The Insurance Exceptions of the Missouri Anti-Indemnity Statute (Part I)

by Terry J. Galganski¹

Introduction

Construction work² has always posed substantial risks — including third-party-over actions and defective construction claims — to owners, contractors, design professionals and subcontractors. Over the years, various risk transfer devices in these parties' respective tool belts have been used to address many of them. Two of the most prevalent tools have been indemnities and insurance.

In the case of indemnities, Missouri courts have allowed (begrudgingly) all types of indemnities, including broad indemnities.³ On July 13, 1999, the instructions regarding these indemnities in contracts for construction work changed. On that date, Governor Mel Carnahan signed into law Missouri's first anti-indemnity statute (statute).⁴ By this event, Missouri joined the ranks of states with such a statute.⁵

The statute, § 434.100, RSMo, invalidates all indemnities for construction work except a limited indemnity⁶ and, as a result, obliterates existing Missouri case law regarding indemnities in contracts for construction work entered into after its effective date of August 28, 1999. Unless one of the statute's exceptions applies, a party to a contract for construction work can no longer transfer a significant portion of its project risks to others via a broad or an intermediate indemnity⁷ and have either indemnity supported by at least two of the other party's insurance policies: the commercial general liability policy and the business automobile liability policy.⁸

In crafting the statute, the Missouri legislature included nine exceptions to its prohibitions, including three exceptions dealing with insurance (collectively referred to as the "insurance exceptions"). I will be focusing on them, which I have entitled: the additional insured exception, the insurance policy exception, and the insurance cap on indemnity exception. By including the insurance exceptions within the statute, the legislature may have intended to follow the lead of many state courts that have ruled, at least as to additional insured requirements, that such requirements do not conflict with the state's anti-indemnity statute,⁹ or the legislature may have recognized that:

An agreement to insure is an agreement to provide both parties with the benefits of insurance regardless of the cause of the loss (excepting wanton and willful acts). An agreement to insure differs from an agreement to indemnify in that, with an agreement to insure, the risk of loss is not intended to be shifted to one of the parties, but is instead intended to be shifted to an insurance company.¹⁰

The Statute

House Bill 256, which became the statute, includes four subsections. The first subsection contains the indemnity prohibitions. The subsequent subsection deals with the exceptions to these prohibitions. The term "construction work" is defined under the third subsection. The final subsection sets forth the statute's effective date.

With the governor signing it into law, the approved bill added a new section to Chapter 434, Contracts Against Public Policy, RSMo 2000. Titles to the insurance exceptions are in italics and are my additions.

434.100. Construction contracts holding harmless a person's negligence or wrongdoing are void and contrary to public policy, exceptions.

1. Except as provided in subsection 2 of this section, in any contract or agreement for public or private construction work, a party's covenant, promise or agreement to indemnify or hold harmless another person from that person's own negligence or wrongdoing is void as against public policy and wholly unenforceable.

2. The provisions of subsection 1 of this section shall not apply to:

(1) A party's covenant, promise of agreement to indemnify or hold harmless another person from the party's own negligence or wrongdoing or the negligence or wrongdoing of the party's subcontractors and suppliers of any tier;

(2) A party's promise to cause another person or entity to be covered as an insured or additional insured in an insurance contract; [additional insured exception]

(3) A contract or agreement between state agencies or political subdivisions or between such governmental agencies;

(4) A contract or agreement between a private person and such governmental entities for the use or operation of public property or a public facility;

(5) A contract or agreement with the owner of the public property for the construction, use, maintenance or operation of a private facility when it is located on such public property;

(6) A permit, authorization or contract with such governmental entities for the movement of property on the public highways, roads or streets of this state or any political subdivision;

(7) Construction bonds, or insurance contracts or agreements; [insurance policy exception]

(8) An agreement containing a party's promise to indemnify, defend or hold harmless another person, if the agreement also requires the party to obtain specified limits of insurance to insure the indemnity obligation and the party had the opportunity to recover the cost of the required insurance in its contract price; provided, however, that in such case the party's liability under the indemnity obligation shall be limited to the coverage and limits of the required insurance; [insurance cap on indemnity exception] or

(9) Railroads regulated by the Federal Railroad Administration.

3. For the purposes of this section, "construction work" shall include, but not be limited to, the construction, alteration, maintenance or repair of any building, structure, highway, bridge, viaduct, or pipeline, or demolition, moving or excavation connected therewith, and shall include the furnishing of surveying, design, engineering, planning or management services, or labor, materials or equipment, in connection with such work.

4. The provisions of this section shall apply only to contracts or agreements entered into after August 28, 1999.

Third-Party-Over Actions

Before discussing the insurance exceptions, it is noteworthy to elaborate on the usual context in which they will likely be (and have been) applied: the injured construction worker. In most instances, a worker's employer is required to provide workers' compensation benefits, consisting of medical expenses and lost wages, to any worker injured during the scope of his or her employment.¹¹ Under the statutory framework for these benefits, there is no need to find the employer at fault. In exchange for imposing this strict liability obligation on an employer, the framework provides protection to the employer from any further liability to its injured employees; that is, the injured employee's exclusive remedy against its employer is the benefits found under the applicable workers' compensation statutes. This exclusive remedy rule is the cornerstone of these statutes.

In many instances, these benefits may not fully compensate the injured construction worker for his or her injuries. In each of these cases, the injured construction worker may look to other parties (third parties) to make him or her whole, including the owner, the general contractor and design professional. When they do, their lawsuits are known as third-party-over actions. Except for several states that allow these third parties to receive contribution from the injured construction worker's employer,¹² these parties are not allowed any contribution from the employer due to the exclusive remedy rule. To overcome this rule and to avoid litigation and indemnity expenses in addressing these actions, an express, enforceable indemnity provision in most states¹³ or certain insurance provisions can be and have been used by third parties to circumvent this rule and to avoid these costs. By so doing, these parties have transferred this liability back to the rightful owner (as they believe): the construction worker's employer.

With the prohibitions of the statute now in place, these third parties can no longer avoid their proportionate fault for the damages sustained by a construction worker; or, for that matter, by his or her spouse, through solely an express indemnity. With this being said, however, they can use one or more of the insurance exceptions to continue transferring this risk as they may have done prior to August 28, 1999. Therefore, each of the insurance exceptions merits some detailed discussion.

