Companies entering a work contract place the burden of risk closest to the party best able to prevent a loss. In the construction industry, a general contractor would transfer liability to subcontractors in two key ways: 1) indemnification language in the contract and 2) requiring that they be added as an “additional insured” on the subcontractor’s insurance policy. The intent of these practices is providing financial reimbursement and insurance coverage to the general contractor in the event of a loss for which the subcontractor holds some responsibility. However, guaranteeing that the additional insured endorsement fully applies when a claim occurs can be complicated. Coverage depends on the causation-trigger language – five little words that make a big difference.
What is causation-trigger language?
When a subcontractor adds a general contractor to their policy, the insurer amends the coverage through an additional insured endorsement. Standard amendments include the name of the additional insured, applicable locations and projects, and a scope of work to which the endorsement pertains. Causation-trigger language helps determine when and if the endorsement applies.
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A general contractor and subcontractor’s insurer have different goals for an additional insured endorsement.
The general contractor wants the broadest possible coverage to minimize their risk exposure for work performed by third parties.
The insurer wants a narrow scope of coverage to prevent paying for losses not caused by their policyholder.
As a result, the endorsement likely contains one of the following types of causation-trigger language:
- “Arising out of” endorsements are broader and afford coverage when an additional insured has a liability growing out of the named insured’s work or operations.
- In contrast, “caused by” trigger language is narrower and limits coverage to liabilities “caused, in whole or in part by” the named insured’s acts or omissions.
While they sound similar, the subtle differences between the causation triggers impact general liability claims coverage.
“Arising Out Of”
Think of “arising out of” the same as “linked to” or “originating from.” When a loss occurs, “arising out of” language provides coverage to the additional insured if the loss is related to the work of the named insured, even if they are not solely at fault. Language in a typical endorsement like the CG 20 10 10 01 form could read:
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.
The exact interpretation of this language varies widely across states, but the court consensus has been an understanding of broad coverage applicability.
One of the most general interpretations came from State Auto. Mut. Ins. Co. v. Kingsport Development, LLC in Illinois. In that case, an employee of the named insured subcontractor sued the general contractor when scaffolding constructed by the general contractor collapsed. The general contractor sought coverage under its additional insured endorsement on the subcontractor’s policy. Even though the subcontractor was not found negligent, the court ruled that the additional insured coverage applied. They reasoned that the plaintiff would not have been injured had he/she not been working for the subcontractor. Therefore, the coverage for the claim “arising out of” the workplace injury applied to the subcontractor’s policy.
To narrow this expansive interpretation, the Insurance Services Office, Inc. (ISO) created new additional insured endorsement language in 2004.
Whereas “arising out of” establishes a liability link, “caused by” or “caused, in whole or in part by” is designed to create a direct connection. The language triggers based on the named insured’s: 1) acts or omissions, or 2) the acts and omissions of those acting on its behalf in performance of operations for the additional insured. Language in a typical endorsement like the CG 20 10 04 13 form could read:
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 and performed for that additional insured.
Again, interpretation varies by state, but in James G. Davis Constr. Corp. v. Erie Ins. Exch. in Maryland, the court found the named insured subcontractor was responsible for another third party’s injury that created a liability for Davis because the subcontractor had hired the third party. Because the complaint raised the possibility that the named insured’s acts or omissions caused the plaintiff’s injuries, the court ruled the additional insured endorsement applied and Erie Insurance owed a duty to defend.
In this case, there was a direct connection between the liability and the named insured. However, in the Kingsport Development case, had the causation-trigger language used “caused by,” we can reasonably believe that the additional insured endorsement would not apply because the injury was not an act or omission of the subcontractor.
Which Is Better?
General contractors and other upstream parties often request the additional insured endorsement include “arising out of” language in pursuit of the broadest application of coverage possible. In general, this is to the benefit of the additional insured. However, while the language is still in use, it is considered dated. Therefore, some insurers will not write the endorsement that way or will charge a higher premium. As a result, this could be a dealbreaker for certain subcontractors or could create a lengthier contract negotiation process. Depending on the state where the work is performed, the court’s precedent for interpretation of “arising out of” and “caused by” could play a major factor. Take that into consideration before deciding which type of causation-trigger language works best.
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