Additional insured issues are generally familiar to insurance professionals. Every day, underwriters receive requests for endorsements to name persons or companies as additional insureds (consistent with the promises their named insureds make in commercial contracts). Claims handlers thereafter receive demands from those persons or companies seeking such coverage. While certainly a common event, the significance of taking on an additional insured risk cannot be overstated.

Language is critical when examining the nature and impact of limitations in two of the most commonly used additional insured endorsements: (1) “arising out of” endorsements, which limit coverage to the additional insured's liability "arising out" of the named insured’s work or operations, and (2) “caused by” endorsements, which limit coverage to damage "caused by" (or "caused, in whole or in part by") the named insured's acts or omissions.

To the casual observer, one might think "arising out of" and "caused by" endorsements would provide the same measure of additional insured coverage. As a general rule, however, the "arising out of" endorsement provides broad coverage for liability that would not have occurred "but for" the named insured’s operations, and the "caused by" endorsement provides narrower coverage for damage proximately caused by the named insured's negligence. Judicial interpretations of these endorsements vary state to state and consideration of state law will inform underwriters and adjusters as to the scope of their obligations.

Additional Insured Endorsements

Insureds often attempt to transfer the risk of accidental bodily injury and property damage through “additional insured” provisions in commercial contracts (i.e., requirements that one entity add another as an additional insured on its insurance policies). These provisions are especially common in construction contracts in which subcontractors are typically required to name other companies, such as the general contractor and developer, as additional insureds on their policies.

These contractual provisions, without more, have no effect. Only the insurance policy controls whether a person or entity is an additional insured and what the scope of such coverage will be. Very often, the additional insured will not have seen the insurance policy until after a claim is made against it (if at all). Nevertheless, the additional insured will generally still demand full protection as though it were the named insured.

Commonly used additional insured endorsements include a specific limitation requiring a relationship between the named insured’s work and the additional insured’s liability. The precise relationship required will depend on the language used by the endorsement and governing state law interpreting that language. In particular, such endorsements limit additional insured coverage to damages “arising out of” the named insured’s work (“arising out of” endorsements) or damages “caused by” or “caused, in whole or in part, by” the named insured’s acts or omissions (“caused by” endorsements).

A typical “arising out of” endorsement provides the following relevant language:

The Who Is An Insured provision of the Policy is amended to include as an insured any person or organization (called “additional insured”) to whom you are obligated by valid written contract to provide such coverage, but only with respect to liability for “bodily injury” or “property damage” arising solely out of “your work” on behalf of said additional insured for which coverage is provided by this policy.

A typical "caused by" endorsement provides the following relevant language:

The Who Is An Insured provision of the Policy is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for "bodily injury" or "property damage" caused, in whole or in part, by "your work" at the location designated and described in the schedule of this endorsement performed for that additional insured.

In Dale Corp. v. Cumberland Mut. Fire Ins. Co., 2010 WL 4909600 (E.D. Pa. Nov. 30, 2010), a Pennsylvania federal court discussed the drafting history that gave rise to these endorsements. As Dale explained, insurers used standard "arising out of" endorsement forms for many years. While courts reached varying conclusions as to the scope of "arising out of" endorsements, they generally construed coverage very broadly. This grew frustrating to insurers who found themselves providing substantial coverage to additional insureds when their name insureds were not at fault for the underlying injury.

Many insurers preferred to provide narrower coverage, limiting the additional insured's coverage to damage directly caused by the named insured's work. In response, insurers started using "caused by" endorsement forms in 2004. The court in Dale cited commentators who concluded:¹

The 2004 revisions are a belated acknowledgement [sic] that the "arising out of" language simply did not accomplish the scope of coverage intended by the industry. Many courts interpreted "arising out of" to be a simple causation test and, therefore, afforded direct primary coverage to the additional insured. The ISO hopes that, by substituting "caused by" for "arising out of," a narrower coverage interpretation will be afforded. Moreover, the revised language specifies that coverage is afforded the additional insured for liability arising out of the named insured's "acts or omissions," not simply the named insured's operations. Arguably, the absence of fault on behalf of the named insured results in a finding of no coverage for the additional insured.

