Companies that work with each other share insurance through adding the other company as an “additional insured” in connection with their work together. Sometimes it is not clear that the claim falls within the scope of additional-insured coverage. The New York Appellate Division recently confronted whether an insurer had a duty to defend in those circumstances, answering the question that it does. BP A.C. Corp. v. One Beacon Ins. Group, 2006 NY Slip Op. 05297 (N.Y. App. Div., 1st Dept. July 6, 2006).
What happens if we don’t know if the entity is “truly” an additional insured until the underlying liability case is resolved? In the New York case, an HVAC contractor was an additional insured “only with respect to liability arising out of your ongoing operations performed” and “ends when your operations for that insured are completed.”
The New York court found that the purpose of being an additional insured, with the concomitant right of defense, would be defeated if the insurer did not provide a defense until the underlying action was over. The majority reviewed prior cases, which basically cleave between those policies that require proof of a fact establishing additional-insured status as a condition precedent and those where no such pre-condition is made clear. The court found that, so long as the allegations of the complaint reasonably can be construed as indicating the facts establishing additional-insured status, the insurer has a duty to defend.
The dissent is right that, if the accident at issue took place after the operations are completed, then there is no coverage (and from the perspective of heaven there never was coverage). But that fact will be determined during the trial of the liability case. The dissent reasons that this dispute of fact precludes summary judgment, and thus that the parties need to await the outcome of the liability case before determining additional-insured status. The dissent does not flesh out the analysis whether the insurer would be collaterally estopped by the finding in the liability case (and under traditional collateral-estoppel principles it’s not clear that it would be bound), but it obviously would make no sense to allow the insurer to relitigate the question and obtain a different result. And the dissent does not address how the question should be resolved if the liability case is settled rather than tried.
The majority, in contrast, finds a presumptive, ongoing duty to defend, but recognizes that indemnity coverage might not apply depending on the way the facts are developed in the underlying case. Given (i) the vigilance of courts in construing defense coverage, (ii) that awaiting the trial of the underlying case before determining whether there was a duty to defend defeats the purpose of the duty to defend, and (iii) the impracticality of not knowing whether coverage is potentially involved (which will impede settlement, among other things), the majority opinion on balance is better taken.
The dissent is also right that an essential element of the insured’s prima facie case for coverage is that it is a covered entity, but it does seem sufficient, in the absence of other undisputed evidence, to allow the insured to rest on the allegations on this point. One way to harmonize the result with existing case law is to apply the ordinary principle that contract provisions are presumed not to be contractual conditions precedent. As a result, in the absence of clear and unambiguous language mandating that proof of a particular fact is a prerequisite to coverage, allegations permitting proof of that fact combined with a dispute of fact proves additional insured status (for purposes of the duty to defend).
The insurer will have the right to terminate its defense prospectively and not to pay for the judgment depending on the facts as found against the insured (which if adverse to the insured would be subject to offensive non-mutual collateral estoppel), but the duty to defend will not terminate retroactively. In other words, the insurer will not have a right to recover from the putative additional insured the defense costs it incurred even though in truth the conduct was not covered by the particular policy.
This is no different from any other circumstance where the duty to indemnify does not apply to the judgment eventually awarded. If a policy applies only to injury during the policy period and injury in that period is disproved at trial of the liability case, the insurer then will not have a duty to indemnify, but the defense obligation is not lost retroactively. While one can come up with some distinctions between named-insured status and other coverage facts, ultimately it does not seem that there is any real distinction of substance. Accordingly, unless the contract makes clear that insured status is a condition precedent or provides an express right of reimbursement for defense costs incurred on behalf of putative insureds, the majority holding seems right: the insurer has an obligation to defend.