Where An Owner is an Additional Insured on Multiple Policies Is One Excess to the Other?

William Floyd School Dist. v. Maxner
--- N.Y.S.2d ----, 2009 WL 4852416
N.Y.A.D. 2 Dept., 2009.

This Second Department case involves a interesting question of priority of coverage as between two policies which both insured a school district as an additional insured.

The school district had contracted with a general contractor (“GC”) to build a new middle school. The contract required the GC to provide the school district with primary insurance coverage. The GC had a policy with QBE Insurance Corp. (hereinafter QBE), and provided the school district with a certificate of liability insurance listing it as an additional insured on the QBE policy. The GC subcontracted with a sub-contractor ("Sub") to supply kitchen equipment, which required the Sub to provide the GC and the school district with insurance. The Sub held a policy with Royal Insurance Company of America, (hereinafter Royal)which contained an additional insured endorsement.

An employee on the job was injured and brought suit against the school district and the GC. The school district and their insurer, Transportation Insurance Company commenced a DJ action, seeking a judgment declaring that the school district was an additional insured under the GC’s policy with QBE. The GC and QBE then commenced a third-party action against Royal, seeking a judgment declaring that the school district and GC were additional insureds under the sub’s policy with Royal, and that Royal’s policy was primary to the QBE policy.

After motions, the Supreme Court granted the school district’s motion declaring that QBE and Royal were co-insurers of the school district. On appeal the Second Department reversed finding that the QBE policy was excess to the Royal policy.

After a discussion confirming the status of the school district and the GC as additional insureds on the Royal policy pursuant to the terms of the sub-contract, the Court addressed the issue of priority between the policies.

The Royal policy provided:

“When an additional insured is added under this provision, and the written contract, written agreement or written permit requires the insurance to be primary and noncontributory, then this insurance is primary except when the Excess Provision under condition 4. Other Insurance in Section IV Commercial Liability Conditions applies. If this insurance is primary our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the Method of Sharing provision under condition 4.”

The Court found Royal’s coverage to be primary pursuant to the terms of the above provision and the subcontract which required the additional insured coverage be primary.

The QBE policy issued to Aurora provided:

“4. Other insurance

If other valid and collectible insurance is available to the insured for a loss we cover ... our obligations are limited as follows: ...

“ b. Excess Insurance

This insurance is excess over: ...

“(2) Any other insurance, whether primary, excess, contingent or any other basis that is valid and collectible insurance available to you as an additional insured under a policy issued to:

(a) A contractor performing work for you.”

While it was clear that this provision made the QBE policy excess with respect to the GC, it was not altogether clear whether this provision was applicable to an additional insured, such as the school district. Royal and the school district argued that the other insurance provision did not apply because the additional insured endorsement by its own terms, provided that it was primary, not excess coverage.

While not addressed by the Court, there were other more substantial arguments which were presumably made by Royal and the school district. They also presumably argued that the term “you” in the “other insurance” provision, refers to the named insured. The term "your work" refers to the work of the named insured, not the additional insured. Further, Royal and the school district had on their side the Court of Appeals’ decision General Motors Acceptance Corp. v. Nationwide Ins. Co., 4 NY3d 451 (2005). In General Motors, the Court of Appeals declined to find that one primary policy excess over another, in part because both insurers “could reasonably have expected to share the expense of the defense.” 4 NY3d at 457. Further, as pointed out by this author in First Department Decisions in Conflict Over ‘Other Insurance’ Provisions, NYLJ, July 13, 2009, p. 4 col. 1, the Court of Appeals in General Motors, commented that the limiting language from the “other insurance” provision was directed at the obligation to contribute to a settlement or judgment, not the duty to defend. Thus, a convincing multi-faceted argument could have been presented to the Court for the proposition that the other insurance provision should not apply to additional insureds. 4 NY3d at 457.

The Second Department however, rejected this contention, citing to the well-worn boiler-plate that an additional insured “enjoy[s] the same protection as the named insured.” (Pecker Iron Works of N.Y. v. Traveler's Ins. Co., 99 N.Y.2d at 393). The Court rightly held that the language in the additional insured endorsement providing for primary coverage needed to be read together with the “other insurance” provision. The Court concluded that “since the school district…and [GC] are additional insureds under the Royal policy issued to a subcontractor, the QBE policy provides them with coverage excess to that provided to them under the Royal policy.

The Court however, neither addressed the fact that the other insurance provision appears to be specifically directed at the named insured, nor did it address the Court of Appeals’ decision in General Motors. It is noteworthy, that now both the First and Second Departments have ignored the Courts of Appeals’ statement in General Motors that the "other insurance" provision does not apply to the obligation to defend -- the subject case, William Floyd, v. Maxner, as well as the recent SportRock Intern., Inc. v. American Cas. Co., 65 A.D.3d 12, 878 N.Y.S.2d 339 (1st Dep’t 2009) and Fieldston Prop. Owners, Assn., Inc. v. Hermitage Ins. Co., Inc., 873 NYS2d 607 (1st Dep’t 2009).