Separation of Insureds (Severability)
Buried in most general liability and umbrella policies is a provision entitled Separation of Insureds. This clause provides that each insured party will be considered separately, without regard to any other insured. It ensures that the existence of one insured will not affect the coverage afforded for any other insured.
The Separation of Insureds clause is particularly important when one insured party sues another. Thus, it is sometimes referred to as the cross suits clause (or cross suits coverage). In some policies, the clause appears under the heading Severability of Interests rather than Separation of Insureds.
Where Is It?
The Separation of Insureds clause typically consists of two parts. The first part applies to named insureds.
1. Suit Between Named Insureds
The first part of the Separation of Insureds clause applies to named insureds. These are the parties listed in the declarations section of your policy. The clause ensures that the policy applies separately to each named insured. That is, if two named insureds are sued, each will be covered as if it were the only one listed on the policy.
The Separation of Insureds clause contains two important exceptions. First, it does not apply to the limits of insurance. This means that the limits don't apply separately to each insured. For example, suppose that two named insureds sue each other for bodily injury they sustained in a single occurrence. All damages the insurer pays on behalf of both parties will be subject to the Each Occurrence limit.
Secondly, the clause does not apply to the specific duties assigned to the first named insured, meaning the person or entity listed first in the declarations. The first named insured has certain obligations, such as the duty to pay premiums. The Separation of Insureds clause does not extend these duties to other named insureds.
Exclusions Applied Separately
The Separation of Insureds clause ensures that policy exclusions will be applied individually to each named insured. This separation of coverage is particularly important when one named insured sues another. This is because some exclusions in the policy apply to you, meaning the named insured(s). In the absence of the Separation of Insureds clause, exclusions that are relevant to one named insured might be applied to the other. Here is an example.
Bill Jones and his brother, Bob, are joint owners of two corporations, Jones Creamery and Jones Manufacturing. Jones Creamery owns a retail ice cream store. Jones Manufacturing makes unique flavors of ice cream. The firms have mutually agreed that all ice cream made by Jones Manufacturing will be sold at Jones Creamery's store. Moreover, the creamery sells ice cream made exclusively by Jones Manufacturing. Both companies are named insureds on the same general liability policy.
Jones Creamery operates its ice cream store in space it rents in a shopping center. Jones Manufacturing operates out of a building it owns that is located behind the shopping center. All property owned by the two companies is insured under the same commercial property policy. Both businesses are named insureds under the same general liability policy.
Late one night, a janitor employed by Jones Manufacturing is preparing to wash the factory floor. He is unaware that bleach and ammonia are combustible when combined, and pours some of each into a bucket. He then heads outside to dump the trash. A few seconds later the mixture explodes. No one is hurt but part of the factory building is destroyed. The shopping center is not damaged.
Jones Manufacturing is forced to shut down for four months until the building is repaired. Jones Creamery is barred by the agreement from using other suppliers, so the store must shut down for four months as well. The damage to the factory is covered by the firms' property policy. Unfortunately, the policy does not include business income coverage.
Eight months after the explosion, Jones Creamery sues Jones Manufacturing for loss of use. (Under a liability policy, loss of use of tangible property that has not been physically injured qualifies as property damage.) The lawsuit contends that Jones Manufacturing is liable for Jones Creamery's loss of income. It states that the explosion, which ultimately prevented the creamery from operating the ice cream store, was the result of the manufacturer's negligence.
Property Damage Exclusion
Most liability policies contain an exclusion (under Bodily Injury and Property Damage Liability) for "damage to property you own, rent, or occupy." This exclusion is intended to eliminate coverage for claims that should be insured under a commercial property policy. The exclusion applies to you (the named insured).
Jones Manufacturing has been sued by Jones Creamery for property damage (loss of use) to the retail store. Jones Creamery occupies the property that is the subject of the claim. Both Jones Creamery and Jones Manufacturing qualify as you.
If the policy didn't apply separately to each named insured, the property damage exclusion cited above might eliminate coverage for the claim against Jones Manufacturing. Fortunately, the exclusion is considered separately for each named insured. When the property damage (loss of use) occurred, Jones Manufacturing did not own or occupy the property (ice cream store) that is the basis of the claim. Thus, the exclusion does not apply, and its claim against the manufacturer should be covered.
2. Suits Between Insureds
Paragraph Two of the Separation of Insureds provision applies to suits between insureds. It 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.
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.