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Misapplication of the Employers Liability Exclusion in CGL Policies: Precluding Coverage for Non-Employer Insureds


The employers liability exclusion is standard in the Insurance Services Office, Inc. (ISO), commercial general liability (CGL) form and is intended to preclude coverage for bodily injury to an insured's employee. Typically, state workers compensation statutes require employers to carry workers compensation insurance while shielding employers from tort liability for their employees' injuries, rendering CGL coverage for such claims unnecessary. However, the analysis changes when the employers liability exclusion is used to deny coverage to insureds sued by other parties' employees, a situation that, unfortunately, has arisen in a variety of cases, thereby undermining insureds' expectations regarding the scope of their CGL coverage.

Misapplication of the Employers Liability Exclusion in CGL Policies: Precluding Coverage for Non-Employer Insureds

On May 26, 2015, the Pennsylvania Supreme Court addressed the issue of the exclusion's misapplication by Pennsylvania's lower courts. Correcting a decades-old precedent that allowed CGL insurers to deny coverage to additional insureds being sued by employees of the policy's named insured, the court dispelled misconceptions regarding the proper interpretation of the exclusionary language. This decision, discussed in more detail below, brings to the forefront the issue of courts improperly broadening the scope of the employers liability exclusion in a way that effectively undermines parties' expectations regarding how CGL coverage will respond to a specific risk.

Background: Insuring Against Subcontractors' Employees' Claims

Construction industry professionals rely heavily on the availability of CGL coverage when designing a project's risk transfer scheme. Ordinarily, general contractors procure their own CGL policies and also require downstream subcontractors to procure separate CGL policies, which afford additional insured coverage to all upstream parties on the project.

This arrangement reflects the fact that the overwhelming majority of bodily injury tort claims faced by general contractors and other upstream parties come from employees of downstream subcontractors working on the project. Since injured employees (and, in certain cases, an employee's estate) are precluded by workers compensation laws from seeking damages from their employers, upstream parties become attractive targets to recoup damages above and beyond amounts statutorily provided by employers under workers compensation laws.

In purchasing CGL insurance pursuant to a trade contract, a subcontractor expects that coverage will be provided to additional insureds on its policy for lawsuits filed by the subcontractor's employees. Likewise, general contractors expect to receive coverage from a subcontractor's CGL policy in addition to their own CGL policy when faced with bodily injury claims by the subcontractor's employees.

Nonetheless, in certain cases, courts have interpreted a CGL policy's employers liability exclusion in a way that would defeat coverage for a general contractor and other upstream parties sued by a downstream subcontractor's employees. The potential impact of such an approach is extremely troublesome for construction industry professionals; not only does it contradict the parties' fundamental expectations, but it also frustrates the intended risk transfer and potentially undermines the viability of the project.

The standard CGL employers liability exclusion provides:

This insurance does not apply to:
"Bodily Injury" to:
1.  An "employee" of the insured arising out of and in the course of:

1.  Employment by the insured; or
2.  Performing duties related to the conduct of the insured's business; or ...

This exclusion applies whether the insured may be liable as an employer or in any other capacity and to any obligation to share damages with or repay someone else who must pay damages because of the injury.

This exclusion does not apply to liability assumed by the insured under an "insured contract".1

"In Any Other Capacity"

One way that courts have expanded the reach of the employers liability exclusion to non-employer insureds is through the reference to the insured's liability as "an employer or in any other capacity." In combination with a broad definition of the term "employee," the "in any other capacity" language may be interpreted as applying the exclusion to insureds that are not employers of the injured claimant.

In one appellate-level case out of New York, the court denied coverage to an insured for injuries sustained by an employee of a stage subcontractor the insured had hired to perform work at an event it planned and managed. See Nautilus Ins. Co. v. Matthew David Events, Ltd., 69 A.D.3d 457 (N.Y. App. Div. 1st Dep't 2010). In addition to the standard employers liability language, the insured's policy contained a broad definition of "employee" that encompassed any person "hired by, loaned to, leased to, contracted for, or volunteering services to the insured, whether or not paid by the insured." Id. The court, noting the insured was liable "as an employer or in any other capacity," concluded that, in order to give effect to the language defining "employee," the exclusion could not be read narrowly to only preclude coverage for claims by persons who directly worked for the insured.

Although courts have not reached a consensus regarding the proper definition of the "in any other capacity" language in an employers liability exclusion, the Nautilus decision undermines the widely held presumption that an employers liability exclusion will only apply in the context of the traditional employer-employee relationship. Accordingly, a more apt interpretation would focus on the evolutionary nature of that core relationship, that the exclusion applies "even if an employee seeks to hold an employer liable in a capacity other than its 'employer' capacity," Forgues v. Heart of Tex. Dodge, Inc., 2003 Wis. App. 188, at *122–23 (Wis. Ct. App. 2003), or that it "refers to multiple theories of liability as to the employer, and not to multiple entities to which the exclusion may apply." Thomson Inc. v. Insurance Co. of N. Am., 11 N.E.3d 982 (Ind. Ct. App. 2014).

