Fourth Circuit: Standard AI Endorsement “Plainly Lacks” Vicarious Liability Limitation

The Fourth Circuit has overturned an insurer’s summary judgment victory regarding the scope of the standard additional insured endorsement, which is frequently the focus of coverage disputes arising from construction litigation. See Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, No. 14-1239 (4th Cir. June 10, 2015). Capital City was the general contractor for a renovation project and hired Marquez Brick as a subcontractor, requiring Marquez to name Capital City as an additional insured. After a wall collapsed during the renovation, Capital City was sued for negligence and demanded a defense as an additional insured under Marquez’s policy.

The ISO endorsement at issue (CG20100704) provides that a party is an additional insured only with respect to liability for bodily injury or property damage caused in whole or in part by the acts or omissions of the named insured, or those acting on its behalf, in the performance of ongoing operations for the additional insured. The complaint against Capital City, however, did not name Marquez as a defendant or allege damages as a result of its acts or omissions. Asserting that the endorsement was limited to allegations of Capital City’s vicarious liability for the acts or omissions of Marquez, the insurer denied coverage. Capital City subsequently filed a third-party complaint against Marquez and initiated a declaratory judgment action against Marquez’s insurer seeking additional insured coverage. The District Court agreed with the insurer’s interpretation of the endorsement and granted summary judgment in its favor.

Applying Maryland law, while acknowledging the lack of appellate authority in Maryland on the issue, the Fourth Circuit reversed, rejecting the insurer’s position. Examining the language of the endorsement, the Court noted that it “plainly lacks the vicarious liability limitation,” concluding that such limiting language was clearly available and could have been included if that was the intent. Instead, it held that the endorsement “extends to property damage caused by Marquez, either in whole or in part, regardless of whether the underlying complaint seeks to hold Capital City vicariously liable for Marquez’s acts or omissions.”

The Fourth Circuit then relied upon Maryland law permitting an insured to introduce extrinsic evidence to determine the duty to defend, a clear departure from other jurisdictions limiting the analysis to the four corners of the complaint. In that regard, it noted that Capital City had introduced evidence in support of its third-party claim that Marquez was involved in the renovation of the wall that collapsed. Coupled with the broad allegations in the complaint against Capital City, which were not limited to Capital City’s sole negligence or specific acts outside the scope of Marquez’s work, the Court held that there was a potentially covered claim and the duty to defend was triggered.

Despite the overall result, the Fourth Circuit did include an analysis that may be favorable to insurers, particularly when addressing the duty to indemnify. In addition to whether the endorsement is limited to vicarious liability, there is often a dispute over the meaning of the causation portion of the endorsement (“caused in whole or in part”), which replaced the prior and far too broadly interpreted “arising from” language. When properly applied, the causation language should require proof that the named insured’s acts or omissions were the proximate cause of the plaintiff’s damages. Additional insureds, however, have asserted that it only requires proof that the named insured’s acts or omissions were a “but for” cause of the underlying plaintiff’s damages or a contributing factor falling short of negligence. In its discussion, however, the Fourth Circuit noted with approval decisions from other courts interpreting the endorsement to require proximate causation and/or a negligence determination.

Thus, the Fourth Circuit has added to a growing split among those courts directly addressing the scope of the additional insured endorsement, giving the endorsement an expansive interpretation based on the lack of specific vicarious liability language. The decision, however, also provides support for requiring a determination that the named insured played a central role in causing the damages sought in order for the additional insured to be entitled to coverage, rather than simply tying some act or omission to the complained of damages- no matter how slight. In any case, the frequency with which additional insured issues are raised, particularly in the context of construction litigation, virtually guarantees that the Fourth Circuit will not be the last word on this evolving and ever important debate among insurers and their putative additional insureds.