I’m not one of those people who thinks that every time an insurer loses a liability coverage case the sky is falling and ISO needs to stop what it’s doing and amend its bread and butter CGL form to prevent a repeat of the situation. Not at all.

General liability coverage cases involve the application of the facts of a potentially infinite number of accident scenarios to an insurance policy with static provisions, zealous advocates on both sides and a human decision maker. All of that translates into a situation where insurers and policyholders will each win some and lose some. Based on these many variables at play, not to mention that the policy provision at issue may not arise with great regularity, every insurer loss is not a harbinger of a nuclear winter.

But sometimes I see a decision, involving the language in ISO’s form CG 00 01, that I believe both creates unintended coverage and could have wide-ranging enough implications, such that it justifies the organization’s consideration whether a change is in order. The South Dakota Supreme Court’s recent decision in Dakota Fire Ins. Co. v. J & J McNeil, LLC, No. 26827 (S.D. June 25, 2014) is in this category.

Before getting to the specifics of the South Dakota case, here’s an explanation of the issue in general. ISO’s Commercial General Liability form CG 00 01 states, right at the outset, that the terms “you” and “your” refer to the Named Insured shown in the Declarations and any other person or organization qualifying as a Named Insured under the policy. The policy also provides a fairly lengthy section, mid-way through, describing who qualifies as an “insured.” And, of course, parties often-times qualify as an “additional insured,” in one way or another, under a named insured’s policy. That the policy has a Separation of Insureds clause further makes clear that there may be many insureds at issue.

The persons and entities who qualify as “insureds” and “additional insured” are just that -- “insureds” and “additional insureds.” In other words they are not “named insureds.”

Now turn to some of the exclusions in ISO’s CGL form. In the “business risk” category there is an exclusion for “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” There is an exclusion for “‘property damage’ to ‘your product’ arising out of it or any part of it.” And there is an exclusion that provides, in part, that no coverage is owed for “property damage” to “property that has not been physically injured, arising out of: [a] defect, deficiency, inadequacy or dangerous condition in ‘your product’ or ‘your work’; or [a] delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.”

What all of these exclusions have in common is that they apply to the work or product of a named insured. That’s because they are written, and defined, in terms of “you” and “your.” And as the policy makes clear in its preamble, the terms “you” and “your” refer to the Named Insured shown in the Declarations. In addition to the business risk exclusions, the ISO policy contains numerous other places where coverage, exclusions and conditions are described in terms of “you” and “your,” i.e., the named insured.

As a result of this distinction in the policy between “you” and “your,” being a named insured, and simply an insured, the stage is set for disputes whether certain insureds are subject to certain policy provisions. The argument is certainly there for the making that exclusions, written in terms of “you” and “your,” do not apply to a person or entity that is simply an “insured” – and not a named insured. If so, then an additional insured, who was perhaps added to a policy for no premium, or less than the cost of a hot dog and soda at a baseball game, gets more coverage (because not subject to the business risk exclusions) than a named insured, that paid many thousands of dollars in premium. Of course that makes no sense. But the often-applied rule of insurance policy interpretation is that, when the policy language is clear, look no further.

This is no far-fetched issue. Many courts have addressed the fact that “you” and “your” refer to the named insured when determining the availability of coverage. The cases involve a hodge-podge of circumstances. But the fact is that many exist, as pointed out by the First Circuit in Wright-Ryan Const., Inc. v. AIG Ins. Co. of Canada, 647 F.3d 411, 417-18 (1st Cir. Jul 27, 2011):

"Decisions interpreting the use of “you” and distinguishing between the “Named Insured” and “Additional Insured” are common, due to the ubiquitous use of those terms in insurance policies:

Insurance carriers often employ the terms “you” and “your” throughout the language of a policy. These terms are typically defined as referring to the named insured shown in the declarations of the policy, and any other person or organization qualifying as a named insured under the policy. Accordingly, “you” and “your” do[ ] not encompass individuals or entities added as an additional insured to the policy.

