by William Silverman, Wall Templeton & Haldrup, PA
Effective risk transfer in the construction industry is critical. So when an opinion comes out broadening that horizon, practitioners should take note. A recent federal court decision in an additional-insured coverage action opens a new door in North Carolina for construction risk transfer by holding that the construction parties’ contract trumps the language of the insurance policies to determine priority of coverage.
Continental Casualty Company v. Amerisure Insurance Company1 arose from a dispute about coverage under a sub-subcontractor’s CGL and umbrella policies for serious personal injuries sustained during a construction project in Charlotte. The general contractor on the project, KBR Building Group, LLC (“KBR”), entered into a subcontract with SteelFab, Inc. (“SteelFab”) to supply and erect the structural steel for the project. SteelFab then subcontracted with Carolina Steel and Stone, Inc. (“CSS”) for the erection of structural steel. During the project, an employee of CSS fell from steel decking and suffered serious injuries.
Under the policy chain for the project, KBR was an additional insured on SteelFab’s CGL policy with Continental Casualty. SteelFab and KBR also were additional insured on CSS’s umbrella and CGL policies with Amerisure. When the injured employee filed suit, the risk transfer line dance kicked into gear. KBR tendered its defense to SteelFab’s carrier, Continental Casualty. Continental Casualty in turn tendered to CSS’s carrier, Amerisure.
Amerisure admitted that SteelFab and KBR qualified as additional insured under the CSS policy, but noted the owner on the project in question had an owner controlled insurance program (“OCIP”) in place. Amerisure’s policy contained an exclusion for damages arising out of the named insured’s operations when included in an OCIP2. Amerisure thus determined that coverage was excluded and, accordingly, denied that it had any duty to defend SteelFab or KBR.
Continental Casualty stepped in to defend KBR and SteelFab in the personal injury suit upon Amerisure’s denial, incurring more than $650,000 in defense costs, and resolving the case for $1.7 million. As part of the settlement agreement, Continental Casualty preserved its rights to pursue indemnification and/or contribution from Amerisure, and filed a declaratory judgment action to establish that:
- Amerisure owed a duty to defend SteelFab and KBR in the personal injury suit;
- the Amerisure policies applied on a primary and non-contributory basis; and
- Continental Casualty was entitled to reimbursement of all defense costs and expenses incurred in connection with the personal injury suit (i.e., equitable subrogation).
Both Continental Casualty and Amerisure eventually filed cross-motions for summary judgment in the declaratory judgment action on all issues. Judge Graham Mullen presided over these motions and ruled as follows:
1. Duty to Defend
There was no real dispute that Amerisure’s duty to defend SteelFab and KBR was triggered in the personal injury suit. Amerisure admitted that SteelFab and KBR were additional insured under the CSS policies, and the complaint in that suit alleged damages because of personal injury caused by an occurrence. Nonetheless, Amerisure argued that the plain language of the OCIP Exclusion (i.e., bodily injury arising out of CSS’s operations included in an OCIP) applied to exclude coverage.
The fallacy in Amerisure’s position, however, was that CSS was not enrolled in the OCIP on the project – a fact of which Amerisure was aware when it denied a defense to SteelFab and KBR. There was inarguably an OCIP in place on the project, and CSS was eligible to be enrolled in the OCIP. Amerisure contended that the OCIP exclusion should apply to bar its duty to defend because its named insured (CSS) was eligible to be enrolled and should have been enrolled in the OCIP.
In his opinion, Judge Mullen conceded that there may be an issue of fact as to whether CSS was eligible to be enrolled and should have been enrolled in the OCIP, but nevertheless rejected Amerisure’s position. He noted that when determining whether an insurer has a duty to defend in North Carolina, the insurer must accept as true all allegations in the complaint, and also must consider reasonably available facts outside the four corners of the pleading that could be covered by its policy3. An insurer, however, may not consider extrinsic facts to defeat a duty to defend4. The complaint in the personal injury suit made no mention of insurance, much less any OCIP in place on the project. Judge Mullen thus held that Amerisure breached its duty to defend SteelFab and KBR because Amerisure could not establish an element of its OCIP Exclusion (that CSS’s operations were included in an OCIP) based solely on the allegations of the personal injury complaint and could not otherwise rely on facts outside the pleadings to establish the application of an exclusion5.
