The Court of Appeals in Burlington Ins. Co. v. NYC Transit Authority correctly refused to apply a negligence trigger with regard to the meaning of “caused, in whole or in part, by” in the additional insured context respecting an indemnity trigger. See Burlington Ins. Co. v. NYC Transit Auth., 29 N.Y.3d 313, 317 (2017).

The difference, of course, in the New York Labor Law environment is that Labor Law §§240(1) and 241(6) provide for vicarious fault which may be a proximate cause of an injury without negligence. Although the Court held that coverage was to be provided to the additional insured where the named insured's acts or omissions were the proximate cause of the injury, some carriers may interpret it to refuse to provide even a defense pending a determination of the negligence findings at trial.

While Burlington may cause some carriers to issue indemnity reservation of rights, it does not support any limitation on the broader duty to defend. Misapplication of Burlington, however, is likely to invite otherwise unnecessary litigation amongst carriers, named insureds, and additional insureds. Focused and timely risk management practices can help alleviate the time and cost of problems post-Burlington. These practices may include (1) review and verify additional insured endorsements and certificates in advance of project work, (2) aggressive risk transfer practices in the face of inappropriate declinations, and (3) good contract review and business partner practices.

Burlington is clearly a landmark and significant decision. The underlying action was brought against New York City (the City) based on an injury sustained by a New York City Transit Authority (NYCTA) employee. The incident occurred when an excavator owned by the named insured—Breaking Solutions, Inc. (BSI), a subcontractor of NYCTA—struck a buried live wire causing an explosion. BSI was contractually obligated to maintain coverage for NYCTA, the City, and MTA New York City Transit (MTA).

After plaintiffs commenced suit, the City tendered its defense to Burlington. Burlington accepted the tender under a reservation of rights. The City then impleaded NYCTA and MTA (collectively, the Authorities). The Authorities also tendered their defense to Burlington, which accepted the Authorities' tender, again subject to a reservation of rights. Burlington subsequently withdrew its reservation only as to the City, as an accommodation to its named insured, BSI, when contract payments were threatened to be withheld.

Following discovery in the underlying action, Burlington disclaimed coverage and commenced a declaratory judgment action asserting that the Authorities were solely liable for the accident. Burlington expressly conditioned its settlement of the underlying action on receipt of the City's contractual indemnification rights against NYCTA. NYCTA signed off on the settlement stipulation which conceded it was solely negligent for the loss.

On Dec. 20, 2012, Judge Michael Stallman entered an order granting Burlington leave to amend its complaint to include a cause of action for contractual indemnification against NYCTA only. The court declared that NYCTA and MTA were not covered for losses arising out of the underlying action and Burlington did not owe a duty to indemnify either. On Dec. 17, 2013, Judge Stallman granted Burlington summary judgment against NYCTA as to the settlement Burlington paid on behalf of the City in the underlying action. Burlington was also granted partial summary judgment against the NYCTA as to the defense costs, including attorney fees, incurred on behalf of the City. The court then severed a second cause of action to the extent it sought defense costs, but granted Burlington partial summary judgment as to liability.

On appeal, the First Department held that NYCTA was entitled to indemnification from Burlington despite the settlement stipulation that NYCTA was solely negligent for the loss. In doing so, the First Department held that the endorsements with the language “arising out of” were substantially the same as those with “caused, in whole or in part.”

Duty to Defend

A basic tenet of insurance law is generally broad interpretation of the duty to defend. New York courts have consistently held that “[a]n insurer must defend whenever the four corners of the complaint suggest—or the insurer has actual knowledge of facts establishing—a reasonable possibility of coverage.” See Cont'l Cas. Co. v. Rapid-Am., 80 N.Y.2d 640 (N.Y. 1993). The duty to defend exists even where the carrier is later found not to be required to provide indemnity. See BP Air Conditioning v. One Beacon Ins. Grp., 8 N.Y.3d 708, 714 (2007).

Under Burlington, where an additional insured is endorsed onto the underlying policy subject to the relevant “caused, in whole or in part” language, it is an additional insured to the extent that the named insured was a proximate cause of the loss. While carriers may be tempted to read this as implying that the duty to defend begins when the named insured is found to be a proximate cause of the loss, the Court of Appeals made no such determination. Moreover, the Court of Appeals did not consider the duty to defend, as its analysis occurred after the underlying action had already settled, and instead focused on Burlington's claim for contractual indemnity.

