Separation of Insureds (Severability), Part Two

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Image courtesy of [Roy Scott] / Getty Images.

Most general liability and umbrella policies contain a provision entitled Separation of Insureds. A previous article addressed the first part of this provision, which applies to named insureds. This article will explain the second part.

Suits Between Insureds

Paragraph Two of the Separation of Insureds provision states that the policy applies separately to each insured that is the subject of a claim or suit.

This provision ensures that if Insured A sues Insured B, the policy will apply to Insured B as if Insured A did not exist.

Why does the Separation of Insureds clause matter? Some of the exclusions in the policy make reference to "the insured". "The insured" typically means an insured that is seeking coverage for a claim or suit. Suppose that Insured A sues Insured B for bodily injury. If the policy did not apply separately to B, exclusions that are relevant to A might also apply to B.

Example

Many suits between insureds involve an additional insured that has sued a named insured. For example, suppose that a property owner called Paramount Properties hires Pete's Painting to paint an office building Paramount owns. A contract between Paramount Properties and Pete's Painting requires Pete's to cover Paramount as an additional insured under Pete's liability policy.

Pete's Painting begins work on the project.

One day, Jeff, a Pete's employee, is positioning a ladder on the building near a window. Suddenly, the window frame falls off the building and hits Jeff in the head. Jeff sustains a head injury and files a claim under Pete's Painting's workers compensation policy. After collecting workers compensation benefits, Jeff files a lawsuit against Paramount Properties.

His suit claims that the window frame was not attached to the building. Paramount was aware of this fact before the accident but failed to warn Jeff of the danger.

Paramount Properties responds by filing a lawsuit against Pete's Painting. Paramount claims that it informed Pete's Painting about the loose window frame. Pete's Painting was negligent in failing to notify Jeff of the danger so Pete's is responsible for Jeff's injury.

Employers Liability Exclusion

In the above example, Pete's Painting has been sued by Paramount Properties because of an injury that occurred to a Pete's employee. If Pete's sends the suit to its liability insurer, the insurer will likely deny coverage based on the employers liability exclusion in the policy. This exclusion eliminates coverage for employment-related bodily injury to an employee of the insured. Work-related injuries are excluded because they should be covered under a workers compensation policy.

Paramount is an additional insured under Pete's liability policy. If Paramount seeks coverage for Jeff's lawsuit under Pete's policy, will the employers liability exclusion extend to Paramount as well?

Because of the Separation of Insureds provision, the policy (including the employers liability exclusion) applies separately to each insured.

Paramount Properties is not Jeff's employer so the employers liability exclusion should not apply to it. The suit against Paramount should be covered.

Limits Don't Apply Separately

The Separation of Insureds provision does not apply to the policy limits. If two insureds sue each other as a result of an accident, all damages (or settlements) awarded to both insureds will be subject to the Each Occurrence limit. The limits do not apply separately to each insured.

Cross Suits Exclusions

Finally, some liability and umbrella policies contain exclusions that eliminate coverage for suits by one insured against another. These "insured versus insured" exclusions vary. Some apply only to suits between named insureds. Others apply to suits between any insureds. Policies with these exclusions should be avoided.