In a recent Nebraska case, Federated Service Ins. Co. v. Alliance Const., LLC, 282 Neb. 638, 646 (2011), the Supreme Court issued a seminal ruling that affects additional insured endorsements written in that state.
In Federated, a subcontractor agreed in a written contract to add a general contractor as an additional insured to the sub’s insurance policy. The parties also had a separate indemnity clause in the contract whereby the sub agreed to indemnify the general for both active and passive negligence, but not for the general’s sole negligence. After a personal injury at the work site, the general contractor tendered the loss to the sub’s insurer, Federated. Federated refused to pay, claiming that the indemnity agreement limited the terms of the additional insured endorsement to only the negligent acts of the named insured. Federated also argued that the indemnity clause in the underlying construction contract was invalid. Such clauses are barred in Nebraska by public policy.
The Nebraska Supreme Court made several key findings. First, it held that:
[The restrictions in an additional insured endorsement are] “irrelevant to interpreting the parties’ intent in the underlying contract. We conclude that a requirement in the underlying contract that the subordinate party make the promissee an additional insured on the subordinate party’s CGL coverage unequivocally shows that the parties intended the subordinate party to insured against the promissee’s negligence.
Id., at 648 (emphasis added).
Second, the Court held that “[E]ven if an indemnity provision (in an underlying contract) is invalid, its invalidity does not affect the coverage extended to another party under an additional insured endorsement.” Id. In other words, the two clauses – indemnity and insurance – in an underlying contract are independent of another.
Third, the endorsement at issue in Federated contained a limitation. It said that coverage for an additional insured “would not exceed ‘the terms of a written agreement to add any insured, or to procure insurance.” The Supreme Court concluded that the underlying agreement between the parties in the insuring clause was to add the general as an additional insured under the policy, which the sub did. Therefore Federated’s coverage of the general contractor’s negligence did not exceed the terms of the written agreement. Note that the Supreme Court did not limit coverage to the indemnity agreement between the parties – only the insuring agreement. Id., at 649. This was consistent with its holding in #2 above.
Fourth, the Supreme Court adopted a very liberal interpretation of the 2004 edition of the CG 20 26 Additional Insured endorsement form. It held that:
We also note that the insurance industry issued a new additional insured endorsement in 2004 in response to courts’ interpreting the “arising out of” language to require only “but for” causation. Finally, a reasonable person would not conclude that the endorsement contains the restrictions for which Federated argues. It neither explicitly requires the principal insured’s negligence to have caused the loss nor states that an additional insured is covered only for its vicarious liability. If this is the only coverage that Federated intended to provide, it could have clearly stated its coverage.
Id., at 651 (emphasis added). The holding in Federated puts the onus on the insurance company to clearly and explicitly allocate coverage between a named insured and an additional insured in the CG 20 26 endorsement. Ultimately the Court found coverage and forced the insurer to pay.