For some reason I tend to stand alone in getting worked up about additional insured language, and when I start in, the more reasonable-minded folks in my company sensibly back away rather than listen to me blather.
In Lyda Swinerton Builders, Inc. v. Oklahoma Surety 16-20195 (5th Cir. Dec. 12 2017), the Fifth Circuit, applying Texas law, issued a clearly-written and sensible opinion on the topic.
Lyda Swinerton was a general contractor. It hired AD Willis, a sub, for Willis to work as a carpenter and roofer. Lyda Swinerton sent a typically onerous indemnity / additional insured agreement, which Willis struck out, signed, and returned. Willis got a GL policy naming Lyda Swinerton as additional insured,
"but only with respect to liability directly attributable to Willis' performance of Willis' work for Lyda Swinerton and its parent and affiliates." Elsewhere, the policy defined Willis' “work” as “work or operations performed by Willis or on its behalf” and “materials, parts or equipment furnished in connection with such work or operations.” The endorsement also stated that it applied “only when Willis has agreed by written ‘insured contract’ to designate Lyda Swinerton and its parents and affiliates as an additional insured subject to all provisions and limitations of this policy.” (cleaned up)
The customer sued Lyda Swinerton, and then amended and sued Willis among other companies, for problems that essentially stem from nonperformance - Lyda Swinerton just up and left the job. Negligence counts were added.
The district court held, and the Fifth Circuit affirmed, that the insurer had a duty to defend (indeed, citing "when in doubt, defend.) Never mind that the underlying suit was for breach of contract, "it requires no more than a logical inference to conclude that at least some of the alleged property damage was potentially attributable to Willis."
Because the insurer failed to defend, it was liable for an additional 18% interest per year(!!!) and attorneys' fees, regardless of the merit of the coverage position. ("Because Plaintiff had a duty to defend, and breached that duty, the Court necessarily concludes that Plaintiff violated the Prompt Payment of Claims Act by erroneously rejecting Defendants' requests for defense and delaying payment of fees and expenses incurred.")
The take-away from the case, under Texas law, is that if you're going to deny coverage, you had better be sure you're right, or you'll face some real penalties. In light of how many policies give an insured an almost unlimited right to name others as additional insureds, there's some dangerous territory for both policy-based and extracontractual damages.