2. Priority of Coverage
Since coverage was established6 and the amount of the personal injury settlement was more than either of the CGL policy’s limits standing alone, the next issue was the order of coverage – which policies were primary and which were excess. In a novel ruling under North Carolina law, Judge Mullen determined that the contract between CSS and SteelFab governed the priority of coverage, not the language of the insurance policies themselves.
Amerisure argued that even if its policies did provide coverage, that its primary coverage was limited to $1,000,000 (the limits of its CGL policy) and that its umbrella policy was excess over Continental Casualty’s primary policy. In other words, Amerisure’s proferred coverage sequence was: (1) Amerisure CGL ($1M limits); (2) Continental Casualty CGL ($1M limits); then (3) Amerisure umbrella. Conversely, Continental Casualty argued that all of Amerisure’s coverage should be primary, and that its coverage should sit excess to the combined limits from Amerisure’s CGL and umbrella policies.
Judge Mullen first looked at the subcontract between SteelFab and CSS before turning to the policies’ language. The subcontract required CSS to procure both CGL and umbrella insurance with $1,000,000 limits each. The subcontract included an express requirement that CSS would provide insurance that was primary and non-contributory to SteelFab’s insurance program. A Certificate of Insurance issued to SteelFab identifying CSS’s coverage with Amerisure also provided that “coverage is written on a primary basis.” The language in the umbrella policy also plainly provided coverage to SteelFab and KBR as additional insured.
Amerisure argued that the “Other Insurance” provisions in its umbrella policy and Continental Casualty’s CGL policy should govern priority of coverage instead of the subcontract language.7 Amerisure argued these competing clauses made its umbrella excess (only providing coverage after the Continental Casualty CGL policy’s limits were exhausted). Judge Mullen agreed with Amerisure that the language of the “Other Insurance” clauses in the competing policies would make Amerisure’s umbrella policy excess over the Continental Casualty primary policy, but ruled the subcontract language trumped this “Other Insurance” clause analysis to make Continental Casualty’s policy excess.
Judge Mullen premised his decision on the rationale that SteelFab should be entitled to the benefit of its bargain with CSS. SteelFab contracted for protection in the form of $2,000,000 in primary insurance coverage from CSS before its own insurance would be tapped. Judge Mullen held that, because the SteelFab/CSS subcontract evidenced the intent of the parties, that language dictated the priority of coverage notwithstanding insurance policy language to the contrary.
Interestingly, Judge Mullen’s determination was not based on any indemnity agreement between CSS and SteelFab8, although the cases cited in support of his decision all include analysis of a contractual indemnity agreement between the insureds as part of the reasoning for shifting the loss to the downstream subcontractor’s insurance carrier.9
The primary lesson of Continental Casualty v. Amerisure is the importance of careful contract drafting. The explicit risk-transfer terms in the SteelFab/CSS subcontract were central to the end result. The specificity of the insurance requirements created a clear picture of the parties’ intent regarding risk allocation, and Judge Mullen deferred to that arrangement. This decision presents a novel approach to determining priority of coverage in North Carolina, and could create a headache for insurance underwriters given the difficulty in quantifying risk of incurring losses beyond the scope of coverage created by insurance policy language. It will be interesting to see whether the North Carolina state courts follow suit when given the opportunity. Amerisure has appealed this decision to the Fourth Circuit, so an update may be warranted once the appellate process is complete.10
Continental Casualty v. Amerisure also reinforces the sanctity of the duty to defend in North Carolina. North Carolina courts, both state and federal, jealously guard the insured’s right to a defense from its insurer, and this decision exemplifies that zeal. But Judge Mullen’s decision also reflects the absence of any real deterrent for a carrier to deny coverage to a putative additional insured where that party’s own insurer has agreed to defend. While Amerisure was found to owe indemnity for the settlement and had to reimburse half of the defense costs to Continental Casualty, it would have presumably incurred those losses anyway had it accepted the tender in the first place.11 Other than the loss of control of defense and settlement in the underlying suit, Amerisure’s only penalty here is the imposition of pre-judgment interest. Both this decision and the Rodgers Builders decision from last year may encourage upstream carriers to go to the mattresses on additional insured issues going forward, especially in the Western District.12
13:14CV529-GCM, --- F. Supp. 3d ---, 2017 WL 34822 (W.D.N.C. Jan. 3, 2017).