Additional Insured Exception

(2) A party's promise to cause another person or entity to be covered as an insured or an additional insured in an insurance contract; . . . .

Although I have entitled this exception as I have, it does also speak of an "insured." Under this exception, an insured may be referring to the protective liability policies that one party can purchase for another, the latter becoming the insured. They include the owners' and contractors' protective liability, the railroad protective liability and the project management protective liability policies. These particular policies will be discussed below under the insurance policy exception. For this exception, the focus will center on an "additional insured."

Who is an "additional insured?"¹⁴ It is someone who has been given a direct contractual relationship with a named insured's insurance carrier, but with no responsibilities to pay the policy premium. This responsibility remains with the named insured or the first named insured. Being made an additional insured under another's policy is accomplished via an endorsement (that is, an amendment) to the policy.

Prior to enacting the statute, a party involved in construction work in Missouri required additional insured status to protect its own policy limits, to guarantee a defense by the indemnitor's insurance carrier, to backstop a potentially unenforceable indemnity provision and/or to avoid subrogation. With this new statute (§ 434.100, RSMo), the reasons now include avoiding its reach. As will be seen, simply requesting "to be . . . an additional insured" will not necessarily avoid this statute's prohibitions.

A party's request to be an additional insured on certain insurance policies of the other contracting party is commonplace, especially in contracts for construction work. An owner makes this demand of its designer, its program manager, its construction manager, its contractor or its design-builder. In turn, these parties generally require the same from their subcontractors or others. Although this request has become routine, the requestor does not usually provide any specific guidelines to the other party on how to meet this demand. Hence, the other party is left to its own devices, which may prove beneficial in trying to keep within the reach of the statute's prohibitions.

The particular language of an additional insured endorsement determines the breadth of coverage and its duration. Hence, its language will determine its effect on the statute's prohibitions. Therefore, if the party requesting additional insured status, its attorney or its broker is astute, they will specify an additional insured endorsement in its contract for construction work that avoids some or most of the reach of the statute. On the other hand, if the other party, its attorney or its broker is shrewd, they will prefer to provide an additional insured endorsement that provides no greater coverage that the tort liability covered under a limited indemnity, the only indemnity now enforceable in Missouri.

Including the additional insured exception in the statute reflects a recognition, whether intended or not, that additional insured status and contractual indemnity obligations operate independently of one another. Indemnities are supported by a policy's contractual liability coverage. The extent of that coverage will depend upon the language of the indemnity, the applicable state's law on indemnities and the damages covered under the policy. Therefore, the insurance coverage obtained by the indemnitee is indirect: it comes not as an insured, but rather, it is triggered by the named insured's contractual indemnity obligation to the indemnitee. An additional insured, on the other hand, has a direct relationship with the insurer. Hence, its coverage from the insurer is governed by the additional insured endorsement and the other provisions contained in the applicable insurance policy. Unless the contract for construction work is incorporated into the insurance policy, the additional insured's coverage is unaffected by the indemnity provision of the contract. The indemnity provision is irrelevant!

Shell Oil Co. v. National Union Fire Ins. Co. of Pittsburgh, PA¹⁵ illustrates the importance of having a direct right under an insurance policy. In 1985, an engineering firm signed a contract with Shell to perform certain professional engineering services at one of Shell's oil refineries. The contract contained an intermediate indemnity¹⁶ and required certain insurance coverage, including naming Shell as an additional insured. A key issue was whether the engineering firm's insurance extended to claims arising out of Shell's sole negligence since Shell was seeking, through this litigation, reimbursement for payments it had made from the engineering firm's insurance carrier as its additional insured.

Based on Shell's presented argument, the court commented that the contractual indemnity provision did not come into play. Moreover, the court went on to say that even if it had, the indemnity provision would have been unenforceable in Washington because of its anti-indemnity statute (which had been pointed out by the engineering firm's insurance carrier). At the end of the day, the court concluded that the coverage afforded by the particular additional insured endorsement made Shell an insured for its sole negligence and ordered the engineering firm's insurance carrier to reimburse Shell.

As mentioned, I find that most parties requesting additional insured status do not instruct the other party how to address their request. Thus, in light of the statute's prohibitions, the central questions under the additional insured exception become: What is the available menu of additional insured endorsements under the relevant insurance policies and what coverage do each of them provide?

Depending upon the insurance policy, a request to be named as an additional insured is handled or treated differently. For what follows, the focus will be on the following named insured's insurance policies:

Ø Commercial General Liability (CGL) Policy

Ø Umbrella or Excess Liability Policy

Ø Commercial or Business Automobile Liability Policy (BAP)

Ø Workers' Compensation/Employers Liability Policy

Ø Professional Liability Policy

Ø Contractor's Pollution Liability Policy.

Commercial General Liability (CGL) Policy

Of all the policies that will be addressed, a CGL policy provides a party to construction work with the greatest opportunity to avoid the reach of the statute through the use of the additional insured exception. This opportunity is usually implemented by selecting from several standard additional insured endorsements that have been developed over the years. In that selection process, it is helpful to either party to construction work to understand the courts' interpretations of them.

Over the last 30 years, CGL policies and their endorsements, including additional insured endorsements, have become standardized through the efforts of the Insurance Service Office, Inc. (ISO).¹⁷ In addition to the ISO's additional insured endorsement forms, some additional insured endorsements are manuscripted by the carriers or its named insureds. Most of the discussion will center on the former, since each manuscript endorsement, by definition, is unique. But, as will be seen, although manuscript endorsements are difficult to address without having the particular manuscript endorsement in hand, most manuscript CGL additional insured endorsements provide limited coverage for certain damages equal to the acts covered under a limited indemnity.

