The United States Court of Appeals, Fourth Circuit, Finds Wrap-Up Exclusion Does Not Bar Coverage of Additional Insureds

The United States Court of Appeals, Fourth Circuit, recently took a close look at the application of a “controlled insurance program exclusion” (wrap-up exclusion) to additional insureds on a commercial general liability policy. In Cont'l Cas. Co. v. Amerisure Ins. Co., 886 F.3d 366 (4th Cir. 2018), the Fourth Circuit examined the interplay of an enrolled party’s additional insured status on an unenrolled party’s commercial general liability (“CGL”) policy with a wrap-up exclusion. The court applied North Carolina law and found that pursuant to the policy’s own language, the exclusion only applied to the original named insured, not the additional insureds.

The case arose out of an injury incurred by an employee of a second-tier subcontractor during the construction of a hospital. On this particular project, the owner maintained a “rolling owner controlled insurance program” (wrap-up insurance program) in which all tiers of contractors were required to enroll, but enrollment was not automatic. The general contractor was enrolled in the owner’s wrap-up policy, but neither the steel manufacturer subcontractor nor its sub-subcontractor, the steel installation company, were enrolled. The underlying plaintiff was injured while he was an employee of the steel installation company, but he did not name his employer in his personal injury lawsuit.

The Cont'l Cas. Co. case was instituted by Continental Casualty Company (“Continental”) after it defended and settled the underlying plaintiff’s claims against its insured and additional insured, the steel manufacturer and general contractor, respectively. Continental sought to be reimbursed for the $1.7 million settlement and attorneys’ fees and costs incurred for the defense and indemnity of the underlying lawsuit.

Continental alleged that Amerisure Insurance Company (“Amerisure”) breached its duty to defend and Amerisure’s policy provided the primary coverage for both the general contractor and steel manufacturer, who were additional insureds on the Amerisure policy. Amerisure denied a duty to defend the additional insureds based on the presence of the wrap-up exclusion.

The steel installation sub-subcontractor complied with contractual requirements imposed by the steel manufacturer and obtained a CGL policy that named both the steel manufacturer and the general contractor as additional insureds. This was the Amerisure policy at issue. Amerisure argued that the policy contained a wrap-up exclusion that operated to bar coverage of the additional insureds. The exclusion specifically barred coverage arising out of the named insured’s ongoing operations if those operations were included within a wrap-up insurance program.

The Fourth Circuit applied the language exactly as written, finding that because the underlying personal injury plaintiff’s complaint alleged that certain acts or omissions of the general contractor and the steel manufacturer caused or contributed to his injuries, the claims in question did not fall within the scope of the exclusion. Put another way, the complaint alleged the injuries arose at least in part by acts or omissions that were not part of the original named insured’s operations. Any injuries allegedly arising out of the acts or omissions of the general contractor and the steel manufacturer were not subject to the wrap-up exclusion.

Based on the wrap-up exclusion’s limited applicability, the Fourth Circuit found that Amerisure had a duty to defend the additionally insured parties, and it breached that duty when it denied a defense based on the wrap-up exclusion. It was critically important that the Amerisure policy referred to “your” operations in the wrap-up exclusion, and the policy elsewhere defined “your” as the “named insured.” The named insured was the original policy holder, the steel installation company.

After addressing the duty to defend, the Fourth Circuit went on to find that Amerisure owed Continental the entire $1.7 million paid to settle the claims because Amerisure’s CGL policy and its umbrella policy were primary to Continental’s policy. The Cont'l Cas. Co. case notes that the Amerisure umbrella policy, which provided the amounts over the $1 million limits of the CGL policy, was (1) required by contract between the steel manufacturer and its subcontractor, the steel installation company; and (2) not contingent on the existence of the Continental CGL policy. Over Amerisure’s objection, the Fourth Circuit found that the subcontract between the parties resolved any ambiguities because it required all of Amerisure’s policies to be “primary and non-contributory.”

Finally, the court used the same “primary and non-contributory” language to conclude that Continental’s policy was effectively an excess policy, meaning it had no duty to defend the general contractor and steel manufacturer. For this reason, the Fourth Circuit awarded Continental the full amount of its fees and costs incurred defending the underlying lawsuit.

Owner and contractor controlled insurance programs, and the provisions of enrollees' insurance policies referencing these insurance programs, add another layer of complexity when analyzing claims related to construction defects and the insurance coverage that may be available to cover those claims. If you have any questions about this decision, or insurance coverage for construction defect claims generally, please contact Ryan M. Charlson at ryan.charlson@csklegal.com or 954-343-3919.