3 Russ & Segalla, supra, § 40:26 (footnote omitted). The mainstream of opinions interpreting this or similar definitions has held “you” to be unambiguous and to refer solely to the individual or organization identified as the “Named Insured” in the policy Declarations. See, e.g., Nat’l Union Fire Ins. Co. v. Liberty Mut. Ins. Co., 234 Fed.Appx. 190, 193 (5th Cir.2007) (taking “as a given” that, under definition of “you” identical to the definition here, “you” was limited to the named insured and did not encompass an additional insured); Alexander v. Nat'l Fire Ins., 454 F.3d 214, 226–27 (3d Cir.2006) (same); Seaco Ins. Co. v. Davis–Irish, 300 F.3d 84, 86 (1st Cir.2002) (holding that definition of “you” was unambiguous and referred only to named insured)."

To take one specific example, in Old Republic Insurance Co. v. Kemper Casualty Co., No. 04-1902 (3rd Cir. May 13, 2005) the federal appeals court rejected an insurer’s argument that the term “your work,” as used in an exclusion, could not be limited solely to a named insured, because that would provide greater coverage to an additional insured than a named insured. The court was not buying the insurer’s argument that the exclusion, because it was applicable to a named insured, operated indirectly to preclude coverage to an additional insured. The court’s decision was based on the fact that the terms “you” and “your” were clearly defined in the policy as referring to the named insured shown in the declarations.

With this background now turn to the South Dakota Supreme Court’s late-June decision in Dakota Fire Ins. Co. v. J & J McNeil, LLC. John McNeil (McNeil) was a member, owner and operator of J & J McNeil, LLC, an excavation and snow-removal company. To keep it simple I’ll set out the rest of the facts verbatim from the opinion:

“Along with his home, McNeil’s property included a large shed which was used primarily to store the LLC’s equipment. The LLC owned a number of vehicles, including a 93–foot Caterpillar scraper (scraper). McNeil also owned a number of vehicles personally, including a 2008 Shelby GT (Shelby), which was subject to the perfected security interest of Harris Bank. During the summer months, McNeil stored the Shelby in the garage attached to his home. During the winter months, McNeil stored the Shelby in the nearby shed, freeing up room in his garage. The Shelby was wholly maintained by McNeils personal funds and had no business purpose.”

“In the early hours of November 13, 2008, McNeil needed to service the scraper and mobilize it for a commercial development project. In order to service the scraper, it needed to be moved inside the shed. Although usually parked out of the way in the back of the shed, the Shelby was parked in a manner that interfered with the scraper’s entrance. McNeil moved the Shelby out of the shed and parked it adjacent to the shed’s exterior, allowing him to pull the scraper into the shed. After servicing the scraper, it was ready for mobilization. Prior to backing the scraper out of the shed and unbeknownst to McNeil, the Shelby, which had a manual transmission, rolled down the incline outside of the shed before coming to rest outside of the shed’s garage door. When McNeil backed the 605 horsepower, 93–foot–long Caterpillar Challenger out of the shed, he did not see the Shelby and drove over it. The impact from the seven-and-a-half-foot tires effectively destroyed the Shelby.”

So to summarize this unfortunate accident, John McNeil, while driving a large piece of equipment, on behalf of J & J McNeil, LLC, smushed an automobile that he owned personally. McNeil sought payment for his automobile from Dakota Fire, the LLC’s general liability insurer.

The general liability insurer maintained that no coverage was owed on account of the policy’s exclusion for “property you own, rent or occupy.” While McNeil was an insured under the LLC’s policy, and owned the automobile, the court held, without too much effort, that the exclusion did not apply. That’s because the court saw it this way: “The policy plainly states that the term ‘you’ only refers to the Named Insured. As given by the policy’s Declarations, the only Named Insured is J & J McNeil, LLC. [John] McNeil is not listed as a Named Insured in the policy’s Declarations. Therefore, the ‘property you own, rent, or occupy’ exclusion only refers to the LLC’s property. The facts clearly dictate that the LLC did not own or rent McNeil’s Shelby.”

It is easy to see how the result could have been different for Dakota Fire. If the policy’s exclusion had applied to “property an insured owns, rents or occupies,” then coverage would have been precluded because the damaged Shelby was owned by an insured [John] under the LLC’s policy.

There are certainly instances in a liability policy where “named insureds” should be treated differently than “insureds” (or additional insureds). But it seems difficult to fathom that the CGL policy should come with a built-in argument that, in some situations, additional insureds or omnibus insureds are entitled to more coverage than named insureds. Where is ISO on this? Ironically, those letters are sometimes used as an acronym for In Search Of.