Daniel Gerber and Bryan Richmond on Whether All Additional Insured Coverage is Primary: Does the Policy’s Other Insurance Clause Matter?
A current debate in New York has been whether “other insurance” clauses in contracts of insurance have any effect when a party is named as additional insured. In other words, is all additional insurance primary? Since the Court of Appeals’ decision in Pecker Ironworks of New York, Inc. v. Travelers Insurance Company, 99 N.Y.2d 391 (2003) and, more recently, the First Department’s decision in BP Air-conditioning Corp. v. One Beacon Insurance Group, 33 A.D.3d 116 (1st Dept. 2006), arguments have been made from co-insurers in New York that an insured’s coverage as an additional insured is always primary to any coverage as a named insured, regardless of whether the “other insurance” clause purports to provide excess coverage only. The Court of Appeals recent decision in BP Air-Conditioning Corp. v. One Beacon Insurance Group should put an end to this debate.
Pecker Iron Works of New York, Inc. v. Travelers Ins. Co.
In 2003, New York’s highest court rendered a decision in Pecker Iron Works of New York, Inc. v. Travelers Ins. Co. that has had a significant impact on the insurance and indemnification obligations a subcontractor and/or its insurer have in New York litigation. 99 N.Y.2d 391 (2003). In that case, the Court of Appeals determined that implicit in an obligor’s contractual obligation to procure liability coverage naming the obligee as an additional insured was the premise that the coverage for the additional insured under the obligor’s liability policy would be primary and noncontributory, even where the contract between the parties did not expressly state that such coverage would be or should be primary.
However, the Court of Appeals in Pecker Iron Works did not address the issue of priority of coverage between insurers. The Pecker Iron Works court simply examined whether Pecker Iron Works was entitled to primary or excess coverage from Travelers based upon the specific additional insured endorsement at issue. Once the court found that Pecker Iron Works was entitled to primary coverage from Travelers, it was not asked to consider the relationship between Travelers’ and the other insurer’s policies. In other words, the court did not consider whether Travelers’ policy was the sole primary coverage or co-primary with the other insurer.
BP Air Conditioning Corp. – First Department’s Decision
The First Department’s holding in BP Air Conditioning Corp. v One Beacon Insurance Group, 33 A.D.3d 116 (1st Dept. 2006) contains similar facts and appeared to base its holding on Pecker Iron Works. The lower court had granted BP’s motion for summary judgment to the extent that One Beacon is obligated to provide a defense in the underlying action. It refused to declare that One Beacon was primarily responsible for BP’s defense costs since no other policies were submitted on the motion and it could not ascertain whether some other carrier should be treated as co-insurer or excess insurer to One Beacon without comparison of the policy language.
In modifying the lower court’s decision, the First Department Appellate Division in BP Air Conditioning, extended Pecker Iron Works by finding that between an insured’s coverage as an additional insured, and its coverage as a named insured, the additional insured coverage is always sole primary, without comparison of the language used in the policies. To support its conclusion that the insurer affording additional insured coverage was the sole primary coverage, the BP Air Conditioning court relied exclusively on the following quote from the Court of Appeals’ decision in Pecker Iron Works:
“When Pecker engaged Upfront as a subcontractor and in writing provided that Upfront would name Pecker as an additional insured, Pecker signified, and Upfront agreed, that Upfront’s carrier—not Pecker’s – would provide Pecker with primary coverage on the risk.”
In its decision, however, the First Department apparently extended Pecker Iron Works beyond its intended reach by ignoring the circumstances of that case and setting aside the long-held and well-recognized tenet that insurance agreements, and not underlying subcontracts, govern priority disputes among insurers.
BP Air Conditioning Corp. – Court of Appeals’ Decision
In the Court of Appeals’ recent decision, New York’s highest court addressed this issue and clarified its holding in Pecker Iron Works. In its decision, the Court of Appeals first addresses whether an insurer’s duty to defend an additional insured is triggered by the allegations in the underlying Complaint or must await some judicial determination as to whether the loss occurred as a result of the work. Relying on a number of its previous holdings, the Court held that “an insurer’s duty to defend is exceedingly broad and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage.” Holding that One Beacon was obligated to provide coverage, the Court noted
“A duty to defend is triggered by the allegations contained in the underlying complaint. The inquiry is whether the allegations fall within the risk of loss undertaken by the insured and it is immaterial that the complaint against the insured asserts additional claims which fall outside the policy’s general coverage or within its exclusionary provisions. The merits of the complaint are irrelevant and, an insured’s right to be accorded legal representation is a contractual right and consideration upon which a person’s premium is in part predicated, and this right exists even if debatable theories are alleged in the pleading against the insured. An insured’s right to representation and the insurer’s correlative duty to defend suits, however groundless, false or fraudulent, are in a sense ‘litigation insurance’ expressly provided by the insurance contract.”
Turning to the issue of priority, the Court stated in the first paragraph of its decision that it was “unable to answer a second question regarding priority of coverage since the relevant parties and policies at issue are not before us.” In addressing the issue later in the decision, however, the Court nonetheless held that the First Department erred in finding that One Beacon’s additional insured coverage is primary and BP’s coverage under its own policy is excess. Modifying the Appellate Division’s order by reinstating the Supreme Court’s decision, the Court of Appeals held
“In order to determine the priority of coverage among different policies, a court must review and consider all of the relevant policies at issue. Here, Supreme Court correctly concluded that because none of the other insurance carriers are parties to this declaratory judgment action and no other relevant policies have been submitted, the priority of coverage cannot be determined.”
“Other Insurance” Clauses Matter
Practitioners and insurers should learn from this case that additional insured coverage can not be deemed sole primary without a comparison of the “other insurance” clauses contained in the policies. Practically stated, “other insurance” clauses matter. The Court of Appeals decision in BP Air Conditioning should eliminate arguments stemming from the First Department’s conclusion that Pecker Iron Works stood for the proposition that additional insured coverage is always sole primary without regard to the language utilized in the policies at issue. By concluding that the issue of priority cannot be judicially determined without a comparison of the policies, the Court of Appeals implicitly held that additional insured coverage is not always sole primary. Although the Court of Appeals did not expressly state that additional insured coverage is not always sole primary in its decision, practitioners and insurers should be weary of extending an argument based upon the Pecker Iron Works decision that coverage to an additional insured is primary without a careful comparison and analysis of the policies’ “other insurance” clauses.
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