Burlington Ins. v. NYC Transit Auth., 19 N.Y.3d 313 (2017), decided by the Court of Appeals on June 6, 2017, interpreted additional insured (AI) coverage and, as expected, has had quick and widespread influence in and well beyond New York. Julian D. Ehrlich, “Readjusting Risk Transfer: 'Burlington Ins. v. NYC Transit Auth.,'“ NYLJ, June 12, 2017; see, e.g., Am. Guar. & Liab. Ins. Co. v. Norfolk S. Ry. Co., 2017 U.S. Dist. LEXIS 178808 (E.D. Tenn. 2017).

However, many insurers are applying Burlington in an overly restrictive manner, thereby raising questions by insureds as to how to re-establish agreed upon risk transfer.

This discussion will examine the new, but very limited role of negligence, the modest effect which Burlington should have on most cases, and how insurers and insureds have reacted.

Uncommon Facts

The court in Burlington made important but precise findings in an action with unusual facts.

The court interpreted the Al trigger language in most Insurance Service Office (ISO) AI endorsements issued after 2004 (hereinafter 07 04 wording), namely, that coverage is afforded “only with respect to bodily injury or property damage caused in whole or in part by the acts or omissions” of the named insured.

Specifically, the court found that where the presumptive AI is solely negligent, coverage is not triggered. In fact, the upstream owner (NYCTA) seeking AI in Burlington acknowledged sole responsibility for the loss.19 N.Y.3d at 319.

However, in most claims where AI coverage is sought, particularly in construction site accident cases, the owner bears no negligence and it is highly unusual for an owner to acknowledge sole responsibility.

The Role of Negligence

The court in Burlington explicitly rejected the argument that “caused by acts or omissions” trigger wording compelled “the conclusion that the endorsement incorporates a negligence requirement.” Id. at 324.

Accordingly, while the court did find a role for negligence, there is no requirement that the named insured be negligent to trigger AI coverage. It was the sole negligence of the presumptive AI, rather than the negligence or lack thereof, of the named insured, that was decisive.

Thus, even after Burlington, AI coverage should still be triggered where the additional insured is up to 99 percent negligent. But perhaps even more significantly, AI coverage can also be triggered where the named insured has not been found negligent at all, but is merely alleged to have proximately caused the loss.

Moreover, the court in Burlington clarified that proximate cause is not the equivalent of negligence.

The court characterized the 07 04 endorsement as describing “proximate causation and legal liability based on the insureds negligence or other actionable deed (emphasis added).” Id. at 321.

Additionally, the court found that this trigger wording “limits coverage for damages resulting from [the named insureds'] negligence or some other actionable act or omission (emphasis added).” Id. at 323.

This is clearly easier to satisfy than a trigger based solely on negligence.

Thus, after Burlington, it is evident that the “caused by acts or omissions” language is more restrictive than the older “arising out of” ISO trigger language (hereinafter the 10 01 wording) but less restrictive than a negligence requirement.

Accordingly, the 07 04 wording now occupies a middle ground.

Examples

Many types of claims include allegations of some other actionable act, omission or deed that may fit into this middle ground to trigger AI coverage.

For example, the named insured is often the employer of an injured plaintiff. Clearly, pursuant to Burlington, the named insured's status as employer alone will no longer trigger AI coverage under the 07 04 wording. Id. at 323-24.

However, the named insured's status as an employer does not end the analysis of how an employers' insurer should respond to an AI tender. Insurers must look at the plaintiff's complaint and beyond for coverage.

It has long been the rule in New York that when considering a duty to defend a presumptive AI, a carrier “must defend whenever the four corners of the complaint suggest—or the insurer has actual knowledge of facts establishing—a reasonable possibility of coverage.” Continental Cas. Co., v. Rapid-American, 80 N.Y.2d 640 (1993).

A review of pleadings alone often will reveal allegations of actionable acts, omissions or deeds by the employer sufficient to trigger AI coverage.

Workers' Compensation exclusivity means that injured employees' complaints often do not contain any direct negligence allegations against the named insured employer. However, these complaints will often contain other allegations or facts implicating the employer for other actionable acts, or omissions or deeds.

For example, employees' complaints often include allegations of OSHA violations. OSHA generally applies to employers, not owners or general contractors and such violations do not support Labor Law claims. Pelleski v. City of Rochester, 198 A.D.2d. 762 (4th Dept. 1993).

Nonetheless, such violations may now be relevant for AI coverage and arguably could be actionable acts, omissions or deeds by the named insured so as to constitute proximate cause and trigger AI coverage.

Moreover, the employers' insurers must look beyond the employees' complaint.

Frequently, insurers considering AI tenders will have extrinsic knowledge beyond the pleadings. It may have investigation, witness statements, incident reports, bills of particulars and discovery relating to improper instruction, supervision or inadequate tools and equipment relating to actionable acts, omissions or deeds.

Accordingly, even if the employer is not a party to the suit, its insurer may be obligated to provide AI coverage.

