Yesterday, the New York Court of Appeals changed the law in New York with respect to endorsements that limit additional insured coverage to liability that is “caused, in whole or in part by” the named insured’s acts or omissions. Since 2012, New York courts have held that there was no material difference between the phrases “arising out of” and “caused, in whole or in part by” in additional insured endorsements — neither phrase required negligence on the part of the named insured, only a nexus to the named insured’s work. The Court of Appeals has now expressly rejected this reasoning, finding instead that the language “caused, in whole or in part” requires partial proximate causation on the part of the named insured.
In Burlington Ins. Co. v. NYC Transit Auth.,1 New York City Transit Authority (NYCTA) contracted with Breaking Solutions, Inc. (BSI) to perform tunnel excavation work at a New York City subway construction project. BSI purchased a commercial general liability policy from Burlington with an endorsement that listed NYCTA, Metropolitan Transit Authority (MTA), and the City of New York as additional insureds, but “only with respect to liability for ‘bodily injury’… caused, in whole or in part, by [BSI’s] acts or omissions …” While performing work at the construction site, a BSI machine operated by a BSI employee touched a live electrical cable buried in concrete, causing an NYCTA employee to fall from an elevated platform. The NYCTA employee sued BSI and the City of New York claiming negligence and violations of New York’s Labor Law. The city brought a third-party action against NYCTA and MTA for indemnification and contribution.
NYCTA and MTA tendered their defense to Burlington as additional insureds under the Burlington policy.2 Burlington accepted the defense but specifically reserved the right to deny coverage to the extent that neither entity qualified as an additional insured. Discovery in the underlying action revealed that the NYCTA was entirely at fault for the accident for failing to mark the electric cable or turn off the power. Burlington disclaimed coverage to NYCTA and MTA but settled the lawsuit on behalf of the remaining defendants for $950,000.
Burlington then brought a declaratory judgment action against NYCTA and MTA, seeking a ruling that neither were additional insureds because the loss was not caused by BSI’s acts or omissions.3 The trial court granted Burlington’s motion for summary judgment on this ground, but the First Department reversed in 2015, holding that although BSI was not negligent, the act of triggering the explosion was a cause of the injury and therefore MTA and NYCTA satisfied the “caused by” requirement in the additional insured endorsement.
In a 4-2 opinion, the New York Court of Appeals reversed the First Department, agreeing with Burlington that coverage does not apply under this endorsement where the additional insured is the sole proximate cause of the injury. More broadly, the decision held that the named insured must be at least a partial proximate cause for the endorsement to apply. The Court of Appeals found unpersuasive MTA’s and NYCTA’s argument that the endorsement required “but for” causation only, and that BSI’s machine operation was a sufficient casual nexus to the injury to establish entitlement to coverage.
The majority opinion distinguished between “but for” causation, which refers merely to a link in the chain leading to an outcome and “proximate causation,” for which legal liability may be imposed. Because the endorsement states that the injury must be “caused in whole or in part,” and “but for” causation cannot be partial, the court found that this endorsement requires legal “proximate causation” to apply. “An event may not be wholly or partially connected to a result, it either is or it is not connected. Stated differently, although there may be more than one proximate cause, all ‘but for’ causes bear some connection to the outcome even if all do not lead to legal liability. Thus, these words — in whole or in part — can only modify ‘proximate cause.’”
Although the court agreed with NYCTA and MTA that the “caused by” language does not require that the named insured be solely negligent, it held that where, as here, the additional insured was the solely negligent party, it fell outside the scope of the endorsement. Thus, had BSI been even partially legally responsible for the accident, the NYCTA and MTA may have been entitled to coverage. Indeed, the court stated that the policy extends coverage only for “damages resulting from BSI’s negligence or some other actionable ‘act or omission,’” although it did not elaborate on what those other “actionable acts or omissions” might be.
The court specifically rejected the First Department’s 2012 decision in W & W Glass Sys., Inc. v. Admiral Ins. Co.4 In that case, the First Department held “the phrase ‘caused by your ongoing operations performed for that insured,’ does not materially differ from the general phrase, ‘arising out of.’” In yesterday’s decision, the Court of Appeals found that “arising out of” is not the functional equivalent of “proximately caused by” and cited to the 2004 revision in the ISO Form CG 20 10 that replaced the “arising out of” language with the “caused, in whole or in part” language. The Court opined that “[t]his change was intended to provide coverage for an additional insured’s vicarious or contributory negligence, and to prevent coverage for the additional insured’s sole negligence.”
New York’s highest court has now acknowledged the impact of the 2004 ISO form revision; these two endorsements no longer afford the same coverage to additional insureds. The majority disagreed with the dissenting opinion that this will lead to uncertainty in the industry. Rather, it held that the purpose of additional insured coverage is to apportion risk to the party most responsible. A general contractor, when it hires subcontractors, is exposed to the risk of subcontractor negligence. As a result, the general contractor typically insists that the subcontractors name it as an additional insured to guard against that risk. The court declared that extending coverage to NYCTA and MTA, in this case, would frustrate the clear purpose of obtaining additional insured coverage in the first instance.
We note that this decision discussed the duty to indemnify only. While an insurer may have an obligation to defend a purported additional insured where the named insured is potentially legally responsible, there may be no obligation to indemnify if supported by the facts in the case.