Indemnity and Additional Insureds
Two recent cases are of interest in interpreting indemnity agreements and additional insured endorsements.
First, in National Union Fire Ins. Co. of Pittsburgh v. Nationwide Ins. Co., 69 Cal.App.4th 709 (1999), the court found that a general contractor solely at fault for an injury was not entitled to indemnity from the subcontractor or the subcontractor's insurer.
In that case, the employee of a plumbing subcontractor slipped and fell during a punch list inspection on a high-rise construction project. The trial court found the general contractor solely at fault and further found that the general contractor's negligence did not arise out of its supervision of the subcontractor's work. Thus, the lower court found the subcontractor not liable for indemnity. (The court did find the subcontractor liable for the approximately $17,000 in defense costs, but the subcontractor did not appeal that portion of the judgment.)
The employee was told to take care of some unfinished plumbing work on the 20th floor of a building under construction. The employee stepped off the elevator to find several inches of standing rain water on a recessed concrete subfloor which had leaked through open portions of the roof. Despite previous complaints by the plumbing subcontractor, the general contractor declined to do anything about the water. The general contractor's project manager stated: "I'm not their mother, you know. You can't go around telling people to be careful walking through water."
The employee slipped and fell, severely injuring his knee, and sued the general contractor for negligence. The general contractor sued the subcontractor for indemnity.
The general contractor was insured by National Union. The subcontractor was insured by Nationwide. The subcontract contained a written indemnity provision requiring the subcontractor to defend and indemnify the general contractor against claims "arising out of or in any way connected with the performance of the subcontract work," including the general contractor's active negligence and excepting only losses caused by its "sole negligence."
The subcontract also required the subcontractor to name the general contractor as an additional insured, and that the subcontractor's policy be primary and noncontributing to the general contractor's own liability insurance.
National Union defended the general contractor and filed a declaratory relief action against Nationwide. National Union settled the underlying case for $231,000 and incurred approximately $17,000 in defense costs. The indemnity cross-complaint against the subcontractor was severed from the main action and consolidated with National Union's declaratory relief action.
With respect to the indemnity claim against the subcontractor, the court found that the subcontract was a "Type I," within the three categories set out in MacDonald & Kruse, Inc. v. San Jose Steel Co., 29 Cal.App.3d 413, 419-421 (1972). Thus, the subcontractor was obligated to indemnify the general contractor even for the general contractor's own active negligence, so long as the general contractor's liability arose out of the subcontractor's performance of the subcontract work. But there was one exception: There is no indemnity for losses caused by the general contractor's sole negligence or willful misconduct. This exception comported with the statutory prohibition against allowing an indemnitor to hold harmless an indemnitee for the indemnitee's sole negligence in construction contracts. Civ. Code § 2782.
The appellate court upheld the lower court finding that the general contractor was solely negligent, because there was substantial evidence that the general contractor was in sole control of the area where the flooding occurred and could have prevented or ameliorated the water hazard.
As to the additional insured endorsement, the National Union court also found that the specific language there at issue did not give rise to a duty to defend or indemnify.
The endorsement contained "highly restrictive language" requiring the general contractor to be "held liable" for the subcontractor's acts or omissions in order to qualify as an additional insured. The "held liable" language in the endorsement tied their status as an additional insured to their vicarious liability for the subcontractor's misdeeds.
The general contractor raised the fact that the indemnity agreement itself required a broader additional insured endorsement. The endorsement required by the contract would provide coverage for the general contractor for acts or omissions in connection with its "general supervision" of the subcontractor's operations.
The court found this to be a distinction without a difference. Even if the supposedly more comprehensive endorsement had been secured, the additional insured coverage for "general supervision" would not apply to the general contractor's "own independent acts or omissions."
In the second case, Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal.App.4th 321 (1999), a contractor's employee working on the roof of a building was injured when he climbed through a hatch providing the only roof access, while on his way to a personal errand. The hatch was negligently maintained by the building owner, who knew about the defect. The owner was included as an additional insured under the contractor's policy with Acceptance, "but only with respect to liability arising out of `your work' for that insured by or for you."
"You" and "your" referred to the named insured employer. It defined "your work" as "work or operations performed by you or on your behalf." The owner was also covered by a policy from Reliance which, by its terms, was excess to other insurance and included a self-insured retention of $150,000.
Acceptance sent the owner a letter advising there was potentially no coverage under the additional insured endorsement, but funded a $400,000 settlement with the plaintiff on the owner's behalf, and then sued the owner and Reliance seeking declaratory relief and reimbursement.
Acceptance contended that "liability arising out `your work'" is ambiguous because (1) it might be interpreted to include any liability arising while the named insured was on the owner's premises to perform the work, or (2) it might be restricted to liability arising directly from the named insured's work product.
Thus, Acceptance argued extrinsic evidence must be consulted to resolve the ambiguity and offered the contract between the owner and the named insured. The contractor called upon the named insured to "carry the necessary insurance" without requiring the named insured to name the owner as an additional insured. Thus, argued Acceptance, the parties must have contemplated that the additional insured endorsement would cover the owner only where the named insured's work or operations exposed the owner to liability when none would otherwise exist. Because the employee was injured after he stopped working and was leaving the job site and was injured solely because of the owner's negligent maintenance, there was no coverage.
The court disagreed that the contract between the owner and the named insured could affect Acceptance's understanding of the additional insured endorsement scope, because Acceptance had never reviewed the contract between the named insured and the owner before issuing the endorsement.
The court also found that Acceptance failed to address the familiar rule that when an ambiguity remains unresolved after considering the policy's language and context and the parties' reasonable expectations, then the ambiguity is resolved against the insurer and in favor of coverage.
Furthermore, the court reasoned that California courts have consistently given an expansive interpretation to the terms "arising out of" or "arising from" in various kinds of insurance provisions. The court found that it was "settled" that this language 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 causal connection or incidental relationship.
Ms. Freeman is a Director in the firm's Insurance Coverage and Appellate Departments.