Similarly, injured workers in New York will often allege Labor Law §§240 and 241(6) claims against owners and general contractors who, in turn, seek AI coverage from subcontractors' insurers.

Because Labor Law §240 is a vicarious liability statute, owners and general contractors can be liable where a subcontractor failed to provide proper fall protection. Accordingly, §240 complaints often contain allegations of failures to provide proper fall protection so broadly or vaguely worded so as to include references to subcontractors' failures, i.e., other acts, omissions or deeds, which trigger AI cover.

The same is true for Labor Law §241(6) claims. Under this statute, which also imposes vicarious liability on owners and general contractors, the plaintiff must plead violations of the N.Y.S. Industrial Code. Ross v. Curtis-Palmer Hydro-Electric Co., 81 N.Y.2d 509, 514, 520 (1993). However, these Code violations are also often so broadly or vaguely plead as to implicate the employer or other subcontractor, thereby triggering AI coverage.

Downstream insurers may have extrinsic knowledge of any number of code, ordinance, rule, regulation or administrative violations by their insureds. Such violations may not constitute negligence per se and be rebuttable rather than conclusive under the rules of evidence in a lawsuit. Elliott v. City of New York, 95 N.Y.2d 730 (2001). Nonetheless, since these violations may be actionable in other forums, they may constitute other acts or omissions or deeds sufficient to satisfy the named insureds' proximate cause requirement to trigger AI coverage.

Overreaction

In the wake of Burlington, many insurers are issuing reservation of rights letters when they once routinely accepted AI tenders. Where insurers were once issuing reservation of rights letters, now they are now issuing more tender denials.

Some commentators and insurers have misread Burlington to require that the downstream named insured be negligent which, as discussed above, does not accurately reflect the holding. See, e.g., Jeff Sistrunk “NY Ruling Curtails Contractors' Additional Insured Coverage,” Law 360 Portfolio Media, June 8, 2017 quoting David Wood of Barnes & Thronburg. Similarly, some insurers are accepting AI coverage only for vicarious liability.

However, the court in Burlington explicitly also rejected this limitation, stating that the ISO “change from 'arising out of' to 'caused by acts or omissions' was to provide coverage for an additional insured's vicarious or contributory negligence (emphasis added) and to prevent coverage for the additional insured's sole negligence.” Id. at 326.

Too often, Burlington is improperly cited as the basis for a response that an AI tender is premature. However, early in the life of a claim, there is often enough information from pleadings and extrinsic facts relating to proximate to allow an insurer to accept AI cover.

Tender rejections often reflect insurers' routine rather than strategic thinking and fail to consider not only known extrinsic evidence but also the totality of the claim including the viability of the other track of risk transfer, i.e., contractual indemnity claims.

Best practices for responding to AI tenders requires more thought and effort from insurers as to the bigger picture of who will eventually be responsible for paying.

Moreover, the earlier this analysis is done, the more cost effective this process will be for insurers. Shortsighted responses and unnecessary reservations may result in the downstream insurer paying separate counsel for multiple insureds as well as costly declaratory judgment actions.

Impact on Insureds

Upstream insureds owners and general contractors have taken notice of the change in insurers' responses to Burlington. Downstream parties are hearing complaints from their customers. Parties' expectations frequently are no longer being met.

Some upstream parties are considering changing their contract insurance procurement provisions to require the 10 01 “arising out of” AI endorsement wording. However, there are market realities because in many in areas of the country the 10 01 is not commercially available.

Insureds are frustrated but their options are limited.

Parties can continue to agree to 07 04 AI requirements understanding that many insurers have changed their interpretations of these endorsements to restrict risk transfer.

Alternatively, parties can change their contracts to require the 10 01 hoping that the broader coverage can somehow be obtained while knowing that compliance is unlikely. Upstream parties may then face further decisions on how aggressively to pursue breach of contract claims. Established business relationships may be involved and new jobs at stake.

Conclusion

For many claims, Burlington will have no effect on traditional risk transfer.

While the court introduced the role of negligence into the 07 04 AI trigger analysis, it was the negligence of the presumptive additional insured, rather than the negligence of the named insured, that was decisive.

It is axiomatic that, where the presumptive AI is solely negligent, the named insured cannot have proximately caused the loss. However, these are rare cases. This scenario is so infrequent, in fact, that this aspect of the Burlington decision has not generated much controversy.

However, overly restrictive applications of Burlington have already had significant implications for insurers and insureds.

Insurers that unnecessarily refuse to accept AI tenders are likely to incur needless extra costs. Insurers should analyze whether the facts, contracts and policies suggest that the downstream party and its insurer will ultimately owe the claim and if so, the better practice is to control the defense and the costs.

Burlington underscores the adage “just because you can reserve, does not always mean you should reserve.”

In due course, the trend of an overly restrictive reading of Burlington should be corrected through the current surge in declaratory judgment coverage litigation. Meanwhile, insureds have some new decisions to make.

Julian D. Ehrlich is Senior Vice President Claims for Aon Construction Services Group in New York.