ISO additional insured endorsements began to be used in the early 1960s.¹⁸ By 1986, when the comprehensive general liability policy was significantly altered to include more coverage within the policy form than through the use of several endorsements and renamed the "commercial general liability policy," 28 standard ISO additional insured endorsement forms were available for use. ISO subsequently modified some of these forms and issued several new additional insured endorsement forms in the 1990s. In fact, some of its modifications reduced coverage! The current ISO CGL edition forms book, which represents ISO's 1998 CGL insurance program, lists 30 ISO additional insured endorsements that can be selected. The relevant ones for this discussion are:

Ø Additional Insured-Engineers, Architects or Surveyors – CG 20 07 07 98

Ø Additional Insured-Owners, Lessees or Contractors-Scheduled Person or Organization (for Use When Contractual Liability Coverage is Not Provided to You under this Policy) – CG 20 09 03 97

Ø Additional Insured-Owners, Lessees or Contractors-Scheduled Person or Organization – CG 20 10 03 97

Ø Additional Insured-Designated Person or Organization – CG 20 26 11 85

Ø Additional Insured-Engineers, Architects or Surveyors Not Engaged by the Named Insured – CG 20 32 07 98

Ø Additional Insured-Owners, Lessees or Contractors-Automatic Status When Required in Construction Agreement with You – CG 20 33 07 98.

This current ISO forms book will soon change because ISO filed revisions to its 1998 CGL insurance program in most of the states in early 2001. When they are approved, they will replace this program. Its form changes will be able to be used by insurance carriers on or after December 1, 2001 in most states.¹⁹ In these changes, there is a new additional insured endorsement for parties involved in construction work: Additional Insured-Owners, Lessees or Contractors-Completed Operations (CG 20 37 10 01), and modifications to two of the aforementioned endorsements (with new edition date listed): CG 20 10 10 01 and CG 20 33 10 01. Each of these 2001 endorsements will be discussed later when the above additional insured endorsement forms are addressed.

As can be seen by their titles, the above ISO additional insured endorsements deal with the instrumental players in any construction work. ISO's Commercial Lines Manual (manual) provides guidance to underwriters and others regarding their use and will be mentioned from time to time in addressing these endorsements. With an understanding of these forms, a party can determine which form may be in its best interests when negotiating or accepting the terms of its contract for construction work mindful of the statute's prohibitions.

I will first address the architects and engineers' options under the additional insured exception. In their agreements with an owner or developer, architects or engineers often seek or provide that the project's general contractor name them as an additional insured under the latter's CGL policy and, in some cases, may ask the same from the owner or developer. If the architect or engineer authors the project's specifications or special conditions, they can simply include the former requirement in these documents. By seeking or providing for this requirement, the architect or engineer is trying to eliminate the defense and indemnity costs it may incur under a third-party-over action involving negligence claims emanating from its nonprofessional acts or omissions during the general contractor's on-site operations. These would include allegations that either had a duty to monitor the general contractor's safety program or to provide a safe jobsite.

According to the manual,²⁰ forms CG 20 07 and CG 20 32 are to be used for architects and engineers. It explains that the former is to be used at no additional charge where the insured has a contract with the architect or engineer, while the latter is to be employed where the insured (usually the general contractor) is required by contract to name a non-contracting party (usually the architect or engineer) as an additional insured under its CGL policy. In the latter instance, the manual states there is to be an additional charge.

Knowing that these two additional insured forms exist is not enough. An engineer or architect should understand their historical development and the coverage they afford to determine if it may be in either's best interest to suggest another additional insured endorsement form to expand its coverage under the named insured's CGL policy. Therefore, the pre-1993 CG 20 07 form, the post-1993 CG 20 07 form and the CG 20 32 form that was introduced in 1996 will be addressed.

Before 1993, the only ISO additional insured endorsement available to an insured for an architect or engineer was CG 20 07 01 87, which assumed the insured had a contract with the architect or engineer. In all other situations, parties were left to their own devices. They could use a manuscript endorsement or an existing ISO form, such as CG 20 10 11 85. As will be seen, the latter provides the broadest coverage to an engineer or architect, especially if the named insured's policy has no professional liability exclusion.²¹

This pre-1993 CG 20 07 form provides coverage to an architect or engineer by modifying the "Who is an Insured" section of a named insured's CGL policy. This endorsement includes them as an insured "with respect to liability arising out of [the named insured's] premises or your work" (emphasis added), but also has an exclusion for any damages arising out of either's professional services. The post-1993 form (CG 20 07 07 98) modifies the previous form to eliminate any coverage once the named insured's work has been completed. Thus, if this endorsement is used, there is no longer any completed operations coverage for the architect or engineer under the named insured's CGL policy.

The relatively new CG 20 32 form was crafted to address the frequent situation where the architect or engineer is to be included as an additional insured by someone with whom neither has a contract, such as the general contractor. This endorsement provides coverage for the scheduled design professional, "but only with respect to liability arising out of [the contractor's] ongoing operations performed by [the contractor] or on [its] behalf." (Emphasis supplied.) Like CG 20 07, it has a professional liability exclusion.

These two existing ISO endorsements should transfer one of the risks of construction work that is not usually the architect or engineer's responsibility or that can be more adequately controlled by others: third party injuries arising from nonprofessional acts or omissions during on-site construction operations. Coverage under either of these forms will depend, in part, on the allegations raised by the injured party, since both have a professional liability exclusion. If, however, the acts or omissions of the architect or engineer are determined to be nonprofessional, either of these endorsements can provide greater protection during the contractor's ongoing construction operations than what can now be legally afforded under a Missouri indemnity. But if a particular claim is too close to call on whether it alleges professional or nonprofessional negligence, the named insured's carrier may eventually seek declaratory relief to determine whether coverage applies to the architect or engineer. Therefore, protection afforded to an architect or engineer under either endorsement may eventually found to be lacking.

If an architect or engineer has some continued presence following construction completion or simply wants to have another's insurance protection as long as possible, either would want to employ the use of form CG 20 07 01 87 when dealing with the owner and designate form CG 30 32 07 98, with the word "ongoing" deleted, for contractors. Moreover, if either wishes to obtain the broadest protection available under a CGL policy, including its professional liability exposure (assuming the named insured's general liability policy has no professional liability exclusion), they should demand one of the following ISO additional insured endorsement forms: CG 20 10 11 85 or CG 20 26 11 85. Each of these forms will be discussed in greater detail now as our attention is drawn to owners, general contractors and subcontractors, and ISO's standard additional insured endorsements for these parties.