Nevertheless, the Nautilus decision highlights the importance of scrutinizing the language used to define "employee," as used in the employers liability exclusion. See also Kelleher v. Admiral Indem. Co., 958 N.Y.S.2d 308 (N.Y. Sup. Ct. 2010) (finding that the "in any other capacity" language of the employers liability exclusion did not operate to preclude coverage for the non-employer insured where the definition of "employee" did not extend to independent contractors).

Given the potential for courts to interpret "in any other capacity" to encompass non-employers and thus exclude coverage for insureds irrespective of an employer-employee relationship with the claimant, construction industry professionals must be wary of relying on general expectations or preconceived notions regarding the applicability of an employers liability exclusion to coverage claims.

"The" Insured versus "Any" Insured

An additional avenue that some courts (albeit, a minority) have utilized to expand application of the employers liability exclusion to CGL policies is interpreting the exclusion's reference to "the" insured as referring to all insureds, both named and additional, under the contract. See Kelly v. State Auto. Ins. Ass'n, 228 F.2d 734 (6th Cir. Ky. 1961). The usual scenario involves an additional insured seeking coverage for bodily injury claims brought by an employee of the named insured. In some cases, even though a policy will vary between using "the" insured and "any" insured, courts will focus on the term "insured," which is defined as "any person or organization qualifying as such [under the [policy],"2 and conclude that, because the term "insured" encompasses the named insured, it necessarily follows that the language "the insured" in the employers liability exclusion includes the named insured, even when viewing the coverage analysis from the perspective of the additional insured making the claim. As a result, an additional insured would likely be unable to receive coverage for bodily injury claims of the named insured's employees. In support of this interpretation, courts have reasoned that reading "the" insured as being limited to only the additional insured seeking coverage would "lead to the curious (if not absurd) result that the [unnamed] insured would have greater protection under the policy than the named insured who pays the premiums." Limon v. Farmers Ins. Exch., 465 P.2d 596 (Ariz. Ct. App. 1970).

Unsurprisingly, the majority of courts disagree with this position. Instead, it is commonly understood that, where a CGL policy distinguishes between "the" insured and "any" insured, the language of an employers liability exclusion referencing "the" insured applies only to the insured seeking coverage, not all insureds on the policy. This is due in large part to the "severability of interests" provision in most CGL policies, which requires an insurer to ascertain coverage under the policy from the perspective of each insured against whom a claim is made. Thus, the employers liability exclusion must be applied individually to each insured seeking coverage under the policy and not collectively to all insureds on the policy. See Sacharko v. Center Equities Ltd. P'ship, 479 A.2d 1219 (Conn. App. Ct. 1984).

Which brings us back to the recent Pennsylvania Supreme Court decision that aligned with the majority rule. See Mutual Benefit Ins. Co. v. Politsopoulos, No. 60 MAP 2014, 2015 Pa. LEXIS 1126 (Pa. May 26, 2015). Prior to Politsopoulos, Pennsylvania courts followed the analysis that "the" insured, as used in an employers liability exclusion, encompassed the named insured, regardless of whether an additional insured was the party seeking coverage.

Recognizing the contradictory nature of such a rule, applied irrespective of "contextual cues or comparative usage across the wider terms of a policy" and the presence of a severability provision, the court sided with the majority of authority and limited application of the exclusionary language to only the insured seeking coverage. By paving the way for lower courts to grant coverage to additional insureds seeking coverage for claims brought by employees of the named insured, this ruling has effectively modernized Pennsylvania's approach to the employer liability exclusion.

Ultimately, even in favorable jurisdictions, parties need to pay close attention to the use of "the" insured versus "any" insured in an employers liability exclusion (and throughout the policy generally) to avoid potential losses of coverage. A court will be much more likely to apply an employers liability exclusion referencing "any" insured to preclude coverage for an additional insured sued by the named insured's employee, even if doing so produces the illogical result of excluding coverage for insureds that are not employers of the claimant. See Endurance Am. Specialty Ins. Co. v. Century Sur. Co., 46 F. Supp. 3d 398 (S.D.N.Y. 2014). This is because even where there is a severability of insureds clause, the plain meaning of the term "any" insured in an exclusionary clause is a strong indicator of application as to all insureds under the policy.

Conclusion

In theory, employers liability exclusions in CGL policies preclude coverage for an insured only where its employee is the party seeking compensation for bodily injury. Operating against this backdrop, general contractors and other upstream parties procuring CGL insurance feel protected from suits by downstream parties' injured workers. However, as indicated above, in certain circumstances—depending on the facts and language at issue—courts may be constrained to expand the applicability of the employers liability exclusion to preclude coverage for insureds absent an employer-employee relationship.

Consequently, upstream parties should not rely on assumptions regarding protections available under employers liability exclusions but, rather, should be vigilant in scrutinizing a CGL policy's exclusionary language and defined terms, or the relevant contractual insurance requirements, to ensure the appropriate application.

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1CG 00 01 04 13, at pg. 2.
2CG 00 01 04 13, at pg. 1.
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