Subrogation, Anti-Subrogation, And Voluntary Payment

Subrogation arises either contractually, or under the doctrine of equitable subrogation. Generally, subrogation redistributes costs based on “responsibility for the loss to the person who in equity and good conscience ought to pay it, in the interest of avoiding absolution of a wrongdoer from liability simply because the insured had the foresight to procure insurance coverage[.]“ Millennium Holdings LLC v. Glidden Co., 27 N.Y.3d 406, 414, reargument denied, 28 N.Y.3d 944 (2016) (quoting North Star Reins. v. Continental Ins. Co., 82 N.Y.2d 281, 294 (1993)). Equitable subrogation allows a carrier to “stand in the shoes” of the insured for the purpose of seeking indemnification for a third party's actions, which resulted in the loss the carrier was obligated to reimburse. See Id.

The anti-subrogation rule, generally, bars carriers from seeking to recover covered expenses—subrogation—from a named insured or from additional insureds. See Millennium Holdings, supra. A carrier is otherwise generally free to seek indemnification from parties other than the named insured or additional insured. The voluntary payment doctrine “bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law[.]“ Dillon v. U-A Columbia Cablevision of Westchester, 100 N.Y.2d 525, 526 (2003).

Additional Insured Coverage Post-'Burlington'

On June 6, 2017, the Court of Appeals in Burlington addressed coverage for additional insureds regarding bodily injury caused, in whole or in part, by the acts or omissions of the named insured. The court declined to follow the First Department, which stated that “arising out of” and “caused, in whole or in part” do not materially differ. Instead, the Court of Appeals held that coverage under the “caused, in whole or in part” endorsement at issue (CG 20 26 07 04) does differ and only applies to injuries proximately caused by the named insured, BSI.

In clarifying its holding, the court noted that there may be multiple proximate causes to an accident, but held that BSI was not a proximate cause of the underlying plaintiff's injuries. Despite its use of the term “proximate cause,” the court declined to impose a negligence standard.

On Aug. 22, 2017, the Appellate Division, First Department, on remittitur, held that the Authorities were not owed coverage in the underlying personal injury action, as they were never additional insureds. See Burlington Ins. Co. v. NYC Transit Auth., 153 A.D.3d 438 (1st Dept. 2017). The First Department found that Burlington's proposed amendment did not lack merit, since claims arose out of NYCTA's use and possession of the leased property, and the anti-subrogation rule was inapplicable. Burlington's cause of action for contractual indemnification was granted in the amount of $950,000 against the Authorities.

Here, it is important to note that although the widest reaching implications of the Courts of Appeals' decision hinges on the notion of proximate cause, the Appellate Division's decision does not use those words. Having declined to discuss the Court of Appeals' analysis of additional insured coverage under the newly imposed proximate cause standard, the Appellate Division instead elected to focus on the voluntary payment doctrine. The Appellate Division found that Burlington's withdrawal of the reservation as to the City, and payment on their behalf, was not voluntary because NYCTA had threatened to stop contract payments to the named insured BSI.

Coverage Implications

Now, more than ever, an owner and general contractor will be better served with a downstream endorsement that utilizes “arising out of” language, whereas a subcontractor and its carrier will benefit even more with the Burlington ”caused, in whole or in part” endorsement. Where some carriers might be emboldened to take a more aggressive stance in disclaiming the defense following Burlington, an early declaratory judgment action may be warranted.

In light of Burlington, it is even more important for an owner, general contractor and their risk team to enforce the use of additional insured endorsements utilizing “arising out” of language to get earlier indemnity. This is because the key to additional insured coverage with the Burlington endorsement is not the additional insured's freedom from negligence, but rather the existence of the named insured's negligence. Fortunately, for putative additional insureds, vicarious liability of the named insured for violations of Labor Law §240(1) or §241(6) would also trigger additional insured indemnity.

Without this scrutinizing focus, we will see continued litigation where the parties exhaust significant time and money to resolve coverage issues avoidable through advance risk management practices. Similarly, we can expect to see increased litigation where putative additional insureds bring third-party actions against the named insureds to pursue contractual indemnity in addition to the additional insured coverage.

The Burlington decisions highlight the various nuances at play in any coverage action, and the importance of understanding the applicable policy endorsements. Even the Appellate Division's analysis on remittitur, however, raises several new questions for future litigation to resolve. As such, insureds seeking coverage—or seeking to provide coverage for additional insureds in compliance with their contractual obligations—should carefully consider their insurer's position on additional insured coverage. Burlington serves as a reminder that careful review of the relevant endorsements is vital to proper risk analysis and management, regardless of the intention of the contracting parties.

John Sparling and Scott Shapiro are partners, and Giancarlo Stanton is an associate, in the construction litigation department of Cullen and Dykman.