In the world of insurance coverage litigation, insurance companies like to accuse policyholders of attempting to expand coverage terms, or limit the scope of exclusions, beyond the language’s plain meaning. “The policy means what it says,” is a common refrain insurers use to justify coverage denials. However, a recent decision by the federal Fourth Circuit Court of Appeals, Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s, London, No. 14-1239 (June 10, 2015), demonstrates that insurers are at least as likely as policyholders to try to make policy language say what they wish it said, rather than what it actually says. The court does an admirable job of applying the straightforward language of an additional insured endorsement that has given some other courts trouble, and demonstrates that oftentimes the best approach is simply to hold insurers to the plain meaning of the language that they drafted.

The facts of Capital City are simple. Capital City Real Estate, LLC (“Capital City”) was a real estate company operating as the general contractor for the renovation of a building in Washington, D.C. The building was owned by 57 Bryant Street, NW LP and Bryant St., LLC (together “Bryant Street”). Capital City subcontracted work on the foundation, structural and underpinning work to Marquez Brick Work, Inc. (“Marquez”). The subcontract required Marquez to indemnify Capital City for damages caused by Marquez’s work and further required Marquez to obtain general liability insurance that named Capital City as an additional insured. Marquez duly obtained a general liability policy from Certain Underwriters at Lloyd’s, London (“the Underwriters”). The policy contained a standard additional insured endorsement that insured Capital City:

but only with respect to liability for … “property damage” … caused in whole or in part by:

  1. the Named Insured’s acts or omissions; or
  2. the acts or omissions of those acting on the Named Insured’s behalf

in the performance of the Named Insured’s ongoing operations for [Capital City].

A common wall between Bryant Street’s building and an adjacent building collapsed while Marquez was working on it. The property insurer of the adjacent building, Standard Fire Insurance Company (‘Standard Fire”), sued Capital City and Bryant Street for negligence in allegedly causing the collapse. The complaint did not name Marquez or explicitly seek damages for any of its acts or omissions.

Capital City responded in part by filing a third-party complaint against Marquez and its owner. Capital City alleged that Marquez’s negligence caused the collapse and that Marquez was required to indemnify Capital City under the terms of the subcontract.

The Underwriters denied coverage to Capital City on the ground that the additional insured endorsement only insured Capital City for vicarious liability based on Marquez’s acts or omissions, and that because Standard Fire’s complaint did not allege that Marquez was negligent or that Capital City was liable based on Marquez’s work, Capital City was not insured for the property damage.

The Fourth Circuit rejected the Underwriters’ attempt to limit the scope of the additional insured endorsement. In particular, the court noted that “there is no mention of vicarious or derivative liability in the Endorsement,” and that “if the parties had intended coverage to be limited to vicarious liability, language clearly embodying that intention was available.” (Quoting McIntosh v. Scottsdale Ins. Co., 992 F.2d 251, 255 (10th Cir. 1993)). The court found that “the plain language of the Endorsement provides for exactly what it says:  coverage to Capital City for property damage caused by Marquez, either in whole or in part.” Thus, Capital City was insured for property damage caused in whole or in part by Marquez, regardless of whether the underlying complaint sought to hold Capital City vicariously liable for Marquez’s acts or omissions.

Having interpreted the policy, the remaining question for the Fourth Circuit was whether the underlying lawsuit triggered the Underwriters’ duty to defend, given that Standard Fire’s complaint did not allege that Marquez caused the collapse. Rather than being restricted to the allegations in the complaint, the court found that Maryland law allows an insured to use extrinsic evidence to establish the potential for coverage, and thus the duty to defend. In this case, the court found that Capital City could rely on its third-party complaint against Marquez, plus the undisputed fact that Marquez was involved in the renovations, to establish that the collapse potentially had been caused, at least in part, by Marquez. The court also distinguished other decisions in which the underlying plaintiffs had pled their cases in such a way as to affirmatively negate the negligence of parties other than the named defendants. Therefore, the court held, the Underwriters had a duty to defend Capital City in Standard Fire’s lawsuit.

Insurance companies are sophisticated entities with extensive experience in writing policies, and they have access to thousands of coverage forms written by entities such as the Insurance Services Office, Inc. It is almost always the case that the insurer drafts the language and/or chooses the forms used in its policies. If the insurer chooses to use language that is unclear, the insurer should bear the consequences of the ambiguity when the language is interpreted in favor of coverage. But policyholders equally should be on guard against attempts by insurers to avoid the plain meaning of language they chose. Capital City illustrates that “the policy means what it says” can be a double-edged sword which, in the right circumstances, can benefit policyholders as well as insurers.