When dealing with these parties to construction work, there are two standard ISO additional insured endorsements in the manual that come into play. They are CG 20 09 (formerly known as "Form A") and CG 20 10 (formerly known as "Form B"). These endorsements have changed over the last several years, too. There are their pre-1993 forms (with an edition date of "11 85"), the 1993 forms and the 1997 forms, with the latter two edition forms eliminating coverage or clarifying coverage intent. In 2001, ISO proposed some further changes to CG 20 10 and added a new endorsement, CG 20 37 10 01. Each of these editions will be discussed in turn.

Prior to the changes made in each of these forms in 1997, CG 20 09 was entitled "Additional Insured – Owners, Lessees or Contractors (Form A)" and CG 20 10, given the heading "Additional Insured – Owners, Lessees or Contractors (Form B)." Of the two forms, CG 20 10 provides the broadest coverage.²² When comparing these endorsements, CG 20 09 provides coverage for the additional insured's liability arising from its general supervision of the named insured's work and its vicarious liability arising from the ongoing operations of the named insured.²³ In contrast, CG 20 10 encompasses coverage to the additional insured for its "liability arising out of the [named insured's work] for [the additional insured] by or for [the named insured]." Unlike the former endorsement, this latter endorsement is not limited to ongoing operations. Hence, there is completed operations coverage available to the additional insured. Moreover, it even provides coverage for the additional insured's sole or contributing negligence so long as the complained damages arose out of the named insured's work!

A majority of courts interpreting the CG 20 10 additional insured form or similar language contained in the contract for construction work and in the insurance certificate conclude that a "but for" test should be used to determine whether coverage should be afforded the additional insured. Thus, there is no need for a direct causal relationship between the additional insured's liability and the named insured's conduct, work or operations.²⁴ Essentially, there need only be a minimal causal link (but there must be one) to establish coverage.

I am aware of one Missouri case addressing the breadth of coverage afforded under an additional endorsement, but it was discussed within the context of a named insured suing an additional insured. It is the case of Union Pacific R.R. Co. v. American Family Mut. Ins. Co.²⁵ The case involved the insurance carrier's appeal of the trial court's declaratory judgment ruling that the insurance company had a duty to defend a railroad as an additional insured under a lawsuit filed by the named insured.

Under the facts of this case, David F. Mecey had entered into a contract with a railroad to perform certain cleaning services on the latter's railcars. In one of its articles, the contract provided:

Before the work or services commence, the Contractor [Mecey] will provide the Railroad with a certificate issued by its insurance carrier providing the insurance coverage required pursuant to Exhibit A-1 of this agreement in a policy which contains the following type endorsement:

MISSOURI PACIFIC RAILROAD COMPANY IS NAMED AS ADDITIONAL INSURED WITH RESPECT TO ALL LIABILITIES ARISING OUT OF INSURED'S, AS CONTRACTOR, PERFORMANCE OF WORK ON BEHALF OF THE RAILROAD.

Contractor WARRANTS that this agreement has been thoroughly reviewed by its insurance agent(s)/broker(s) and that said agent(s)/broker(s) has been instructed to procure insurance coverage and an endorsement as required herein. (Emphasis added.)²⁶

Nearly one year after executing the contract, Mecey was injured when he fell from a ladder while cleaning some railcars. He subsequently sued the railroad. The railroad tendered its defense to American Family, Mecey's insurance carrier. American Family declined its tender, which caused the railroad to file a declaratory judgment action demanding American Family to defend it. The trial court directed American Family to do so. On appeal, American Family claimed that it had no duty to defend because the policy language clearly provided coverage only for claims by third parties against Mecey and the railroad. The endorsement provision was identical to CG 20 10; and, when "(e)liminating all of [its] superfluous language," it read: "WHO IS AN INSURED? (Section II) is amended to include Missouri Pacific Railroad, but only with respect to liability arising out of work or operations performed by David Mecey for Missouri Pacific by David Mecey."

Thus, according to American Family, the endorsement did not provide coverage to the railroad for Mecey's claims for injuries due to the railroad's negligence.²⁷

The railroad countered American Family's argument by citing several of the cases listed below, including the Shell Oil Co. case,²⁸ for the proposition that coverage is afforded by this additional insured endorsement so long as there is some minimal causal connection (i.e., a "but for" causation analysis); and, since its phrase "arising out of" is considered a broad or vague term, the endorsement "must be liberally construed" in an insured's favor.

The appellate court affirmed the trial court's ruling for two reasons. First, there was no policy language to suggest the additional insured endorsement, including the endorsement itself, would only apply to third party claims. In fact, the court stated the insurance contract requirements supported this interpretation because they "required Mecey to provide Missouri Pacific with insurance against 'all liabilities arising out of insured's, as contractor, performance of work on behalf of the railroad.'"²⁹ Second, "[t]here is, at least, an ambiguity on the issue of coverage for claims of a named insured against Missouri Pacific as an additional insured. We are required to resolve the ambiguity in favor of the insured."³⁰

In Admiral Ins. Co. v. Trident NGL, Inc.,³¹ the court discussed the "arising out of operations" wording of the following additional insured endorsement: "In consideration of the premium charged, the persons or entities insured provision is amended to include as an insured the organizations designated below [main company], but only with respect to liability arising out of the named insured's [K-D Oilfield Services'] operations."

This additional insured endorsement is nearly identical to the pre-1993 ISO endorsement form, CG 20 10 11 85. In this declaratory judgment action, Trident sued K-D Oilfield Services' insurance carrier for its failure to accept Trident's tender by claiming there was no coverage under K-D Oilfield Services' CGL policy. Under its facts, Trident had been added as an additional insured using the above endorsement to K-D Oilfield Services' CGL policy to meet the contract requirements so the latter could perform certain services at Trident's facilities. While one of its employees was performing maintenance work on a Trident compressor, he was injured when it exploded. Neither he nor any other K-D employee did or failed to do anything that caused the compressor to explode. The injured employee eventually sued Trident.

