"Additional Insured" Coverage Under a CGL Policy

Many different commercial agreements can require one party to obtain liability insurance for the benefit of the other.  This obligation is more often honoured in the breach rather than with compliance.  But when the client does indeed follow through with his broker, the latter will usually arrange an endorsement to the CGL policy along the following lines:

"It is understood and agreed that XYZ Company is added as an additional insured to this policy, but only with respect to liability arising out of the operations of the Named Insured."

This clause is both broad and vague.  In the U.S.A., it has spawned much litigation but there have been relatively few lawsuits on the subject in Canada.

The "reach" of such an "additional insured" clause was recently considered by the Supreme Court of British Columbia in the July 30, 2003 case of School District No. 79 v. Lloyds Underwriters.

The facts were simple.  The District had allowed a certain sports club to use one of its fields for a baseball tournament but stipulated that appropriate third party liability insurance be obtained for the event.  The sports club obtained liability coverage from Lloyds and the District was added to the policy under an "additional insured" clause identical to the one set out above.  A player broke his leg on the field during the tournament and sued the District.  The latter sought coverage from Lloyds but coverage was denied.

Lloyds argued that the claims against the District did not "arise out of" the operations of the sports club but rather were founded upon the District's entirely independent occupier's liability obligations as the owner of the field.  They argued the District owed the same duty of care to any casual, uninvited user of the field regardless of whether any tournament was being held. Hence, so the argument went, coverage was not triggered in the circumstances.

The Court ruled that the allegations against the District were not  sufficiently "separate and distinct" from the operation of the tournament to avoid coverage.  Rather, there was a "clear nexus"  between the tournament, the alleged negligence and the alleged  injury.  The claims therefore "arose out of" the operations of the  sports club as host of the tournament, "the very operations that Lloyd's agreed to insure".

Coverage was therefore enforced against Lloyds and the insurer was required to reimburse the District's defence costs incurred to  date.

Insurers sometimes argue that the "additional insured" endorsement limits exposure only to vicarious liability for the Named Insureds' operations.  Or, as the above case demonstrates, that it has no application to the additional insured's own negligence which is "separate and distinct" from the Named Insured's operations.

But insurers usually wind up on the losing end of these arguments.  The "arising out of" language is both broad and vague and will  usually be liberally construed in favour of the additional insured.  Great care must be taken with the drafting of the endorsement if  coverage is meant to be only for a very narrow band of liability  exposure.

Of course, these endorsements also give rise to disputes between  insurers about overlapping coverage.  The "additional insured" very often has his own CGL coverage and the question arises whether that coverage is primary, excess or contributory.  These issues involve an analysis of "other insurance" clauses in the policies and the complicated common law principles respecting contribution between insurers.  Yet another Pandora's Box.

The School District No. 79 v. Lloyds Underwriters case can be  accessed on the B.C. Supreme Court website at: http://www.courts.gov.bc.ca/Jdb-txt/SC/03/13/2003BCSC1303.htm 

Readers with any questions regarding "additional insured" endorsements, overlapping coverage issues, or the rather unique  defences that can arise from "covenants to insure", are welcome to contact at any time Nigel Kent at (604) 643-3135 or npk@cwilson.com.