While an insurance carrier must treat additional insureds and named insureds as if they are separately covered under the policy, it is important to keep in mind that in some instances one insured’s conduct can negatively impact coverage for other insureds.  The Appellate Division, First Department, recently addressed this issue in Citizens Ins. Co. of America v. Illinois Union Ins. Co.

Illinois Union Insurance Company issued a CGL policy to the “named insured,” who acted as a general contractor on a construction project performed on the property of an entity named as an “additional insured” under the Illinois policy.  The policy contained a sub-limit endorsement, which provided that coverage for any loss will be reduced to $100,000 in the event that the named insured breaches any conditions to coverage listed in the endorsement.  The sub-limit endorsement only imposed conditions on the named insured, and made no reference to any additional insured.

Here, the named insured violated a condition to coverage which required its subcontractor to have in force an insurance policy that afforded coverage to the named insured contractor as an additional insured.  Thus. Illinois Union argued that coverage was reduced to $100,000 for the additional insured.   Citizens Insurance Company, the primary carrier for the additional insured, rejected Illinois Union’s position, and commenced a declaratory judgment action.

The First Department affirmed the trial court’s decision that the sub-limit endorsement applied equally to the additional insured.  The court declared that although the sub-limit endorsement only placed conditions on the named insured, once the named insured breached a policy condition, coverage for the additional insured was also reduced.  According to the court, the “separation of insureds” doctrine did not alter the fact that the sub-limit endorsement applied to all insureds, named or otherwise.

Finally, the First Department also rejected Citizens’ contention that Illinois Union was estopped by Insurance Law § 3420(d) from relying on the sub-limit endorsement because it allegedly provided late notice of the sub-limit.  There was simply no evidence of any prejudice to the additional insured by any delay, as it received full payment of the sub-limit coverage, and there was no excess exposure because Citizens’ paid the balance of the settlement.

Thanks to Steve Kaye for his contribution to this post.  If you would like more information, please write to Mike Bono.