After reviewing and discussing several cases around the country that had interpreted similar additional insured language, the court concluded that Trident was entitled to a defense because coverage was afforded under the above endorsement. It held:

The majority view of these cases is that for liability to "arise out of operations" of a named insured it is not necessary for the named insured's acts to have "caused" the accident; rather, it is sufficient that the named insured's employee was injured while present at the scene in connection with performing the named insured's business, even if the cause of the injury was the negligence of the additional insured. (Emphasis supplied.)³²

A similar holding occurred in Acceptance Ins. Co. v. Syufy Enters.³³ A contractor's employee was injured while climbing through the owner's roof hatch. The owner was named as an additional insured using ISO CG 20 10 11 85 under the contractor's CGL policy. The contractor's insurance carrier denied coverage on several grounds, including its contention that his injury did not involve his work; that is, his work was limited to the roof itself.

The appellate court did not agree. It stated that the "arising out of" language of this additional insured endorsement "does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causation connection or incidental relationship." (Emphasis supplied.)³⁴ Since the injured employee could not do his work unless he went through the roof hatch, the "arising out of" portion of the additional insured endorsement had been met.

Another case coming to the same conclusion, but focusing on the contract requirements and the insurance certificate, is Shell Oil Co. v. AC & S, Inc.³⁵ In that case, Shell Oil sought coverage from a subcontractor's and sub-subcontractor's insurance companies as an additional insured under a declaratory judgment action arising from a third-party-over action. That action involved an employee of AC & S, a subcontractor of Sachs Electric, who in turn was a subcontractor of Bechtel Constructors Corporation, Shell Oil's general contractor for the project where this incident occurred. This employee was at one of Shell Oil's facilities to perform some insulation work. While walking back to his employer's trailer, the employee tripped over a pipe and was injured. He filed a workers' compensation claim against AC & S and subsequently filed a third-party-over action against Shell Oil.

Based on its contract requirements, AC & S had had its insurance carrier name, among others, Shell Oil as an additional insured for claims "arising from AC & S's operations at [the Shell Oil facility]."³⁶ In construing the "arising from" phrase, this court adopted the view of another Illinois district court case involving injuries at an additional insured's premises³⁷ by holding these words to "mean 'originating from,' 'having its origin in,' 'growing out of,' and 'flowing from.'"³⁸ The court went on to state: "Consonant with this definition, a 'but for' causation analysis is applied to the facts in the instant case.. . . The injuries would not have occurred 'but for' [the employee's] employment by AC & S and AC & S's presence on [Shell Oil's] premises. We find that because the underlying complaint alleged facts that fall within or potentially fall within policy coverage, [AC & S's insurance carrier] had a duty to defend [Shell Oil] in the underlying lawsuit."³⁹

Other cases supporting these broad interpretations for similar additional insured endorsements include:

Ø McIntosh v. Scottsdale Ins. Co.⁴⁰ This case involved an additional insured endorsement very similar to CG 20 10. The court held coverage afforded by this endorsement is not limited to the additional insured's vicarious liability. It requires using a "but for" standard, which is more liberal than having to find proximate cause.

Ø American States Ins. Co. v. Liberty Mutual Ins. Co.⁴¹

Ø Merchants Ins. Co. of New Hampshire, Inc. v. United States Fidelity & Guaranty Co.⁴² This decision involved an additional insured endorsement nearly identical to ISO CG 20 10 11 85. By concluding that the "arising out of" phrase is ambiguous, the court construed it liberally in favor of the additional insured and against the insurer. Thus, coverage included the additional insured's own negligence.

Ø Aetna Casualty and Surety Co. v. Ocean Accident & Guarantee Corp.⁴³

Ø Transamerica Ins. Co. v. Turner Construction Co.⁴⁴

Ø Continental Heller Corp. v. St. Paul Fire and Marine Ins.⁴⁵

Ø Saavedra v. Murphy Oil U.S.A., Inc.⁴⁶ This case focused upon an additional insured endorsement similar to CG 20 10 and held the owner was covered as an additional insured "with respect to operations performed by or for [the contractor]."

Ø Township of Springfield v. Ersek.⁴⁷ The court held "arising out of" means causally connected with the incident, not proximately caused by it. Hence, the additional insured is covered for its own negligence.

Ø Consolidated Edison Co. of New York, Inc. v. Hartford Ins. Co.⁴⁸ The court stated that since the policy language does not focus upon the cause of the accident, but rather on the "general nature of the operation in the course of which the injury was sustained. . . ," the negligence of the additional insured "is immaterial."

Ø Casualty Ins. Co. v. Northbrook Property & Casualty Ins. Cos.⁴⁹ The court stated 'but for' causation" is sufficient to find coverage; it does not depend on the additional insured's fault.

Ø Lim v. Atlas-Gem Erectors Co.⁵⁰ The court concluded the negligence of the additional insured is immaterial under an additional insured provision similar to CG 20 10.

Ø Container Corp. of America v. Maryland Casualty Co.⁵¹ Fault of the named insured was not at all necessary to trigger coverage under provisions for an additional insured similar to CG 20 10.

Ø Shell Oil Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa.⁵² The court rejected several arguments that no coverage is afforded the additional insured, including the argument that the additional insured endorsement is tied to an unenforceable indemnity under the contract (that is, the indemnitee's (additional insured's) sole negligence) and, therefore, it cannot apply to this situation. The court stated the owner "did not contract to exculpate itself from liability. Rather, it contracted for the procurement of insurance."

As evidenced by other cases, however, insurance companies can issue additional insured endorsements that specifically limit coverage to circumstances where the additional insured is only covered for its vicarious liability for the named insured's negligent conduct. It is evident from the above cases that if that is the insurer's or named insured's intent, the endorsement must be worded clearly to convey that desire. There are several cases that illustrate this point.

In the case of Harbor Ins. Co. v. Lewis,⁵³ the additional insured endorsement read, in part:

IT IS AGREED THAT THE INSURANCE AFFORDED BY THIS POLICY SHALL APPLY TO THE FOLLOWING ADDITIONAL INSUREDS BUT ONLY TO THE EXTENT OF LIABILITY RESULTING FROM OCCURRENCES ARISING OUT OF THE NEGLIGENCE OF READING COMPANY AND/OR ITS WHOLLY OWNED SUBSIDIARIES. (Emphasis supplied.)

