Indian Harbor Ins. Co. v. Valley Forge Ins. Co., No. 06-20707 (5th Cir. July 11, 2008) see Indian Harbor Decision
The issue in this case is deceptively simple, when is one party liable for the conduct of another? Put another way, how broad is "vicarious liability" under Texas law? Insurance companies frequently assert that additional-insured coverage, like that involved here, applies only if the additional insured is vicariously liable for the named insured's conduct. Insurers lose that argument, at least under Texas law, because vicarious liability is very narrow, applying almost exclusively to the employer-employee relationship. Courts do not interpret the typical additional-insured endorsement so narrowly. But first the facts.
Construction project. General contractor (GC) hires two subcontractors, one to construct a steel structure and one to lay a concrete slab. The steel sub hires a sub-sub to deliver the steel, and sub-sub runs over the fresh slab. Crack! Owner sues everyone on the site. Concrete sub's insurer, Indian Harbor, defends concrete sub (named insured) and GC (additional insured).
Valley Forge insures steel sub and Liberty Mutual insures sub-sub trucking company. Both of these commercial auto policies provide that "any party that is liable for the conduct of the named insured is also covered as an insured." Indian Harbor believes that that the GC is an additional insured under the auto policies because, it asserts, the GC is liable for the conduct of its subs and their sub-subs. Indian Harbor sues Valley Forge and Liberty Mutual.
The court sets the stage by clarifying that the legal name for one party being liable for the conduct of another party is "vicarious liability." Moreover, the legal basis for holding one party responsible for another, at least in this context, is the principle of "agency." A principal can be held responsible for the conduct of its agent, assuming the agent is acting within the scope of the agency relationship. The court went on to spell out that relationship:
Under Texas Law, "[a]gency is the consensual relationship between two parties when one, the agent, acts on behalf of the other, the principal, and is subject to the principal's control." To prove agency, evidence must establish that the principal has both the right: (1) to assign the agent's task; and (2) to control the means and details of the process by which the agent will accomplish that task. "It is the principal's extent of control over the details of accomplishing the assigned task that primarily distinguishes the status of independent contractor from that of agent." (citing Happy Indus. Corp. v. Am. Specialties, Inc., 983 S.W.2d 844 (Tex. App.-Corpus Christi 1998, pet. dis'd w.o.j.)
The court found nothing unusual in the manner of the GC's control of the project to create an agency relationship. The subs and sub-subs were acting as independent contractors, not as employees of the GC. Therefore, Indian Harbor could not recover contribution from the other insurers.
The typical additional-insured endorsement does not, explicitly or implicitly, say that the insurer will cover the additional insured only if the additional insured is vicariously liable for the named insured's conduct. Accordingly, those endorsements that purport to cover the additional insured but only for liability arising from the named insured's conduct, are illusory under Texas law -- they will never cover the additional insured unless the additional insured is the named insured's employee, and employees are probably covered already as omnibus insureds.
Insurance companies should stop making this argument; it won't work under Texas law.