Separation of Insureds (Severability)
Most commercial liability policies contain a condition entitled Separation of Insureds (or Severability of Interests). This clause ensures that if a covered party is sued, that party will be considered separately without regard to any other insured. That is, the existence of one insured will not affect the coverage afforded for any other insured.
The Separation of Insureds clause becomes relevant when one insured party sues another. For this reason, it is sometimes referred to as the cross suits clause (or cross suits coverage). The following discussion concerns the Separation of Insureds clause found in the standard ISO general liability policy. The clause consists of two parts. One applies to suits between named insureds while the other applies to suits between other insured parties.
1. Suits Between Named Insureds
The first part of the Separation of Insureds clause applies to named insureds, the parties listed in the policy declarations. It ensures that the policy will apply separately to each if one named party sues another. The following example shows why this is important.
Example of a Suit Involving Named Insureds
Bill and Bob Jones are brothers who jointly own two corporations: Jones Creamery and Jones Manufacturing. Bill operates Jones Creamery, an ice cream store, from rented space in a shopping center. Bob runs Jones Manufacturing, an ice cream maker, out of a building the company owns behind the shopping center. All business property owned by the companies is insured under a single commercial property policy.
A mutual contract between the firms ensures that Jones Creamery is the sole distributor of Jones Manufacturing's products. The agreement prohibits Jones Creamery from selling products made by any company other company. Both firms are named insureds on a single general liability policy.
Late one night, a janitor employed by Jones Manufacturing is preparing to wash the floor. He pours bleach and ammonia into a bucket and then steps outside to dump the trash. A few seconds later the mixture explodes. No one is hurt but part of the factory building is badly damaged.
Jones Manufacturing is forced to shut down for four months until the building can be repaired. Jones Creamery must shut down as well since it is barred by its agreement with Jones Manufacturing from selling products made by other suppliers. The firms' joint property policy covers the physical damage to the factory but it does not cover their income losses. Neither company has purchased business income coverage.
Eight months after the explosion, Jones Creamery sues Jones Manufacturing for loss of use. The lawsuit contends that Jones Manufacturing is liable for Jones Creamery's loss of income because the manufacturer caused the explosion that forced the creamery to shut down.
Property Damage Exclusion Applied Separately
Jones Creamery's suit against Jones Manufacturing may be covered under the firms' liability policy as a property damage claim. The ice cream store is suing for loss of use, not physical damage (the store wasn't damaged in the explosion). Under a liability policy, the loss of use of tangible property that hasn't been physically injured qualifies as property damage.
Like most liability policies, the Jones' policy contains an exclusion entitled Damage to Property. The exclusion eliminates coverage for claims that should be insured under a commercial property policy. Among other things, the Damage to Property exclusion precludes coverage for property damage to property you (the named insured) own, rent, or occupy. Both Jones Creamery and Jones Manufacturing are named insureds on the policy so both qualify as you.
The explosion that is the subject of the Jones lawsuit caused damage to property owned by Jones Manufacturing. Does the property damage exclusion eliminate coverage for the creamery's claim against the manufacturer? The answer is no.
The Separation of Insureds clause ensures that exclusions are applied separately to each named insured. The lawsuit seeks damages for the loss of use of the creamery's property (the ice cream store). Jones Manufacturing does not own or occupy the store that is the basis of the claim. Thus, the property damage exclusion does not apply, and the creamery's 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. That is, an exclusion that applies to Insured A won't automatically apply to Insured B as well. If the policy did not apply separately to B, exclusions that are relevant to A might eliminate any coverage for B. The following scenario demonstrates why this provision is important.
In many suits between insured parties, the plaintiff is an additional insured and the defendant is a named insured. For example, Paramount Properties is a commercial property owner that has hired Pristine Painting to paint an apartment building Paramount owns. A contract between the companies requires Pristine to cover Paramount as an additional insured under Pristine's general liability policy.
Pristine Painting begins work on the project. Steve, a Pristine employee, is painting a second-floor a balcony outside an apartment when the balcony detaches from the building. Steve falls to the ground and sustains several injuries. He files a claim under Pristine Painting's workers compensation policy and collects workers compensation benefits. He then files a lawsuit against Paramount Properties, claiming that Paramount is liable for his injuries because it failed to maintain a safe workplace. Paramount forwards the claim to its liability insurer.
Employers Liability Exclusion
A general liability policy contains an employers liability exclusion, which precludes coverage for employment-related bodily injury sustained by employees. The exclusion applies to bodily injury to an employee of the insured.
In the previous example, Paramount Properties is an additional insured under Pristine Painting's liability policy. Paramount has been sued for a work-related injury. Is the claim against Paramount covered or is it excluded by the employers liability exclusion? The exclusion applies if an employee of "the insured" has been injured. In an insurance policy "the insured" generally means the insured seeking insurance coverage. In this scenario, Paramount Properties is seeking coverage. Steve is employed by Pristine Painting, not Paramount Properties. Because of the Separation of Insureds provision, the employers liability exclusion is considered separately for each covered party. The exclusion does not apply to Paramount so the claim against it should be covered.
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 instance, suppose that Bob and Bill are insureds under the same liability policy. Both are injured in an explosion for which each holds the other responsible. If two men sue each other, all damages (or settlements) awarded to both will be subject to the Each Occurrence limit in the policy. The Each Occurrence limit does not apply separately to each.
Secondly, the Separation of Insureds clause does affect the duties assigned to the first named insured (the party listed first in the declarations). The first named insured has certain obligations, like paying premiums. The Separation of Insureds clause does not extend these duties to other named insureds.
Cross Suits Exclusions
Finally, some commercial liability and umbrella policies contain "cross suits" or "insured versus insured" exclusions that eliminate coverage for suits by one insured against another. These exclusions vary. Some apply only to suits between named insureds. Others apply to suits between any insureds. Policies with these exclusions should be avoided.