This endorsement listed the city as an additional insured. The case arose out of an accident involving a child who had been killed by a train. The youth's parents brought suit against the Reading Company, a railroad. The Reading Company then elected to join the city as an additional defendant. The jury found the city and the railroad jointly and severally liable and assessed a $3,000,000 verdict against them. As a result, the city claimed that payment of the verdict should come from the policy in which it was named as an additional insured, since the accident arose out of the railroad's negligence. Reading Company's insurer argued that this endorsement only provided coverage for the additional insured's liability arising from the negligence of the named insured. Since the city was found to be concurrently and contributorily negligent with the railroad, liability was not vicarious. The federal court agreed with the carrier. No coverage was afforded the city as an additional insured.

The following three cases also hold that coverage is limited to the additional insured's vicarious liability:

• Consolidated Coal Co., Inc. v. Liberty Mutual Ins. Co.⁵⁴ The additional insureds were covered "only with respect to acts or omissions of the named insured."

• Maryland Casualty Co. v. Nationwide Ins. Co.⁵⁵ The additional insureds were covered only to the extent of liability resulting from occurrences arising out of the negligence of the named insured.

• American Country Ins. Co. v. Cline.⁵⁶ The additional insured endorsement contained the following restriction: "The coverage afforded to the Additional Insured is solely limited to liability specifically resulting from the conduct of the Named insured which may be imputed to the Additional Insured."

In each of these four cases, the additional insured endorsement was a manuscript form. Therefore, a party seeking to avoid much of the statute's reach through this exception would generally want to identify a standard ISO additional insured endorsement while the other party would prefer to craft an additional insured endorsement providing no greater coverage than allowed by the statute's prohibitions.

Similar to the revisions made to the CG 20 07 and new CG 20 32 additional insured endorsements for architects and engineers, the 1993 revisions to CG 20 10 limit its coverage to "ongoing operations." As a result, completed operations coverage has been lost by the additional insured! In 1997, titles to CG 20 09 and CG 20 10 were changed. As has been briefly mentioned already, CG 20 10 has been modified again as part of ISO's 2001 CGL insurance program changes. Its changes add specific language to reaffirm that its additional insured coverage does not include completed operations coverage. Moreover, because of the continued demand by additional insureds for completed operations coverage, ISO has also introduced a new endorsement to meet it in 2001. It is known as Additional Insured-Owners, Lessees or Contractors-Completed Operations (CG 20 37 10 01). According to IRMI, "[t]his new endorsement requires the completion of a schedule which will include the name of the additional insured person or organization and the location and description of the completed operations."⁵⁷

There is another, existing ISO additional insured endorsement worthy of some discussion. It is the "catch-all" endorsement: CG 20 26 11 85.⁵⁸ This endorsement has not changed since 1985. Its language is identical to that found in CG 20 10 11 85 before its first revisions in 1993. This endorsement includes as an additional insured the organization identified in its schedule "with respect to liability arising out of [the named insured's] operations or premises owned or rented to [the named insured]." (Emphasis supplied.) Thus, if used in the context of construction work, this endorsement would provide the additional insured premises and completed operations coverage for its sole or concurrent negligence for certain damages that would not have occurred but for the named insured's operations at the construction site.

Based upon the above discussion regarding these three ISO additional insured endorsements available for construction work, an owner or general contractor would be best served if they designate CG 20 10 11 85 or CG 20 37 10 01(so long as the description of the completed operations is broad enough to encompass any situation that could give rise to coverage) for its additional insured coverage. By so doing, they have effectively skirted most of the reach of the statute. If either experiences some difficulty obtaining the former endorsement because it is not the current edition of this form, demanding use of CG 20 26 11 85 will provide the same broad coverage. This latter endorsement may also serve the architect or engineer well.

There is one remaining, existing ISO endorsement worth mentioning: the automatic additional endorsement form. It is CG 20 33 07 98, first introduced by ISO in 1997. This endorsement has the same "arising out of" phrase that has already been addressed. Until its creation, many contractors simply used the CG 20 10 form or applied for or crafted a manuscript automatic additional insured endorsement to reduce the administrative requirements needed to meet the frequent request to name others as additional insureds. Like all current ISO additional insured endorsement forms, it speaks of ongoing operations, too.⁵⁹ Moreover, it restates this restriction in its very next sentence: "A person's or organizations (sic) status as an insured under this endorsement ends when your operations for that insured are completed." Therefore, an owner or general contractor would want to avoid this endorsement's use and continue to push for CG 20 10 11 85 (or CG 20 26 11 85) or CG 20 37 10 01. They are the most effective tools to avoid the statute's reach since they provide the broadest coverage available to an additional insured.⁶⁰

A recent California appellate district court decision involving defective construction brings home quite well this lengthy discussion of CGL additional insured endorsements for construction work. In Pardee Constr. Co. v. Insurance Co. of the West,⁶¹ the general contractor sued four of its subcontractors' general liability insurers for declining to defend it in a lawsuit filed by residents for property damage arising out of alleged defects involving its subcontractors' work seven years after completing the project. The subcontractors' insurers argued, among other things, that the additional insured status provided to the general contractor did not include completed operations, citing their standard ISO endorsement CG 20 10 pre-1993 edition—that is, CG 20 10 11 85.

The court did not accept this argument because:

• The ISO CGL definition of "your work" includes warranties and representations.

• Certain commentators maintain that this additional insured endorsement does include completed operations.

• The 1993 form of this endorsement speaks in terms of "ongoing operations."

• The insurers could have limited coverage by express policy language, but they did not do so.

Finally, the court also rejected the insurers' argument that it was not the parties' intent to provide the general contractor coverage for claims arising after the construction work by stating:

Damage resulting from a subcontractor's work often does not arise for years. It is thus prudent for general contractors to obtain completed operations coverage as additional insureds from their subcontractors' insurers. Why would [the general contractor] have required its subcontractors to maintain CGL coverage that included completed operations coverage and to name it as an additional insured on those policies unless it expected to be covered for the same completed operations as its subcontractors? Certainly that expectation is reasonable given that the additional insured coverage is intended by the insurance industry to cover vicarious liability that an additional insured may incur due to operations of the originally named insured.⁶²

Part 2 will begin by completing the discussion of the additional insured exception within the context of the following insurance policies: umbrella or excess liability, commercial or business automobile liability, workers' compensation employers liability, professional liability and contractor's pollution liability. From there, it will address the remaining insurance exceptions of the statute, the insurance policy exception and the insurance cap on indemnity exception.