2The actual exclusion read: "This insurance does not apply to 'bodily injury' or 'property damage' arising out of either your ongoing operations were at any time included within the 'products-completed operations hazard' if such operations were at any time included within a 'controlled insurance program' for a construction project which you are or were involved."
3Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986).
4Judge Mullen explained: "an insurer may look to facts collateral to the allegations against the policyholder to confirm a defense obligation, but no to negate one." 2017 WL 34822, *5 (emphasis in original) (citing St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 724 F. Supp. 1173, 1179 (M.D.N.C. 1989), aff'd 919 F.2d 235, 239 (4th Cir. 1990)).
5See New NGC, Inc. v. Ace Am. Ins. Co., 105 F. Supp. 3d 552, 568 (W.D.N.C. 2015) ("Permitting evidence outside the pleadings to negate allegations in the complaint is akin to a perfunctory review of the merits of the underlying claims against the insured. Such review is not consistent with the duty to defend as understood by the insured party and as explained by North Carolina law pertaining to the interpretation of contracts for insurance.")
6Because Amerisure breached its duty to defend, Judge Mullen held that it relinquished any coverage defenses and was liable for the costs of defense and settlement paid on behalf of SteelFab and KBS. 2017 WL 34822, *6 (citing Vigilant, 919 F.2d at 240).
7There is North Carolina authority applying competing "Other Insurance" clauses to determine priority of coverage for an additional insured. See Universal Ins. Co. v. Burton Farm Dev. Co., LLC, 216 N.C. App. 469, 479, 718 S.E.2d 665, 672 (2011). The Burton Farm decision, however, was in the context of two competing primary CGL policies. The author is not aware of any North Carolina precedent addressing priority of coverage under facts analogous to this case.
8Judge Mullen expressly refrained from addressing the impact and enforceability of the indemnity clause in the subcontract because he found the plain language of the subcontract and the umbrella policy shifted the entire loss to Amerisure. 2017 WL 34822, *9 n.5.
9E.g., St. Paul Fire & Marine Ins. Co. v. Am. Int'l Specialty Lines Ins. Co., 365 F.3d 263 (4th Cir. 2004) (applying Virginia law); Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F. 3d 583 (8th Cir. 2002): Am. Indem. Lloyds v. Travelers Prop. & Cas. Ins. Co., 335 F. 3d 429 (5th Cir. 2003).
10Continental Casualty has filed a cross-appeal concerning Judge Mullen's ruling (not discussed above in the interest of brevity) that it was only entitled to a pro-rata reimbursement of its defense costs from Amerisure through a contribution claim. Continental Casualty alleged equitable subrogation, and not contribution, for recovery of all defense costs based on the theory that Amerisure's coverage was primary and non-contributory. Continental Casualty would have no duty to defend until exhaustion of underlying primary coverage if it truly sat excess, so contends it should be entitled to complete reimbursement for defense costs.
11In dicta, Judge Mullen explains in his decision why Amerisure's proposed interpretation of its OCIP Exclusion supporting its denial would render its coverage meaningless. 2017 WL 34822,*6-*7. Accordingly, it appears that there would have been coverage under Amerisure's policy(ies) even if it had accepted SteelFab's and KBR's tender and pursued its coverage defenses.
12See Rodgers Builders, Inc. v. Lexington Ins. Co., No. 3:15CV110-MOC-DSC, 2016 WL 1052623 (W.D.N.C. Mar. 11, 2016), appeal dismissed (Sept. 14, 2016) (finding coverage for general contractor as additional insured under subcontractor's CGL, coverage even where no formal legal claim was asserted by the project owner).