, agents executing

- 20 -

this type of agreement have a hybrid role. See Johnson, supra, 233 N.J. Super. at 62.

In our hypothetical if the issuance of a certificate of insurance is within the scope of the

agent's authority under the agency agreement, the insurer can be estopped from

disputing that the person or entity is an additional insured based on Harr. The insurer

may, of course, have recourse back against the agent for indemnity; however, that

indemnity may be limited.

Another important aspect of certificates of insurance is the section of the

certificate that purports to describe any additional coverages. Certificates often are

issued to parties that are not to be added as insureds, and those parties simply will be

identified on the certificate as the "Certificate Holder." Unless there is some indication

in the "Description of Operations/Locations/Vehicles/Special Items" section that the

holder is entitled to some coverage benefit, the holder ordinarily should have no rights

under the policy. This is stated plainly on the face of the certificate.

This shows the importance of gathering all relevant documents for additional

insured coverage claims. This must include any underlying agreement between the

parties, any certificates of insurance for a putative insured, and also any agency

agreement that may exist between the insurer and the broker/agent. Although a simple

review of the policy may indicate that an entity never was added as an insured, that

entity may have a certificate of insurance from the insurer's authorized agent indicating

otherwise. The existence of that document certainly will bear on any final coverage

determination.

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IV. BREACH OF CONTRACT FOR FAILURE TO OBTAIN INSURANCE

As noted at the outset, leases and construction contracts generally include

provisions obligating one party (i.e., the named insured) to purchase insurance for

another party (i.e., the additional insured). If the named insured does not purchase the

insurance as it promised, the putative additional insured often sues both the named

insured and the named insured's insurer. In the latter instance, the additional insured

often claims that by virtue of the named insured's contractual promise to procure

insurance, the additional insured is entitled to coverage under the named insured's

policy. The named insured itself may also sue its insurer for coverage for the breach of

contract claim. In both cases, the insureds look to the contractual-liability coverage

provided under a CGL policy to support their claims.

Contractual liability coverage issues most often arise out of an exception to the

contractual liability exclusion in the policy. For example, one typical clause states, in

part, that insurance under the policy does not apply to:

"Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:

* * *(2) Assumed in a contract or agreement that is an"insured contract",....

[ISO CGL Form.]

The exception to the exclusion naturally leads to the definition of "insured

contract," which under the ISO CGL Form includes six examples, including leases and

that portion of any contract relating to the named insured's business under which the

- 22 -

named insured assumes the tort liability of another. It is no wonder, then, that additional

insured coverage issues are most prevalent in landlord/tenant and construction cases.

It seems that case law in this area has been slow to develop in New Jersey

inasmuch as research reveals only a single reported case that addresses directly the

issue of whether coverage for breach of a contract to procure insurance is covered

under a CGL policy. See Karadis Bros. Painting Co. v. Pennsylvania National Mut. Cas.

Ins. Co., 119 N.J. Super. 446 (Ch. Div. 1972). Karadis arose out of a wrongful death

action instituted by the estate of an employee of Karadis due to a fall from allegedly

defective scaffolding. Id. at 449. Karadis was impleaded in a third-party action

instituted by the lessor of a motorized hoisting device being used by Karadis at the time

of the accident. Ibid. One of the counts in the third-party action was for breach by

Karadis of its alleged contractual obligation to supply insurance coverage for the lessor.

Ibid. Karadis in turn instituted its declaratory judgment action against Pennsylvania

National.

Concerning the count relating to breach of the contract to procure insurance, the

court held that it was "not within the scope of the policy in question." Karadis, supra,

119 N.J. Super. at 453. The basis for that holding was that the liability assumed by the

named insured did not fall within any of the five enumerated "incidental contracts" for

which there was an exception to the contractual liability exclusion. Ibid. In other words,

because the contract to procure insurance was not an "incidental contract" – i.e., a

contract defined in the policy to be excepted from the exclusion – liability assumed

pursuant to it was excluded by virtue of the contractual liability exclusion.

Despite the dearth of New Jersey case law on this subject, this issue has been

- 23 -

the subject of numerous extra-territorial decisions throughout the country. Those courts

generally have expanded on the Karadis holding and have concluded that contractual-

liability insurance provides coverage for the insured's contractual assumption of the tort

liability of another party; it does not provide coverage for the insured's contractual

agreement to procure insurance for another party, regardless of whether the promise is

contained in a defined (e.g., "incidental") contract. See, e.g., Musgrove, supra, 898

F.2d 1041; Giancristoforo v. Mission Gas and Oil Products, 776 F. Supp. 1037 (F.D. Pa.