The scope of coverage under each endorsement will vary based not only on the language used, but the sometimes unpredictable (state-specific) interpretation of that language. For instance, while some courts have interpreted "arising out of" broadly to encompass all damage "relating to" the insured's work, other courts have held it limits coverage to the additional insured's "vicarious liability" for the named insured's conduct. Similarly, while some courts have interpreted "caused by" endorsements to require proximate causation between the named insured's acts and the plaintiff's injury, other courts have imposed a less stringent standard of causation.

"Arising Out Of" Endorsements—1985, 1993, 1997 and 2001 ISO

Courts generally take one of two approaches in interpreting the scope of coverage provided by this language. Under the first approach, this endorsement provides coverage where there is any causal relationship between the named insured's work, acts and/or omissions and the additional insured's liability. Under the second approach, this endorsement limits the coverage to the additional insured's vicarious liability for the named insured's conduct.

The former approach is the majority rule. Federal Ins. Co. v. Am. Hardware Mut. Ins. Co., 184 P.3d 990 (Nev. 2008) ("the majority of jurisdictions resolving disputes over whether coverage extends to the additional insured's own negligent acts have interpreted additional insured endorsements in favor of coverage, regardless of fault, provided that the injury or loss is connected to the named insured's operations performed for the additional insured").²

State Auto. Mut. Ins. Co. v. Kingsport Development, LLC, 846 N.E.2d 974 (Ill. App. 2006) is an example of the majority rule. In Kingsport, an employee of the named insured subcontractor, Anderson, sued the general contractor, Kingsport, for liability arising out of a workplace injury. The plaintiff alleged he was injured while working on the site for Anderson when a scaffold constructed by Kingsport collapsed. The court held Anderson's insurer owed a duty to defend Kingsport under an endorsement covering liability arising out of Anderson's work. The court explained:

[T]he phrase "arising out of" has been held to mean "originating from," "having its origin in," "growing out of," and "flowing from," 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.

Even though the complaint alleged that Kingsport was liable as a result of its own independent negligent acts, not Anderson's negligence, the court held there was a duty to defend. The court reasoned that because the plaintiff was employed by and working for Anderson when he was injured, he would not have been injured "but for" Anderson's work.

Ohio courts have taken a different approach, holding that an "arising out of" endorsement limits coverage to the additional insured's vicarious liability for the named insured's conduct. See, for example, City of Cleveland v. Vandra Bros. Constr., Inc.,948 N.E.3d 298 (Ohio Ct. App. 2011). In Vandra Bros., the plaintiff sued the City of Cleveland and a contractor for injuries sustained in a car accident occurring after his car hit a pothole. The plaintiff alleged the city negligently allowed the pothole to exist and the contractor failed to warn motorists. The court held there was no coverage for the city under the contractor's policy because the city was sued for its own independent negligence, not for its vicarious liability for the contractor's failure to warn. Under the Ohio rule, the "arising out of" endorsement provides a strong limitation of coverage and will not cover allegations that an additional insured was negligent even if there is also the allegation that the named insured's work caused the accident at issue.

Worth Constr. Co., Inc. v. Admiral Constr. Co., 888 N.E.2d 1043 (N.Y. 2008) provides an example of a middle ground between the two rules. In Worth, the plaintiff alleged that he slipped on the stairs built by the named insured, Pacific, as a result of the fireproofing later placed on the stairs by another subcontractor. The injury occurred after Pacific's work was complete. The general contractor (Worth) was sued by the plaintiff and sought coverage under Pacific's insurance policy.

Pacific's policy provided additional insured coverage to Worth, "but only with respect to liability arising out of [Pacific's] operations." The court found that under New York law, the phrase "arising out of" means "originating from, incident to, or having connection with" and requires "only that there be some causal relationship between the injury and the risk for which coverage is provided."

The court did not use the phrase "but for," but instead found the key issue "is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained." Applying this conclusion, the court held Worth was not covered under Pacific's policy because another subcontractor was responsible for the application of the fireproofing upon which the plaintiff was injured.

