Limiting “Incidental Operations” Coverage to the Named Insured Department

Introduction

The Fourth Circuit’s decision in Travelers Indemnity Company v. American Alternative Insurance Corp. (No. 24-1332 & 24-1370, decided April 8, 2025) clarifies how courts should interpret “incidental operations” clauses in municipal liability policies. At issue was whether an insurance policy naming Surry County Emergency Services as insured also covered negligence by employees of a distinct county 911 call center. After a fatal apartment‐fire incident in Surry County, North Carolina, Travelers—insurer of the County—settled wrongful‐death claims for $9 million and sought contribution from AAIC, whose policy also provided primary and excess coverage but only for “incidental operations of” Emergency Services. The district court held that AAIC’s primary coverage extended to the call center, but its excess coverage did not. On appeal, the Fourth Circuit unanimously held that neither portion covered the 911 operators’ conduct, reversing in part, affirming in part, and remanding.

Summary of the Judgment

The incident: Four second-floor apartment occupants died of smoke inhalation after a 911 dispatcher advised against opening a window.
Underlying suit: Estates sued Surry County and two 911 dispatchers for negligence, alleging inadequate supervision and training.
Travelers’ action: After settling for $9 million under its general and excess policies, Travelers sued AAIC for contribution under AAIC’s $1 million primary and $7 million excess policies.
Policy language: Both AAIC policies covered injury “arising out of … emergency services, including operations incidental … of [Emergency Services].”
District court: Held primary coverage extended to the 911 Call Center but excess did not, awarding Travelers $1 million.
Fourth Circuit: Concluded both policies were limited to operations performed or supervised by the Emergency Services department. Neither primary nor excess coverage applied to the call‐center negligence. Judgment was affirmed in part and reversed in part, and the case remanded for entry of judgment for AAIC.

Analysis

Precedents Cited

The court relied on established North Carolina contract‐interpretation principles:

ABT Building Products Corp. v. National Union Fire Insurance Co. (472 F.3d 99): Insurance‐policy terms are questions of law; undefined terms get ordinary meaning.
Lumbermens Mutual Casualty Co. v. Pennsylvania National Mutual Casualty Ins. Co. (321 S.E.2d 10): Undefined, nontechnical words in policies assume their plain dictionary meaning.
First National Bank of Anson County v. Nationwide Ins. Co. (278 S.E.2d 507): Ambiguous policy provisions must be construed in favor of coverage.

These cases guided the Fourth Circuit’s approach: read “incidental operations” in context, apply the ordinary meaning of “of,” and avoid interpretations that render the insured’s identity meaningless.

Legal Reasoning

Key to the court’s reasoning was parsing the policy language:

Primary:    “…arising out of … emergency services, including operations incidental thereto, of [Emergency Services].”
Excess:     “…arising out of … emergency, rescue or incidental operations of [Emergency Services].”

Though structured differently, both provisions limit coverage to operations “of” the named insured—Surry County Emergency Services. The preposition “of” signals a possessive relationship: only those operations directed, performed, or supervised by that department fall within scope. The 911 Call Center is a separate unit, so its dispatchers’ conduct cannot be shoehorned into “incidental operations of” Emergency Services.

The court rejected Travelers’ broad reading—under which any activity tangentially aiding Emergency Services (even by coffee suppliers or equipment vendors) might trigger coverage—as absurd. By confining “incidental operations” to tasks undertaken by the insured department itself, the court preserved the policy’s meaningful allocation of risk and premium.

Impact

This decision will shape future coverage disputes in several ways:

It underscores the importance of identifying the precise named insured and limiting “of” clauses to that entity’s operations.
Municipalities and insurers will draft and negotiate clearer policies to avoid ambiguity over “incidental” coverage.
Counsel will stress department distinctions in governmental‐liability policies to allocate risk more finely.
Courts will apply a contextual, dictionary‐based approach and refuse readings that expand coverage to loosely connected activities.

Complex Concepts Simplified

“Named Insured”: The specific person or entity that the policy explicitly covers.
“Incidental Operations”: Minor or auxiliary tasks connected to the department’s core functions (e.g., restocking an ambulance).
Preposition “of” in Policies: Indicates possession or belonging—only operations belonging to the named insured are covered.
Contract Interpretation: Under North Carolina law, unclear insurance‐policy terms are construed in favor of coverage, but plain terms control.

Conclusion

Travelers Indemnity Co. v. American Alternative Insurance Corp. establishes that “incidental operations” clauses must be read in light of the named insured’s identity. By confining coverage to tasks performed or supervised by Surry County Emergency Services, the Fourth Circuit preserves the policy’s intended risk allocation and prevents expansive readings that would undermine premium distinctions. This decision brings welcome clarity to municipal liability coverage and underscores the critical role of precise policy drafting.