Additional Insured Coverage Language in the Context of a "Third Party Over" Action
Fifth Circuit Addresses the Most Recent Additional Insured Coverage Language in the Context of a “Third Party Over” Action
In Gilbane Bldg. Co. v. Admiral Ins. Co., ___ F.3d ___, 2011 WL 6153370 (5th Cir. Dec. 12, 2011), the Fifth Circuit addressed the most recent standard additional insured endorsement, clarifying some of the outstanding questions concerning an insurer’s duties, but arguably using flawed rationale regarding an insurer’s duty to indemnify under the endorsement. A subcontractor’s employee was injured on-the-job when he slipped and fell off of a ladder on a construction site. As is typical, the employee sued the general contractor for allegedly causing his injuries, since he was barred from suing his employer as a subscriber to the workers compensation scheme. The general contractor then sought defense and indemnity as an additional insured from the subcontractor/employer’s general liability carrier. The policy provided that an additional insured was “a contractor on whose behalf you [the named insured] are performing ongoing operations, but only if coverage as an additional insured is required by written contract or written agreement that is an ‘insured contract.’” The coverage afforded to the additional insured was “only with respect to liability for “bodily injury,” “property damage” or “personal & advertising injury” caused, in whole or in part, by: 1. Your [the named insured’s] acts or omissions; or 2. The acts or omissions of those acting on your[the named insured’s] behalf.”The carrier denied coverage because the relevant indemnity provision was not enforceable, and, therefore not an “insured contract,” and the allegations did not indicate that its named insured (the subcontractor/employer) caused the employee’s injuries. The general contractor ultimately settled the claims.
In the declaratory judgment action addressing coverage, the district court ruled that the carrier owed a duty to defend, but a fact issue remained with regard to the duty to indemnify. A trial was held on the duty to indemnify, resulting in a verdict for the general contractor. The carrier appealed.
The Fifth Circuit first addressed the carrier’s argument that the general contractor did not qualify as an additional insured because the indemnity provision did not meet the “express negligence” test and was unenforceable; therefore, the subcontractor had not assumed the general contractor’s tort liability as required by the policy’s definition of “insured contract.” The court rejected the carrier’s argument, finding that “the additional insured question turns not on enforceability, but on whether [the subcontractor] agreed to ‘assume the tort liability of another party.’ In the [subcontract], [the subcontractor] contracted not only to indemnify [the general contractor], but also to secure insurance on its behalf; by doing so, it agreed to assume [the general contractor’s] tort liability.” Having held that the general contractor was an additional insured, the court next addressed the duty to defend.
With regard to the duty to defend, the court focused upon the endorsement language requiring that the named insured cause in whole or in part the plaintiff’s injuries. The court first noted that it was bound by the “eight corners” rule. Looking to the policy language “caused in whole or in part,” the court held that the carrier owed the general contractor a duty to defend “only if the underlying pleadings allege that the subcontractor, or someone acting on its behalf, proximately caused the plaintiff’s injuries.” The district court had characterized the petition as stating that “the injuries occurred when [the employee] was walking down the ladder with muddy boots,” which it considered sufficient to implicate his contributory negligence, thus meeting the terms of the endorsement that someone acting on the subcontractor’s behalf had caused the employee’s injuries. Contrary to that characterization, however, the Fifth Circuit found that the pleading did not allege that the employee had climbed down the ladder with “muddy boots.” Rather, the Fifth Circuit, read the pleading and concluded that the allegations stated only that the general contractor’s negligence caused the work area to become “slippery and hazardous,” resulting in the employee’s injuries, which did not meet the causation requirement under the endorsement, and, as such, there was no duty to defend. Accordingly, the Fifth Circuit reversed the district court’s finding on the duty to defend.
With regard to the duty to indemnify, the Fifth Circuit considered the trial court’s findings on this issue. The district court found that the employee was injured when he slipped while descending a ladder carrying an extension cord, and that he told a co-worker immediately after he fell that his “feet got wrapped up in the extension cord.” Based upon this evidence, the district court found that the employee’s conduct was a contributing proximate cause of his damages and that a jury would have found him or his employer 1% or more responsible for causing the injuries. Thus, under the terms of the policy, the district court concluded that carrier had a duty to indemnify. The Fifth Circuit agreed.
The Fifth Circuit acknowledged the difficulties presented in a “third party over” action when additional insureds desire to trigger coverage “while navigating difficult workers compensation and contributory negligence issues.” In other words, it is rare, if ever, that the injured employee is going to allege that his employer proximately caused his injuries because the employee has no claim against his employer. Accordingly, the duty to defend an additional insured under this endorsement in a “third party over” action will likely never exist. Unfortunately, however, at least in Texas, given the ability of a general contractor to name the employer as a responsible third party, entitling it to a finding of the employer’s negligence, the insurer is always subject to a potential duty to indemnify in a case over which it had no ability to defend its insured’s conduct. Moreover, given the Fifth Circuit’s conclusion, the contributory negligence of the employee is also going leave the insurer’s duty to indemnify lurking in the background. It is the Fifth Circuit’s conclusion on this issue that is more problematic.
A finding that a plaintiff’s contributory negligence is the basis for a duty to indemnify under the endorsement is flawed. The rationale is nonsensical because, under the endorsement, the additional insured’s liability for bodily injury must be caused by the named insured’s acts or omissions. There can be no liability attributable to the additional insured based upon a plaintiff’s comparative fault, because a plaintiff cannot recover for his or her comparative fault. The opinion, however, does not indicate whether this argument was raised by the insurer.
Finally, the court’s conclusion that the named insured’s or its employee’s 1% fault required the carrier to fund the entire settlement also is arguably incorrect. The endorsement requires that coverage be provided for the additional insured’s liability caused by the named insured’s acts or omissions. Accordingly, an argument exists that the carrier should owe only that percentage of the settlement or judgment attributable to the named insured, or in the case before the court, 1%. While the Fifth Circuit represents the first appellate opinion interpreting Texas law on this endorsement, given the importance and frequency with which these issues arise, more litigation is likely to come.
 This type of lawsuit is commonly referred to as a “third party over” action.