Additional Insurance: When “Ongoing Operations” Coverage Extends To Damages After Completion

One of the areas of insurance coverage law that can make a legitimate claim to being the most challenging is the area of problems arising out of additional insured status. Additional insurance is frequently required in the construction industry by general contractors, and additional insurance arrangements are extremely common. This involves the GC requiring a subcontractor to add the GC to the subcontractor’s insurance policy as an insured to the extent the GC becomes liable for the negligence (sometimes it is stated as the subcontractor’s "fault," a broader concept than negligence, or sometimes simply "acts," "omissions," "conduct," "activities," "operations" or similar word). 

Stemming out of the explosion of construction defect litigation in the 1990s, "long tail" liability for construction defect damages became a frequently litigated reality, and insurers responded with a number of measures including exclusions for injuries in progress, multi-unit construction, losses for which pre-policy notice was provided and stacking of multiple policies. Part of this was designed to bring more certainty to indemnity issues under "occurrence" liability policies, but another part was designed to relieve insurers of the duty to defend in many instances — construction defect cases are often massive and expensive to defend, with defense costs exceeding indemnity exposure in a high percentage of cases. 

Insurers also sought to limit AI responsibilities by producing an endorsement form that specified that the coverage applies to "ongoing operations."  More about that in a minute. One of the great challenges of insurance coverage law is that this field is really just out of its infancy.  Widespread commercial liability insurance is a relatively new product — since about the early to mid-1960s — and has been evolving continuously. As a result, in many states, key questions have not even been addressed by the judiciary, or the decisions that do exist aren’t very helpful and are perhaps not the most sophisticated or insightful analysis that could be done. This is why I call insurance coverage The Great Workshop of the Common Law. It’s a work in progress — an "ongoing operation," if you will. 

Now, back to AI endorsements.  In 1993 and 1997 the Insurance Services Office produced additional insured endorsements that were supposed to limit exposure to damage that occurred during ongoing operations. The problem is that, many times, courts said the language of the endorsement didn’t actually say that: for example, ISO form CG 20 10 03 97 (which as the last four numbers of the form indicate was produced in March 1997) says AI coverage is in respect to "liability arising out of your [the subcontractor’s] ongoing operations performed for [the additional insured]." Some courts have said this language actually covers not just damages that occurred during ongoing operations, but damages that occurred after completion. Because the vast majority of construction defect liability stems from water intrusion and related damages that occur after completion of a project, these cases present a problem for insurers. 

I saw a recent Ninth Circuit case that highlights this language: Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co. The case was decided under Arizona law. This case appears to me to involve the 20 10 03 97 form, judging by the language the court analyzed. The Ninth Circuit found that the "arising out of ongoing operations" did not limit the GC’s coverage to just liability for damages that the subcontractor caused before completion, but also for damages that occurred after completion, as long as they happened during the policy period. "During the policy period" isn’t as much of a restriction as you might think, or the Ninth Circuit appeared to believe — in the absence of a continuing loss or other exclusion, damages that begin during a policy period are usually covered by a commercial general liability policy if they continue after the policy period.  

The Ninth Circuit said that damages that occur after completion necessarily must have arisen out of ongoing operations — if the subcontractor didn’t do any ongoing operations, there wouldn’t have been anything completed. The court said it wasn’t going to consider the drafter’s history, which I think is a legitimate call, and was going to hold the insurer to what it actually said. I think there is an argument for what the court said, but there is one aspect of its analysis I think is lacking.  The court examined exclusion (j)(6) in the body of the subcontractor’s policy, it appears, to show that if the endorsement didn’t provide coverage for completed ops damages, there was no coverage at all. Exclusion (j)(6) is the one that precludes coverage for "that particular part of any property that must be restored, repaired or replaced" because the insured’s work "was incorrectly performed on it." There is an exception in the exclusion for damages that occur after completion, meaning it applies only to ongoing operations. I take it the Ninth Circuit’s point is that, if the AI endorsement excludes completed operations and (j)(6) excludes ongoing operations, there is no coverage and that is ridiculous.

If that is what the court is saying, my reaction is this: (j)(6) might indeed limit the subcontractor’s coverage to completed operations only, but as to the additionally insured GC, there is potential coverage for ongoing operations as well as completed ops because the definition of "your work" in a commercial general liability policy has an exception that allows coverage for a GC when work was performed for it by a subcontractor.  In other words, the (j)(6) exclusion will be applied differently to a GC insured as an AI under the policy than to the named insured subcontractor. If this seems weird, don’t forget that there is a Separation of Insureds or Severability of Insureds clause in such policies that instructs you to analyze coverage separately as to each insured. 

Because of case law like this, ISO put out an AI form in 2004 that changes the coverage language and contains an express exclusion for damages that occur after completion. But even seven years after this AI form was produced by ISO, not every insurer uses it. Many still use old forms, or use manuscript forms of their own devising, or modify the ISO form. 

I could go on and on and on about AI insurance, but this is a good place to stop for today. There are something like 28 current ISO AI forms, and many, many old ISO forms, out there. Also, there are dozens if not hundreds of manuscript and adapted forms out there, so this issue is one we will keep seeing being constructed and deconstructed again and again upon our visits to The Great Workshop of the Common Law. 

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