1991); Aetna Cas. & Sur. Co. v. Spancrete, Inc., 726 F. Supp. 204 (N.D.

Ill.1989);Reliance Ins. Co. v. Gary C. Wyatt, Inc., 540 So.2d 688 (Ala. 1989); Olympic v.

Providence Washington Ins. Co., 648 P.2d 1008 (Alaska 1982); Office Structures, Inc.

v. Home Ins. Co., 503 A.2d 193 (Del. 1985); Pyles v. Pennsylvania Mfrs. Ass'n Ins. Co.,

600 A.2d. 1174 (Md. App.), certif. denied 607 A.2d 7 (Md. 1992); Holman Erection Co..

Inc. v. Employers Inc. of Wausau, 920 P.2d 1125 (Or. App.), review denied, 927 P.2d

600 (Or. 1996).

The Supreme Court of Alaska's decision in Olympic, supra, 648 P.2d 1008, is

often cited to illustrate this point. In Olympic, the insured, Alaskan General, Inc.

("Alaskan General"), entered into a lease agreement with its landlord, Olympic. Among

other things, the lease required Alaskan General to procure insurance in the minimum

amount of $300,000 and to identify Olympic as a named insured. Id. at 1009. Although

Alaskan General procured an insurance policy with Providence Washington Insurance

Company of Alaska ("Providence"), which provided comprehensive general liability

insurance and contractual liability insurance, Alaskan General failed to name Olympic

as a named insured. Ibid.

- 24 -

Under that general liability insurance policy, Providence agreed, in pertinent part,

to pay on behalf of the insured (Alaskan General) all sums that the insured shall

become legally obligated to pay as damages because of:

A. bodily injury; or

B. property damage to which this insurance applies, caused by an occurrence....

[Id. at 1010.]

Immediately following the insurance agreement, the policy set forth what commonly is

referred to as a "contractual liability exclusion," which provided as follows:

This insurance does not apply:

(a) to l iabil i ty assumed by the insured under anycontract or agreement except an incidental contract;

[Ibid.]

The policy defined an "incidental contract" as "any written...lease of premises," among

other thins. Ibid.

While both the lease agreement and the Providence policy were in effect, a

wrongful death action was instituted against Olympic and others by the estate of a

firefighter who died extinguishing a blaze in a store that Alaskan General operated.

Ibid. Olympic's insurer, Chicago Insurance Co. ("Chicago"), paid $600,000 on behalf of

Olympic to settle that matter. Ibid. Thereafter, Chicago instituted an action against

Providence seeking indemnification for $300,000 of that settlement. Ibid.

Because it was undisputed that "[i]f Alaskan General had fulfilled the lease

agreement to provide $300,000 in insurance for Olympic, Chicago would have been

- 25 -

saved $300,000 of the wrongful death settlement," Chicago claimed entitlement to that

amount from Alaska General's insurer, Providence. Ibid. Chicago contended that

because the Providence policy's contractual liability exclusion precludes coverage for

"liability assumed by the insured under any contract...except an incidental contract," by

implication, the policy must insure against liability under any contract defined as

"incidental." Ibid. Chicago further argued that because the Providence policy included

a lease agreement in its definition of an "incidental contract," Alaskan General's breach

of the incidental contract – i.e., the lease agreement – due to its failure to name Olympic

as an insured gave rise to liability covered by the policy. Ibid.

The Olympic court disagreed with Chicago's contentions. Initially, the court

recognized that "in order to be covered under the general liability policy, a contract must

not only be 'incidental' within the meaning of the policy, but it must also be a contract in

which liability is assumed." Ibid. In that regard, the Olympic court concluded that the

policy's reference to "liability assumed by the insured under any contract" "refers to

liability incurred when one promises to indemnify or hold harmless another, and does

not refer to the liability that results from a breach of contract." Id. at 1010-11.

A critical distinction exists between a contract to assume liability for another's

negligence (e.g., an indemnity agreement) and a contract to purchase insurance. An

agreement wherein the insured agrees to procure insurance for another party is merely

an agreement to transfer the cost of liability insurance; it is not an attempt to transfer

liability for another's negligence. Id. at 1010-11. Therefore, the Olympic court

concluded that Alaskan General's "contractual obligation to procure insurance was not a

`hold harmless' or 'indemnification' agreement resulting in insurance coverage." Ibid.

