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REVERSING FIRST DEPARTMENT, NEW YORK COURT OF APPEALS CONCLUDES "ACT OR OMISSION" LANGUAGE IN BLANKET ADDITIONAL INSURED ENDORSEMENT REQUIRES PROXIMATE CAUSE
NOW FOR THE HARD PART-IDENTIFYING THE CLAIMS POTENTIALLY IMPACTED BY THE DECISION AND FIGURING OUT THE IMPACT
For years, New York courts broadly construed the phrase "arising out of" the named insured's work in blanket additional insured endorsements to include all manner of situations, often having little to do with the insured's work per se. Any injury to the named insured's employee automatically implicated the coverage.
To narrow the coverage to comport with what was originally intended, the endorsement was amended to provide coverage for additional insureds "only with respect to liability for 'bodily injury' . . . caused, in whole or in part, by: 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf."
In Burlington Ins. Co. v. NYC Transit Auth., 14 N.Y.S.3d 377 (1st Dep't 2015), the Appellate Division, First Department construed the meaning of this language in an additional insured endorsement making the Transit Authority and the MTA additional insureds.
Burlington's named insured was Breaking Solutions. The plaintiff, who was not employed by Breaking Solutions, was injured in an explosion that occurred when Breaking Solutions was excavating a subway tunnel in Brooklyn. The explosion happened when Breaking Solutions' excavator struck an energized electrical cable buried below the concrete. It was undisputed that the Transit Authority was responsible for identifying and marking or protecting any hazards in advance to allow the excavator to avoid them. Discovery established that Breaking Solutions was not at fault.
A Transit Authority employee was injured when he fell from an elevated work platform while trying to evacuate the tunnel following the explosion.
The First Department concluded that the "language of the relevant endorsement, on its face, defines the additional insured coverage afforded in terms of whether the loss was 'caused by' the named insured's 'acts or omissions,' without regard to whether those 'acts or omissions' constituted negligence or were otherwise actionable."
The court cited prior cases by it involving injuries to employees of the named insured. Burlington was the first case by the First Department to find the "acts or omissions" language was triggered when an act of the named insured allegedly injured an employee of a third-party.
Before Burlington, the case law in New York interpreting the "act or omission" language appeared to require an actual finding of negligence against the named insured before the additional insured coverage was owed. See Crespo v. City of New York, 303 A.D.2d 166 (1st Dep't 2004).
It was believed that the New York Court of Appeals might address in Strauss Painting, Inc. v. Mt. Hawley Ins. Co., 24 N.Y.3d 578 (2014) whether the "acts or omissions" language required negligence by the named insured. However, the Court resolved the appeal without the need to reach the issue.
In Burlington, in a 4-2 decision, the Court of Appeals held that the "caused by" language describes proximate cause and is narrower than the phrase "arising out of." In the majority's words, "[t]he 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."
Agreeing with Burlington, the majority concluded that the phrase "caused, in whole or in part" requires proximate causation because "but for" causation cannot be partial. The words "in whole or in part" can only modify proximate cause and, in the majority's view, the defendants' interpretation would render the words superfluous in contravention of the rule requiring the court not to render part of the provision meaningless.
The majority also concluded that the endorsement's reference to "liability" caused by Burlington's acts or omissions further confirms that coverage for additional insureds is limited to situations where the insured is the proximate cause of the injury because "liability exists precisely where there is fault."
The majority expressly rejected the First Department's conclusion, based on its prior decisions, that the phrase "caused by" does not materially differ from the phrase "arising out of" and results in coverage even in the absence of the insured's negligence.
Members of both sides pressed Burlington's counsel at oral argument to acknowledge that the endorsement would be clearer if it included the word "negligence." The majority was willing, however, to consider that a change had been intended when the "arising out of" language was replaced by "caused by" and the "act or omission" language was added.
Justice Rivera, who authored the decision, also pressed the Transit Authority's counsel on the fairness of construing the contract to require some negligence since its contract required the ISO "act or omission" form of the endorsement.
Justice Fahey, who authored the dissent, was house counsel for Kemper for eight years. That experience did not help Burlington as Justice Fahey kept reminding Burlington's counsel that the rules of insurance policy interpretation, as with the interpretation of contracts generally, do not allow the use of extrinsic evidence unless there is an ambiguity and, in the case of an ambiguity, the policy is to be construed against the insurer.
Similar to hard cases making bad law, this is a case where the extreme facts and apparent inequitable result in applying the "act or omission" language literally may have led the majority to rule in favor of the insurer (and its insured) in a case that arguably was a close call.
The additional insured was solely negligent, and it was purely fortuitous bad luck that the named insured did the act (striking the active electrical cable) causing the explosion which, in turn, caused the claimant to fall from a platform. Neither the insurer in its contract with its named insured nor the named insured in its contract with the Transit Authority bargained for being financially responsible for such an incident.
Finally, addressing Justice Fahey's concern that the majority's "approach would threaten the stability and certainty of our bedrock rules of insurance policy interpretation," Justice Rivera wrote: "[o]ur analysis should come as no surprise to the industry because the drafters of the language used here intended it to mean proximate causation."
What now? Start reviewing your Burlington issue claims since 2015.
For two years, insurers have been operating under the First Department's Burlington decision where all that was necessary was an act, any act, by the insured's employees to implicate the "act or omission" AI language. Based on the decision, Owners and GCs (and their insurers on their behalf) have been claiming AI status under a CGL policy where the claimant was, for example, merely walking through the site and tripped over something having nothing to do with the contract work.
The Court of Appeals reversal will affect (for better or for worse depending on which side of the tender you are on) all claims involving a coverage opinion based on the earlier ruling. Coverage opinions, tender acceptances and denials, and coverage disputes in litigation, all could be affected. Whereas before all that was necessary was an act, now the named insured must have caused, in the proximate cause sense, the accident.