Insurance Coverage: Big Change for Additional Insured Provisions “Caused By” the Court of Appeals
June 21, 2017
In Burlington, the New York City Transit Authority (NYCTA) and MTA New York City (MTA) sought AI coverage in connection with an underlying bodily injury action under a liability policy issued by The Burlington Insurance Company (Burlington) to Breaking Solutions, Inc. (BSI). The Burlington AI endorsement provided coverage only for liability for bodily injury “caused, in whole or in part” by the “acts or omissions” of BSI.
NYCTA had contracted with BSI to perform tunnel excavation work on a New York City subway. The NYCTA-BSI contract obligated BSI to procure liability insurance naming the NYCTA, MTA, and New York City (the City) as AIs. During the project, a BSI machine touched a live electrical cable buried in concrete, resulting in an explosion. An NYCTA employee was injured when he fell from an elevated platform as he tried to avoid the explosion.
The NYCTA employee and his wife commenced suit against BSI and the City, alleging negligence and violations of Labor Law. The City impleaded the NYCTA and MTA, asserting indemnification and contribution claims. The NYCTA tendered its defense to Burlington as an AI under the BSI policy. Burlington initially accepted the defense subject to a reservation of rights based on the NYCTA’s qualification as an AI, but later disclaimed coverage based on the NYCTA’s lack of AI status after it was determined that the NYCTA failed to identify and mark the electric cable and turn off the power and was therefore solely at fault. Since BSI could not have known about the location of the cable or the fact that it was electrified, the claims against BSI were eventually dismissed with prejudice.
Burlington commenced a coverage action against the NYCTA and MTA seeking a declaration that it did not owe them coverage as AIs since the underlying accident was not “caused, in whole or in part by” BSI’s “acts or omissions.” The Supreme Court, New York County, granted Burlington’s motion for summary judgment and concluded that the NYCTA and MTA were not AIs because the Burlington policy limited AI coverage to instances in which BSI was negligent. The NYCTA and MTA appealed. The Appellate Division, First Department, reversed the Supreme Court’s decision. In doing so, the First Department read the “caused by” language to mean the same as the “arising out of” language found in similar AI endorsements. The First Department therefore applied a “but for” causation test and held that because “the act of triggering the explosion . . . was a cause of [the employee’s] injury,” the NYCTA and MTA were entitled to a defense and indemnification from Burlington as a matter of law, consistent with then-controlling precedent. The Court of Appeals granted Burlington leave to appeal.
The Court of Appeals reversed the First Department’s decision. The Court rejected the use of the “but for” causation test and found that “where an insurance policy is restricted to liability for any bodily injury ‘caused, in whole or in part’ by the ‘acts or omissions’ of the named insured, the coverage applies to injury proximately caused by the named insured.” Interestingly, the Court relied on numerous federal and out-of-state decisions in reaching its conclusion, perhaps inviting future references to decisions from other jurisdictions where the weight of authority has fallen to a particular interpretation of policy language. The Court explicitly rejected the NYCTA’s and MTA’s invitation to adopt the First Department’s conclusion that the “caused by” language does not materially differ from the phrase “arising out of,” because “arising out of” was not used in the Burlington policy and is not the functional equivalent of “proximately caused by” but instead has been interpreted to mean that there is “but for” causation. The Court explained that “not all ‘but for’ causes result in liability,” whereas “‘proximate cause’ refers to a ‘legal cause’ to which the Court has assigned liability,” and that for proximate cause, “the chain of causation must have an endpoint in order ‘to place manageable limits upon the liability that flows from negligent conduct.’” The Court reasoned that since the Burlington AI provision extends AI coverage “only with respect to liability,” the “‘caused, in whole or in part, by’ language necessarily limits coverage for damages resulting from [the named insured’s] negligence or some other actionable ‘act or omission.’” Since BSI was adjudicated not to have been at fault in the underlying action, the Court held the NYCTA and MTA did not qualify as AIs under the Burlington policy.
Only Justice Fahey, dissenting, opted to apply the “but for” causation test instead of proximate cause, reasoning, in short, that the provision at issue was ambiguous and must be read against the drafter.
The Court of Appeals’ decision in Burlington is sure to affect many decisions across New York State with respect to a putative AI’s entitlement to indemnification, which it appears will first require an allocation of liability in the underlying action.
However, since the Court did not engage in an analysis as to how its decision affects an insurer’s duty to defend, it is unclear how this decision will be applied in situations where, for example, the claimant is the named insured’s employee, since often the complaint will not identify the employer or contain specific allegations that the employer was the proximate cause of the claimant’s injuries.
A question also exists as to what exactly the Court meant by “some other actionable ‘act or omission’” or “actionable deed.” It is also unclear how courts in New York will use Burlington to interpret endorsements commonly found in insurers’ policies that may not say “in whole or in part” or may only pertain to liability caused by the named insured’s “ongoing operations” instead of its “acts or omissions.”
What can be said, however, is the Court’s decision in Burlington represents a significant jurisprudential development in the context of AI coverage in New York that should be a tool in any insurance coverage litigator’s kit.