- 26 -

It should be noted that Chicago had argued alternatively that Providence was

obligated to pay $300,000 because "this $300,000 constitutes 'sums,' within the

meaning of the policy, 'which the insured (became) legally obligated to pay as damages

because of...bodily injury' to the firefighter." Id. The Olympic court dismissed that

contention as well. The court held that "the term 'legally obligated to pay as damages

because of...bodily injury' refers to liability imposed by law for tort, and not for damages

for breach of contract, except contracts for indemnity." Id. at 1012. Accordingly, the

court held that the insured's breach of its obligation to procure insurance was not

covered under the contractual liability coverage of the policy. Ibid.; see also Data

Specialties, Inc. v. Transcontinental Ins. Co., 125 F.3d 909, 912-13 (5th Cir. 1997)

(recognizing that "the insured must be liable for damages arising from its own tortious

conduct to trigger liability insurance coverage. A breach of contract action does not fall

within CGL coverage."); Redevelopment Auth. v. International Ins. Co., 685 A.2d 581,

592 (Pa. Super. 1996) (holding that general liability policy did not provide coverage for

insured's alleged breaches of contractual duties), appeal denied, 695 A.2d 787 (Pa.

1997); Isle of Palms Pest Control Co. v. Monticello Ins. Co., 459 S.E.2d 318, 320 (S.C.

App. 1994) (noting that "[a] general liability policy is intended to provide coverage for tort

liability for physical damage to the property of others; it is not intended to provide

coverage for the insured's contractual liability which causes economic losses"), aff’d 468

S.E.2d 304 (S.C. 1996); First Wyoming Bank. N.A., Jackson Hole v. Continental Ins.

Co., 860 P.2d 1094, 1099-1101 (Wyo. 1993) (noting that it "previously held that

comprehensive general liability policies cover tortious acts but do not cover claims for

beach of contract").

- 27 -

Similarly, in Musgrove, supra, the insured, LCE, breached its contractual

obligation to name Citgo as an additional insured under its comprehensive general

liability policy with St. Paul Insurance Company ("St. Paul"). 898 F.2d at 1044. Citgo

contended that the St. Paul policy afforded coverage for that contractual breach

"through an endorsement providing blanket contractual coverage." Ibid. The Musgrove

court held, however, that contractual liability coverage "is coverage for the insured's

contractual assumption of the liability of another party. It typically is in the form of an

indemnity agreement." Ibid. Accordingly, the Musgrove court held that Citgo was not

entitled to insurance coverage under the St. Paul policy by virtue of LCE's breach of its

obligation to purchase insurance for Citgo. Ibid.

The court's opinion in Aetna Casualty & Surety Co. v. Spancrete, Inc., supra, also

is instructive. In Aetna, the insured, Spancrete, which was a subcontractor, entered into

a construction contract with the general contractor, Power Contracting & Engineering

Corporation ("Power"), in which Spancrete agreed to name Power as an additional

insured in certain liability policies that covered Spancrete's work at the site. 726 F.

Supp. at 206. Spancrete, however, failed to identify Power in that fashion in its CGL

insurance policy issued by Aetna. Ibid. In dismissing the insured's claim that its breach

of the agreement to procure insurance should be covered by the policy provision that

extended coverage to liability assumed under the insured's contracts, the Aetna court

noted that agreeing to obtain insurance naming another as an insured is not equivalent

to agreeing to assume the liability of another. Id. at 207. "Contractual liability coverage"

"afford[s] coverage [only] for liability assumed by a contractual provision, not liability

arising out of a breach of a contractual provision." Ibid.

- 28 -

In New Jersey, the Karadis court, and the Supreme Court before it in Ohio

Casualty, recognized that the contractual-liability exclusion precluded coverage for

undefined contracts in which one party agrees to indemnify or hold harmless another.

Ohio Casualty, supra, 44 N.J. at 521,22; Karadis, supra, 119 N.J. Super. at 451. If,

however, such a contract falls within the definition of "incidental contract" (today,

"insured contract") – for example, a lease – the insured is entitled to coverage for that

liability. See Ohio Casualty, supra, 44 N.J. at 521-22; Karadis, supra, 119 N.J. Super at

451. Though Karadis expressly held that breach of a contract to procure insurance was

not covered under the policy at issue, it did so because the contract was not an -

incidental contract." 199 N.J. Super. at 453. As noted above, the out-of-state cases go

beyond Karadis and hold that even if the agreement to procure insurance is an

"incidental" or "insured" contract - for example, a lease - the insured's liability for breach

of that contract still is not covered because it is not the assumption of the tort liability of

another for bodily injury or property damage. It would seem that conclusion follows

logically from the holdings in Karadis and Ohio Casualty.