Endnotes

¹ Terry J. Galganski, J.D. is risk manager, corporate risk management for Jacobs Engineering Group, Inc., a publicly traded engineering and construction firm, in its St. Louis offices. He received his law degree at St. Louis University Law School in 1980 and his undergraduate degree at Northwestern University in 1977. He extends his gratitude to Kenneth A. Slavens and Kristin Figge, a partner and an associate, respectively, with the law firm of Brown & James in St. Louis, for their efforts in providing him with certain court cases.

² For purposes of this article, the term "construction work" will be given the meaning set forth in § 434.100.3, RSMo 2000.

³ A broad indemnity provides for the indemnitor to protect the other party to the contract (the indemnitee) from third party claims due to their respective actions, including the indemnitee's sole negligence. See Waterwiese v. KBA Constr. Managers, Inc., 820 S.W.2d 579, 583-85 (Mo. App. E.D. 1991), for broad indemnity language held to be "clear and unequivocal" and the discussion of existing Missouri case law on indemnities found within Chapter 4, Construction Insurance in Mo., Construction Law §4.18, (MoBar 2000), pages 4-34 through 4-36, with certain sections of this chapter authored by Terry J. Galganski and the remaining sections co-authored by Susan L. McGreevy and Paul J. Odum.

⁴ Section 434.100, RSMo 2000.

⁵There are now 42 states that have some form of an anti-indemnity statute involving design or construction projects and some of their participants.

⁶ A limited indemnity provides for the indemnitor to protect the other party to the contract from third party claims to the extent due to the indemnitor's negligence.

⁷ An intermediate indemnity provides for the indemnitor to protect the other party to the contract (indemnitee) from third party claims due to the indemnitor and indemnitee's actions, except for the indemnitee's sole negligence.

⁸Each of these policies contains contractual liability coverage that will support an insured's indemnity obligations, including a broad indemnity. Contractual liability coverage under both policies is handled identically. In the Insurance Service Offices' commercial general liability forms (CG 00 01 and CG 00 02) and business automobile liability policy form (CA 00 01), which are the standard forms used by most insurance carriers, this coverage is found under their Contractual Liability exclusion (the specific policy language for each of these forms is set forth in footnote 30 of Part 2 of this article.). Crucial to its understanding is the definition of an "insured contract," a term contained within the exclusion. It is defined under these policy forms as "[t]hat part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another to pay for 'bodily injury' or 'property damage' to a third party or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement." Copyright, Insurance Services Office, Inc., 1997.

⁹ See the following cases that have held that a party requiring to be named as an additional insured under another party's applicable policy does not violate the state's statute regulating contractual transfers:

Heat & Power Corp. v. Air Products & Chemical, Inc., 578 A.2d 1202 (Md. 1990)

Chevron U.S.A. Inc. v. Bragg Crane & Rigging Co., 225 Cal. Rptr. 742 (Cal. App. 1986)

Long Island Lighting Co. v. American Employers Ins. Co., 131 A.D.2d 733 (N.Y. App. Div. 1987)

¹⁰ Indiana Erectors, Inc. v. Trustees of Indiana Univ., 686 N.E.2d 878, 880 (Ind. App. 1997), citations omitted. Needless to say, if an insured has agreed to accept any kind of deductible for any of its policies, the "risk of loss" is not fully "shifted to [its] insurance compan[ies]."

¹¹ In Missouri, any employer with more than four employees must maintain workers' compensation coverage for them. See § 287.030.1(3), RSMo 2000.

¹² Examples of such states are Illinois and Minnesota.

¹³ Oregon will not allow a third party to receive protection from an employer who has paid workers' compensation benefits even where the employer has given an express indemnity to the third party. See Roberts v. Gray's Crane & Rigging, Inc., 697 P.2d 985 (Or. 1984) and Or. Rev. Stat. § 656.018 (2001).

¹⁴ There have been many articles and publications written about additional insureds. The best and most encompassing one is The Additional Insured Book, by Donald S. Malecki, Pete Ligeros & Jack P. Gibson, Fourth Edition, January 2000, which is published by the International Risk Management Institute, Inc. (IRMI). Similar information, but not as detailed, can be gathered from IRMI's publication: Contractual Risk Transfer Strategies For Contract Indemnity And Insurance Provisions, 2000. See also Gary D. Nelson, "Additional Insured" Endorsements Conflicting Expectations, 24 The Brief 29 (Summer 1995); Lisa Oonk, The Construction Industry: Coverage Issues Created by Claims Against Additional Insureds, 28 The Brief 8 (Summer 1999); Risk Transfer Tactics for Indemnitors, 22 The Risk Report 12 (International Risk Management Institute August 2000); and Richard H. Glucksman & Glenn T. Barger, Additional Insured Endorsements: Their Vital Importance in Construction Defect Litigation, 21 The Construction Lawyer 30 (Winter 2001).

¹⁵ 52 Cal. Rptr. 2d 580 (Cal. App. 1996).

¹⁶ See footnote 7.

¹⁷ The Insurance Service Office, Inc. is a non-profit association of insurance companies that has been involved for many years in standardizing workers' compensation/employers liability, commercial general liability and commercial automobile liability policies for insurers.

¹⁸ See Chapter 9, Owners and Contractors as Additional Insureds, The Additional Insured Book, Fourth Edition, January 2000.

¹⁹ Paul E. Joudrey, 2001 ISO General Liability Program Changes, 24 The Risk Report 2 (October 2001).

²⁰ The manual is published by ISO to provide guidance on policy and endorsement forms for insurers, including any premium guidelines for adding a particular endorsement. In most states, the insurers follow the manual because the states' insurance regulators have approved it. General Rules Section I of the manual focuses on CGL issues, with Division Six, Rule 16, "Additional Interests," providing the ground rules for the ISO additional insured endorsements.

²¹ The standard ISO CGL policy forms (CG 00 01 or CG 00 02) have no exclusion for professional liability exposures. Because there is no such exclusion, the ISO CG 20 07 and CG 20 32 forms include this exclusion to ensure that this endorsement does not include coverage for an architect or engineer's professional liability exposure. In addition, this exclusion is usually addressed via an endorsement to these policy forms when a named insured has any design exposure.

