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Insurance – Duty to Defend – Commercial Lines Policy – Separation of Insureds

Universal Insurance Co. v. Burton Farm Development Co. (Lawyers Weekly No. 11-07-1120, 22 pp.) (Martha A. Geer, J.) Appealed from Forsyth County Superior Court. (Ronald E. Spivey, J.) N.C. App. Click here for the full-text opinion.

Holding: In an underlying lawsuit, a subcontractor alleges that the defendant-developer’s project manager defamed the subcontractor and intentionally caused a breakdown of the contractual relationship between the subcontractor and the developer. Even though the project manager’s commercial lines insurance policy – which names the developer as an additional insured — contains an exclusion for injury “done by or at the direction of the insured with knowledge of its falsity,” since the policy treats each insured separately, the insurer is required to defend the developer against the subcontractor’s claims against it.

We affirm the trial court’s declaratory judgment that the insurer has a duty to defend the developer.


W.O. White, LLC (the subcontractor) had a series of contracts with the defendant-developer to perform site grading, pave roads, install storm drains, and perform work related to the installation of water lines at a subdivision owned by the developer.

The developer replaced its existing on-site manager with a new project manager, Bernard Mancuso, who was president of Mancuso Development, Inc.

In the underlying lawsuit, the subcontractor alleged that Mr. Mancuso caused the developer to breach its contracts with the subcontractor. The subcontractor also alleged that Mr. Mancuso maliciously defamed the subcontractor.

In a commercial lines policy, plaintiff Universal Insurance Co. insured Mancuso Development as the named insured and the developer as an additional insured. Universal filed this action seeking a declaratory judgment that it had no duty to defend the developer against the subcontractor’s complaint.

Defendant First Specialty Insurance Co., which insured the developer via a commercial general liability policy, was allowed to intervene. The trial court granted First Specialty’s motion for summary judgment and ruled that Universal had a duty to defend the developer.

Separation of Insureds

Universal does not dispute that the subcontractor’s complaint triggered coverage under the personal and advertising injury provisions in the Universal policy. The Universal policy provides coverage for personal and advertising injury arising out of one or more of the following offenses: “Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services….”

Universal argues that the policy excludes coverage for personal and advertising injury “done by or at the direction of the insured with knowledge of its falsity.” Universal contends that the allegations contained in the subcontractor’s complaint — that Mr. Mancuso, the named insured, “mounted a ‘smear campaign’” — fit this exclusion, thus precluding any duty to defend the developer.

However, the “separation of insureds” clause in Universal’s policy states, “Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:

“a. As if each Named Insured were the only Named Insured; and

“b. Separately to each insured against whom claim is made or “suit” is brought.”

The vast majority of jurisdictions which have addressed the issue have held that a “separation of insureds” clause modifies the meaning of an exclusion phrased in terms of “the insured,” such that the exclusion will only be effective if it applies with respect to the specific insured seeking coverage. We adopt the majority rule.

The exclusion at issue – the “knowledge of falsity” exclusion — excludes coverage for personal injury “done by or at the direction of the insured with knowledge of its falsity.” Since the exclusion refers to the insured rather than any insured, the separation of insureds clause requires that the exclusion be applied separately with respect to each insured.

The subcontractor’s complaint does not allege that the developer made or directed the making of any injurious statements about the subcontractor with knowledge of their falsity. Consequently, the “knowledge of falsity” exclusion does not apply with respect to the developer.

Universal argues that the “knowledge of falsity” exclusion applies to Mancuso Development, and, therefore, Universal has no duty to defend the developer because the developer has no greater rights versus Universal than does Mancuso Development. However, this argument cannot be reconciled with the separation of insureds clause. It would, in fact, render the separation of  insureds clause meaningless.

Next, Universal contends that no coverage exists because the Universal policy excludes coverage for personal and advertising injury arising out of “supervision … done by or for you on a project on which you serve as a construction manager.” Although the policy defined “you” as Mr. Mancuso, it did not define “construction manager.”

However, the subcontractor’s complaint does not refer to Mr. Mancuso as a “construction manager.” Instead, the subcontractor’s complaint identifies Mancuso Development as a “building contractor” and Mr. Mancuso, the president, owner, and operator of Mancuso Development, as a “project manager.” The subcontractor’s complaint contains no reference to a “construction manager.”

Universal has not shown that a “construction manager” and a “project manager” are synonymous. As we are required to construe exclusions narrowly, we conclude that Universal has not met its burden of showing that the “construction manager” exclusion applies to preclude a duty to defend the developer in connection with acts by its project manager.

Primary Insurance

Universal’s and First Specialty’s policies contain identical excess insurance clauses. Thereunder, each policy is excess only over “other primary insurance available to you.” “You,” as defined in the policies, “refer[s] to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy.”

While the wording of the clauses in the two policies may be identical, the effect of the application of that wording differs between the policies because of the different identity of the “Named Insured” under each policy.

Because Mancuso Development is the “Named Insured” under the Universal policy and the developer is simply an “additional insured,” the Universal policy provides primary coverage with respect to the developer.

On the other hand, the developer is the “Named Insured” under the First Specialty policy. Because the developer, through Universal, has other primary insurance available to it, the First Specialty coverage is excess over Universal’s coverage.


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