Let’s get wonky. In an insurance kind of way.
Well, Dear Readers, we are going to both dig deep and go narrow today. We will explore together a little known gap in additional insured coverage. It is wonky and conceptual but I know you can handle it. It’s called the additional insured employee exclusion. Savor it, then bring it up for discussion at your next cocktail party. Impress your friends and acquaintances. Who wouldn’t want to know this stuff?
When an additional insured is added by endorsement, the policy will generally cover those losses which arise out of, or which are connected to, the named insured’s work. Policy endorsements may differ; but for our purposes here we are talking about standard form coverage by endorsement.
Here is an example of how this coverage would arise: O’Brien Construction Company hires a sub-contractor, Martin Subs, to perform work at a building site. O’Brien requires Martin to add O’Brien as an additional insured by endorsement to its CGL policy. Martin does. O’Brien’s employee trips over a wrench left by Martin at the work site. An O’Brien supervisor saw it laying there, but did not pick it up. The employee sues both Martin and O’Brien.
Both then tender their claims to the insurance company for defense of the lawsuit and indemnity against judgment. The insurer denies O’Brien’s claim, but accepts Martin’s. Is the insurer correct? Why? Shouldn’t both have coverage since Martin’s work caused or contributed to cause the injury to O’Brien’s employee?
The insurer is correct. There is a standard clause in a CGL main form that excludes employee claims.
e. Employer Liability. Bodily Injury to:
(1) An employee of the insured, arising out of and in the course of
(a) Employment by the insured; or
(b) Performing duties related to the conduct of the insured’s business . . .
Case law tells us that the use of the word “the” before the word “insured” means that defense costs and coverage for O’Brien – in a claim by his employee for injuries – which arose out of his employment are explicitly excluded – even if caused in whole or in part by Martin’s negligence. Martin does have coverage for the claim, however, under the policy since the employee works for O’Brien. To the contrary, O’Brien would have coverage for claims made by a Martin employee which may have arisen from his employment. (Remember, there are other avenues for legal redress here. We are only discussing insurance coverage for defense costs and indemnity).
This interpretation is the majority rule among those states which have considered the issue. The exclusion serves the underlying intent of the CGL policy to overall exclude work comp type claims because there is a separate insurance product to cover those types of employee losses. See Costco Wholesale Corp. v. Liberty Mut. Ins. Co., 472 F. Supp. 2d 1183, 1203 (S.D. Cal. 2007) [“(E)mployer’s liability exclusions prevent private insurance from duplicating the effects of a legal regime that preexists the policy. i.e., the exclusion merely acknowledges background law. Interpreting a employer’s liability exclusion more broadly would transform the exclusion into a substantive limitation on coverage. Insurance policies contain severability clauses to make sure such a transformation does not take place.”) and Sacharko v. Ctr. Equities Ltd. P’ship, 2 Conn. App. 439, 444, 479 A.2d 1219, 1222 (1984) (“The primary objective of an employee’s exclusion clause is to avoid duplication of coverage with an employer’s workers’ compensation coverage.”).
To make matters more complex, employee liability coverage can be added back in by another endorsement covering contractual indemnity of an “insured contract.” This creates an exception to the policy exclusion for employee liability which is “assumed by the insured under an insured contract.” Insured contract is defined in the general policy form, and can sometimes include contracts which cover only tort liability assumed by another in a contract.
What is meant by the phrase “liability assumed by the insured under contract” in insurance policies has been the topic of litigation in other jurisdictions. An Alaska case, Inc. v. Providence Washington Ins. Co., 648 P.2d 1008, 1011 (Alaska 1982)-provides the following explanation for the phrase:
Liability assumed by the insured under any contract” refers to liability incurred when one promises to indemnify or hold harmless another, and does not refer to the liability that results from breach of contract.
Id. The phrase does not provide coverage for liability caused by a breach of contract; rather, the coverage arises from a specific contract to assume liability for another’s negligence. The phrase has been interpreted “to apply only to indemnification and hold-harmless agreements, whereby the insured agrees to ‘assume’ the tort liability of another.” Gibbs M. Smith, Inc. v. U.S.F. & G., 949 P.2d 337, 341 (Utah 1997).
If the Martin/O’Brien policy had a separate endorsement for contractual liability, we would look to that contract in order to determine what tort liability Martin agreed to assume in O’Brien’s underlying contract. See, e.g., Martinez v. Colasanto, 906 N.Y.S.2d 781 (N.Y. 2009). If Martin only promised to indemnify O’Brien for its passive negligence, then O’Brien would be covered because this would be a tort liability that Martin expressly assumed.
Confused? Don’t be. Just remember these general rules:
Additional Insured Employee v. Additional Insured = No Coverage.
See, e.g., Atchison, Topeka and Santa Fe Ry. Co. v. St. Paul Surplus Lines Ins., 328 Ill. App. 3d 711, 767 N.E.2d 827 (Ill. App. 1 Dist. I Div. 2002) (claims by additional insured railroad’s employee against railroad is precluded from coverage); Employers’ Liability Assurance Corporation v. Travelers Ins. Co., 411 F.2d 862, 865-66 (2d Cir. 1969) (the exclusion under the policy as to employees of the insured is confined to the employee of the insured who seeks protection under the policy); and General Aviation Supply Co. v. Ins. Co. of North America, 181 F. Supp. 380, 384 (E.D. Mo.), aff’d, 283 F.2d 590 (8th Cir.1960).
Named Insured Employee v. Additional Insured = Coverage.
See Sacharko v. Ctr. Equities Ltd. P’ship, 2 Conn. App. 439, 443, 479 A.2d 1219, 1222 (1984)(a suit by the named insured’s employee against an additional insured under the policy is protected from the employee exclusion clause).
This is true UNLESS there is a separate endorsement for contractual liability that overrides the policy terms for employee exclusion. If so, then look to the separate endorsement and the underlying contract to determine whether the named insured agreed to assumed the tort liability of another and to what extent.