²² See Chapter 9, Owners and Contractors as Additional Insureds, The Additional Insured Book, Fourth Edition, January 2000.

²³ The coverage afforded by this endorsement is comparable to what is available under an owners' and contractors' protective liability policy. This policy is discussed later in this article.

²⁴ See Douglas R. Richmond, The Additional Problems of Additional Insureds, 33 Tort & Ins. L. J. 945, 956-65 (1998), and the cases discussed and listed in this article. There are only two cases that I am aware of that do not reach this conclusion. They come out of the state of Texas, one state court case and a federal case. They are: Granite Constr. Co., Inc. v. Bituminous Ins. Cos., 832 S.W.2d 427 (Tex. App. 1992), and Northern Ins. Co. of New York v. Austin Commercial, Inc., 908 F. Supp. 436 (N.D. Tex. 1994).

²⁵ 987 S.W.2d 340 (Mo. App. E.D. 1998), rehearing and/or transfer denied (March 16, 1999), transfer denied (April 27, 1999).

²⁶ Id.

²⁷ Although the policy form is not mentioned in the appellate court's decision, I am assuming that the policy American Family issued to Mecey was not the standard ISO CGL policy forms (CG 00 01 and CG 00 02), but rather a business owners protective policy, known as a BOP policy. A BOP policy is often issued to very small businesses to cover general and automobile liability exposures.

²⁸ Shell Oil Co. v. A C & S, Inc., 649 N.E.2d 946 (Ill. App. 1995).

²⁹ Union Pacific R.R. Co., 987 S.W.2d at 345.

³⁰ Id., citing Harrison v. Tomes, 956 S.W.2d 268, 270 (Mo. banc 1997).

³¹ 988 S.W. 2d 451 (Tex. App. 1999). In a 2-1 decision adopting the majority position, this particular case briefly refers to the aforementioned Texas cases listed in footnote 24. In a footnote to this case, this court simply stated: "To the extent they are contrary to this opinion, we disagree with two these cases." Id. at 454.

³² Id.

³³ 81 Cal. Rptr. 2d 557 (Cal. App. 1999). This case provides an excellent discussion on this subject.

³⁴ Acceptance Ins. Co., 81 Cal. Rptr. 2d 557.

³⁵ 649 N.E.2d 946 (Ill. App. 1995).

³⁶ This language was contained in the AC & S insurance certificate. Furthermore, the relevant provisions of the insurance requirements of the AC & S sub-subcontract provided:

C. The policy of insurance which affords Comprehensive General Liability shall contain a provision or endorsement stating that such insurance:

******

c. includes OWNER and CONTRACTOR as additional insureds as regards their liability arising out of operations performed for OWNER and CONTRACTOR by SUBCONTRACTOR under this Subcontract.

(Emphasis supplied in original text). Shell Oil Co., 649 N.E.2d at 951.

³⁷ Maryland Casualty Co. v. Chicago & North Western Transp. Co., 466 N.E.2d 1091 (Ill. App. 1984). In considering whether an assault arose of the leased premises, the court concluded that:

The phrase "arising out of" is both broad and vague, and must be liberally construed in favor of the insured; accordingly, "but for" causation, not necessarily proximate causation, satisfies this language. . . . [B]y construing the policy liberally in favor of the insured — a procedure necessitated by the ambiguity of the "arising out of" language — the instant injuries [sustained by an employee of the insured on property owned by the additional insured] appear to have arisen from the operation and use of the leased premises, since they would not have been sustained "but for" the victim's employment on those premises. (Emphasis added.)

³⁸ Shell Oil Co., 649 N.E.2d at 951.

³⁹ Id.

⁴⁰ 992 F.2d 251 (10th Cir. 1993).

⁴¹ 683 N.E.2d 510 (Ill. App. 1997).

⁴² 143 F.3d 5 (1st Cir. 1998).

⁴³ 386 F.2d 413 (3rd Cir. 1967).

⁴⁴ 601 N.E.2d 473 (Mass. App. 1992).

⁴⁵ 47 Cal. App. 291 (Cal. App. 1996).

⁴⁶ 930 F.2d 1104 (5th Cir. 1991).

⁴⁷ 660 A..2d 672 (Pa. Commw. 1995).

⁴⁸ 203 A.D.2d 83 (N.Y. App. Div. 1994).

⁴⁹ 501 N.E.2d 812 (Ill. App. 1986).

⁵⁰ 225 A.D.2d 304 (N.Y. App. Div. 1996).

⁵¹ 707 So.2d 733 (Fla. 1998).

⁵² 52 Cal. Rptr. 2d 580 (Cal. App. 1996).

⁵³ 562 F. Supp. 800 (E.D. Pa. 1983).

⁵⁴ 406 F. Supp. 1292 (W.D. Pa. 1976).

⁵⁵ 76 Cal. Rptr. 2d. 113 (Cal. App. 1998).

⁵⁶ 722 N.E.2d 755 (Ill. App. 1999).

⁵⁷ Paul E. Joudrey, 2001 ISO General Liability Program Changes, 24 The Risk Report 2 (October 2001), p. 5.

⁵⁸ Section B of Rule 16 Additional Interests of the manual provides that this endorsement is "[f]or all others. . . ."

⁵⁹ Just as CG 20 10 has been modified by ISO in its 2001 CGL program changes, this endorsement has been similarly altered by these program changes to reaffirm ISO's intent to remove completed operations from its coverage. It is identified as CG 20 33 10 01. Interestingly enough, ISO did not create a new automatic additional insured endorsement providing for completed operations coverage as it did with its new CG 20 37 form.

⁶⁰ CG 20 33 07 98 or CG 20 33 10 01 can provide coverage equal to any of these endorsements if the term "ongoing" and the last sentence of its paragraph A are deleted.

⁶¹ 92 Cal. Rptr. 2d 443 (Cal. App. 2000).

⁶² Id. at 457. The last sentence of the quoted court's opinion inaccurately portrays CG 20 10 11 85 as covering an additional insured's vicarious liability only.

JOURNAL OF THE MISSOURI BAR
Volume 58 - No. 2 - March-April 2002