The cases above demonstrate that coverage claims based on a breach of an

agreement to procure insurance take on two forms. First, the named insured may sue

for coverage for any liability it may have to the putative additional insured. Second, the

putative additional insured may sue for coverage claiming it is entitled to additional

insured status by virtue of the named insured's contractual promise to procure

insurance. Those cases firmly establish that neither scenario is covered under the

named insured's CGL policy. In the first instance, breach of a contract to procure

insurance does not fall within the contractual liability coverage typically provided under a

- 29 -

CGL policy. In the second instance, the mere fact that the named insured agreed to

add another insured under the policy does not change the policy language. Where the

putative additional insured is in fact not added as an insured, the policy governs and

there should be no coverage.

As with many complex coverage issues, the resolution of the question of whether

a breach of contract to procure insurance is covered or creates coverage does not

necessarily end the insurer's inquiry. That is because as noted above, commercial

leases and construction contracts often include broad indemnity agreements whereby

the named insured agrees to indemnify and hold harmless the putative additional

insured. Those agreements may actually provide a back door to the named insured's

coverage even though the putative additional insured never was named in the policy.

The above cases all stand for the proposition that contractual-liability coverage

under the CGL policy encompasses the tort liability assumed by a named insured

pursuant to a contractual indemnity agreement. Thus, ordinarily the named insured is

covered under its CGL policy for this contractually assumed liability. In those instance

in which the named and putative additional insured are both sued, the putative

additional insured often will cross-claim against the named insured for not only breach

of contract for failure to procure insurance, but also for contractual indemnity. The latter

typically is covered while the former is not. Thus, the named insured's insurer must

defend and indemnify the named insured for any liability it may have pursuant to the

contractual indemnity clause in the underlying contract.

If the indemnity obligation of the named insured is broad enough, this exposure

can prove much greater to the insurer than if it had merely accepted coverage on behalf

- 30 -

of the additional insured. That is because only the named insured's insurer covers the

contractual indemnity obligation and so it will be 100% liable for its insured's liability. In

the additional insured context, the named insured's insurer may be able to secure

contribution from any other coverage the additional insured has on its own. Typically

the additional insured's insurer will be providing a defense to the additional insured

pending resolution of the additional insured's contractual indemnity claim against the

named insured and any coverage claim against the named insured's insurer. It

therefore may welcome a cost-sharing proposal rather than further litigation.

V. CONCLUSION

Issues concerning coverage for additional insureds arise in many different

contexts, although we see them most often in cases involving commercial leases or

construction contracts. Because the rights of an additional insured often are inextricably

intertwined with the underlying contractual obligations of the parties, it is always critical

to obtain a copy of the underlying contract at issue when evaluating a claim. It also is

important to identify the nature of the claim being made and by whom, so that coverage

claims can be distinguished from liability claims.

Although this information is valuable and important, the question of whether there

is coverage generally should be made based on the insurance policy language. In the

additional insured context, courts generally will interpret provisions relating to the

inclusions of persons within the policy coverage broadly and liberally. Nevertheless,

those same courts have not hesitated to enforce clear and unambiguous policy

language to preclude coverage where appropriate.

It also is important to remember that once a coverage determination has been

- 31 -

reached, that should not end the inquiry. Where more than one policy potentially is

applicable, courts will have to resort to the policies' "other insurance" clauses. Thus, the

mere fact that a person or entity qualifies as an "insured" under a policy does not mean

that policy covers 100% of any liability that the insured may face. Conversely, the mere

fact that a person or entity does not qualify as an insured does not necessarily mean an

insurer will avoid all liability to that person or entity. Contractual indemnity clauses often

provide a "back door" to the very same coverage the putative insured sought directly.

Additional insured coverage issues tend to be multi-faceted and often are hotly

contested. Nevertheless, by careful review of the policy, contractual provisions and

other relevant documents at issue, and by giving thought to all sides of the issues,

insurers should be able to negotiate amicable resolutions with considerable ease.