The fact that the plaintiff's injury occurred where Pacific completed its work was not sufficient to compel the conclusion that his injury "arose out of" Pacific's operations. A stronger relationship between the named insured's work and the plaintiff's injury was required. Compare Worth with Regal Constr. Corp. v. Natl'l Union Fire Ins. Co. of Pennsylvania, 930 N.E.2d 259 (N.Y. 2010) (holding an injury to the named insured's employee sustained in the course of its operations arose out of the named insured's work even if the injury may have been caused by the additional insured's actions).

"Caused by" Endorsements—2004 and 2013 ISO

Most courts have held that "caused by" endorsements cover damage proximately caused by the named insured's negligence. For instance, in Dale, the court recognized that, like Illinois courts, "Pennsylvania courts have uniformly held phrases like ‘arising out of' to require only a showing of ‘but for' causation." Then, the court assessed the scope of coverage provided by a "caused by" endorsement by evaluating the drafting history of additional insured endorsements.

The court noted that the Insurance Services Office created the "caused by" endorsement and hoped that "by substituting ‘caused by' for ‘arising out of,' a narrower coverage interpretation will be afforded." The court cited two Texas cases holding the "caused by" endorsement limited coverage to those circumstances in which the named insured's work proximately caused the accident.³ The court concluded, "[t]he case law and the drafter's history supports my conclusion that the additional insured provision requires a showing that [the named insured's] acts or omissions were a proximate cause of [the plaintiff's] injuries in order to trigger the policy coverage."

In James G. Davis Constr. Corp. v. Erie Ins. Exch., 126 A.3d 753 (Md. Ct. App. 2015), the court reached the same conclusion, rejecting an even narrower interpretation of the "caused by" endorsement. The insurer argued that a "caused by" endorsement limited coverage to those circumstances in which the additional insured was vicariously liable for the named insured's acts or omissions. The court disagreed, finding the "caused by" endorsement required proximate causation between the named insured's work and the injury. The court held that an insurer owed a duty to defend so long as the complaint raised the possibility that the named insured's acts or omissions caused the plaintiff's injuries.

Not all courts have found "caused by" endorsements to provide narrower coverage than "arising out of" endorsements. In New York, "arising out of" and "caused by" endorsements have been interpreted to provide identical coverage. Petrillos Stone Corp. v. QBE Ins. Corp., 984 N.Y.S.2d 634 (N.Y. App. Div. 2014) ("[t]he phrase ‘caused by' does not materially differ from the phrase ‘arising out of,' used in other additional insured endorsements, which focuses not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained"). Nevertheless, as a general rule, the "arising out of" endorsement provides far broader coverage than the "caused by" additional insured endorsement.

Conclusion

Additional insured questions are very often the most complex and hotly contested questions that are presented by large commercial claims. While the "caused by" endorsement has been utilized by insurers for more than a decade, both "arising out of" and "caused by" additional insured endorsements remain in the marketplace (as well as many other variations of such endorsements). Knowing how the language of such endorsements will be construed should assist underwriters in managing such risks and be instructive to claims personnel in deciding how to respond to such claims.

We extend our sincere thanks to Mr. Pinderski and Mr. DiSantis from Tressler LLP for contributing to Gen Re client research and publications.

About the Authors

Jim Pinderski, Partner, is an accomplished litigator who focuses his practice in the areas of insurance coverage litigation and complex commercial litigation. He has handled a wide variety of insurance-related disputes, including issues of general coverage, environmental coverage, advertising injury/personal injury coverage, asbestos coverage, professional liability coverage and bad faith. Jim has served as national coverage counsel for several major insurance companies. You can contact Jim at the Tressler Chicago office at jpinderski@tresslerllp.com or 312 627 4092.

Michael DiSantis, Associate, focuses his practice in the areas of insurance coverage analysis and insurance coverage litigation. He represents insurance companies in litigation matters nationwide and advises insurers in non-litigated disputes relating to bodily injury, property damage and personal and advertising injury coverage. You can reach Michael in the Chicago office at mdisantis@tresslerllp.com or 312 627 4103.

Tressler LLP - Headquartered in Chicago, with six offices located in four states, Tressler LLP is a national law firm comprised primarily of attorneys who devote their practices to the representation of the insurance industry in coverage analysis and resolution, litigation, underwriting consultation, product development, claims management and reinsurance. For additional information about the firm, visit www.tresslerllp.com.