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Vol. 5, Iss. 5
April 29, 2016

Is There A Duty To Defend An Additional Insured That Doesn’t Ask For A Defense?

 

Sometimes an insurer is presented with a suit from its insured, and in the course of determining the insurer’s obligations, discovers that another defendant in the suit may be an additional insured under the insured’s policy, and entitled to a defense. For example, the insured’s policy may contain a blanket additional insured endorsement. And the insured, as part of its tender, or in response to an insurer request, may have provided a contract to the insurer, indicating that the insured was obligated to name another defendant in the suit as an additional insured. Translation, on account of the blanket additional insured endorsement, this other defendant may be an additional insured under the insured’s policy and entitled to a defense. But does the insurer have to consider a defense for this potential additional insured and advise it of its determination? After all, the potential additional insured has not sought a defense. In fact, the party likely has no idea that it may even be an additional insured under such policy.

The Connecticut federal court in Dominion Energy, Inc. v. Zurich American Ins. Co., No. 13-156 (D. Conn. Mar. 15, 2016) did not answer this specific question. However, the court identified one consequence for an insurer that did not address coverage for the potential additional insured.

The facts go like this. Dominion Energy owns and runs power generation facilities, including the Salem Harbor Generating Station in Salem, Massachusetts. Alstom Power, Inc. performs inspections of facilities, including the Salem Station. In April 2007, a Service Engineer for Alstom inspected Boiler Number 3 at the Salem Station. In November of the same year, a steam explosion of Boiler Number 3 caused the deaths of three individuals and injured two.

In 2005, Dominion and Alstom entered into an agreement providing that “Alstom would obtain and maintain general commercial liability insurance coverage as to certain inspections that it would perform for Dominion, and it would name Dominion as an additional insured under said insurance.”

Alstom’s corporate parent purchased a Zurich commercial general liability insurance policy covering the period from April 1, 2007 to April 1, 2008. While the Zurich policy did not explicitly name Dominion as an insured, it stated that entities, in addition to Alstom, were automatically insured, if Alstom had agreed to name them as an insured, with respect to services Alstom performed for them.

In December 2007, Zurich received a notice that a steam explosion had occurred at a Dominion power generation facility, that Dominion was a client of Alstom, and that the event potentially could involve the Zurich Policy. In May 2009, the decedents’ estates and others filed suit against Dominion and Alstom and others. Zurich received notice of the action in July 2009. In April 2011, while discovery in the explosion litigation was ongoing, Dominion requested that Zurich provide it with a defense in such litigation. Zurich did not agree to defend Dominion or reimburse it for any of its costs of defense in the action. Dominion filed suit against Zurich.

Putting aside some details, the issue before the court in Dominion Energy v. Zurich was Zurich’s obligation to pay for Dominion’s pre-tender defense costs. More specifically, Zurich received notice of the injury suit, naming Dominion as a defendant, in July 2009. However, it was not until April 2011 that Dominion “officially” tendered its defense to Zurich. At issue – was Zurich obligated to pay for the defense of Dominion (an additional insured) prior to the time that Dominion asked for a defense?

Zurich had no problem citing cases for the proposition that insurers do not have an obligation to pay for pre-tender defense costs. And the court had no problem distinguishing such cases: “In contrast to the insurers in [cases cited by Zurich], Zurich had actual notice of the Massachusetts Action shortly after it was filed.”

That Zurich had “actual notice of the Massachusetts Action shortly after it was filed” was the key to the court’s decision that Zurich was obligated to pay for the defense of Dominion, an additional insured, prior to the time that Dominion officially asked for a defense.

But, as I see it, that notice was curious. Dominion was only an additional insured, under the Zurich policy, on account of a Dominion--Alstom agreement providing that “Alstom would obtain and maintain general commercial liability insurance coverage as to certain inspections that it would perform for Dominion, and it would name Dominion as an additional insured under said insurance.”

While the Zurich policy did not explicitly name Dominion as an insured, it stated that entities, in addition to Alstom, were automatically insured, if Alstom had agreed to name them as an insured, with respect to services Alstom performed for them.

But how did Zurich know about the Dominion--Alstom agreement, whereby Alstom had agreed to name Dominion as an insured, with respect to services Alstom performed for them?

The court does not answer this, except to note that “Zurich received notice of the accident that gave rise to the Massachusetts action approximately one month after the accident occurred. That notice included information about Dominion, naming Dominion as ‘a client of Alstom,’ which is the company that held the Zurich Policy. Zurich also received notice of the Massachusetts Action shortly after that lawsuit was filed. Dominion was a named defendant in the Massachusetts Action. In sum, Zurich was promptly notified of both the accident that gave rise to the Massachusetts Action and the filing of the lawsuit itself, as well as Dominion's involvement in these matters.”

While Zurich may have known about “Dominion’s involvement in these matters,” and the Dominion—Alstom client relationship, that’s a far cry from Zurich knowing that Alstom had agreed to name Dominion as an insured, with respect to services Alstom performed for Dominion. In any event, the court concluded that Zurich was liable to Dominion for its pre-official tender defense costs.

In arriving at this decision, the court also noted that there was no evidence that Dominion’s failure to officially tender the defense to Zurich, prior to April 2011, resulted in prejudice to Zurich or that it was otherwise not able to protect its interests. Lastly, the court nipped in the bud any concerns that its decision “could motivate insured parties to assume, and spend lavishly on, their own defenses with the expectation that the insurer will ultimately pick up the tab.” This, the court observed, was “mitigated by the fact that Dominion will only be able to recover reasonable pre-tender defense costs.” (emphasis in original).

 

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