Additional insured coverage for bodily injury to a downstream party's
employees is one of the foremost considerations in any traditional risk
transfer scheme. Upstream and downstream parties alike generally intend for the
downstream party's insurance to respond to these claims—before the upstream
party's insurance and in lieu of a contractual indemnity claim. But,
without careful contract drafting and insurance program review, that goal can
often be frustrated, as a recent Illinois decision illustrates.
Acknowledgment
The author would like to acknowledge and thank
coauthor Tiffany Casanova, Esq., for her contributions to this
commentary.
A standard general liability policy—Insurance Services Office, Inc. (ISO),
form CG 00 01—is intended, by use of the employers liability exclusion
("e."), to preclude coverage to insured entities for bodily injury to
their own employees. Statutorily imposed workers compensation requirements
shield the employer from tort liability while still providing insurance
coverage for the employee for its injuries, thus, eliminating the need for
general liability coverage.
The exclusion applies only to claims by employees of "the insured"
(that is, the insured making a claim on the policy), and thus, it should not
apply to the nonemployer insured.1 As a failsafe,
the employers liability exclusion also contains an exception for liability
assumed in an "insured contract."2 In
that scenario, the upstream party could assert a contractual indemnity claim
against the named insured for the bodily injury exposure, and the named
insured's claim (based on an "insured contract") would fall
within the exception to the exclusion.
Vivify Construction LLC v. Nautilus Insurance Co.
In Vivify Construction, LLC v. Nautilus Ins. Co., 2018 IL App (1st)
170192, 419 Ill. Dec. 743, 94 N.E.3d 281 (App. Ct. 2018), the Appellate Court
of Illinois held that a subcontractor's insurer did not owe a duty to
defend to the general contractor, an additional insured, for a bodily injury
claim despite the existence of a requirement for said coverage in the
subcontract agreement. The court reasoned that an employee exclusion placed the
claim outside the scope of coverage.
Background
In 2014, Vivify Construction, a general contractor, entered into a
subcontract agreement with Victoria Metal Processor LLC, a subcontractor, that
required Victoria to indemnify Vivify against bodily injury claims resulting
from Victoria's work under the subcontract. In conjunction with the
indemnification requirement, the subcontract also required Vivify to procure
general liability coverage that included Vivify as an additional insured for
claims caused in whole or in part by Victoria's negligent acts or
omissions. To that end, Victoria procured a general liability policy with
Nautilus Insurance Company (Nautilus) and, undisputedly, named Vivify as an
additional insured for bodily injury caused by Victoria's, or those acting
on its behalf, acts or omissions.
In 2015, a Victoria employee fell from the second-story scaffold and was
injured. The employee filed a negligence action against Vivify, alleging that
Vivify failed to supervise work at the project. Vivify filed a third-party
complaint against Victoria alleging that its negligence caused the injury and
simultaneously tendered its defense to Nautilus. Nautilus denied any duty to
defend.
Application of Employee Exclusion
The Nautilus policy coverage form originally excluded coverage for bodily
injury to "a[n] 'employee' of the insured," however,
that exclusion was replaced by a manuscript employee exclusion designed to
apply more broadly that reads as follows:
This insurance does not apply to:
e. Injury to Employees, Contractors, Volunteers and Other
Workers
'Bodily injury' to
- 'Employees', 'leased workers', 'temporary
workers', 'volunteer workers', statutory 'employees',
casual workers, seasonal workers, contractors, subcontractors, or
independent contractors of any insured; or
-
Any
insured's contractors', subcontractors', or
independent contractors' 'employees', 'leased
workers', 'temporary workers' 'volunteer workers',
statutory 'employees', casual workers, seasonal workers,
contractors, subcontractors or independent contractors
arising out of and in the course of:
- Employment by any insured; or
- Directly or indirectly performing duties related to the conduct of
any insured's business…."
In addition to precluding coverage for the insured's employees, the
modified exclusion also removes coverage for "any insured's
contractors,' subcontractors' or independent contractors'
employees" and removed the exception for liability assumed in an
insured contract.
In the dispute over the application of this exclusion, Vivify argued that
the policy's separation of insureds provision, which states that the terms
of insurance apply separately to each insured, requires the court to hold that
the injured party's status as Victoria's employee has no bearing on
Vivify, a nonemployer additional insured. Alternatively, Nautilus argued for a
plain language reading that the exclusion barred liability for employees of
"any insured."
The court found that the exclusion, by its own terms, did not bring this
claim into the scope of the policy. As a result, Nautilus did not have a duty
to defend Vivify. The broadening modifications to the exclusion in the second
subsection preclude bodily injury to any insured's subcontractor's
employees regardless of the subcontractor's status as an insured.
Victoria was Vivify's subcontractor—in other words, an insured's
subcontractor. An employee of that subcontractor was injured, and thus the
exclusion applied. This interpretation, according to the court, did not render
the separation of insureds provision meaningless as it still applied to other
exclusions in the policy.
Consideration of the Terms of the Subcontract Agreement
Vivify also argued that the court must consider the terms of the subcontract
agreement between itself and Victoria to effectuate the meaning of the
insurance policy in determining the duty to defend. The subcontract agreement
between the parties contained this insurance requirement:
[Victoria] shall cause the commercial liability coverage required by the
Subcontract Documents to include: (1) [Vivify] . . . as [an] additional
insured[ ] for claims caused in whole or in part by [Victoria's]
negligent acts or omissions during [Victoria's] operations; and (2)
[Vivify] as an additional insured for claims caused in whole or in part by
[Victoria's] negligent acts or omissions during [Victoria's]
completed operations.
The court rejected Vivify's argument and explained that, under Illinois
law, it must give the policy words their plain and ordinary meaning as written
where reasonable, as it was with the employee exclusion.3
Interestingly, the court noted that Vivify failed to explain how the terms
of the subcontract agreement impacted Nautilus's intent in entering the
contract. Though not discussed in the opinion, if perhaps Vivify had some
rationale for its argument and focused on how it bore on Nautilus's intent
in contracting the policy, or if the policy exclusion at issue were ambiguous,
perhaps the outcome may have been different.
Lessons Learned
There are a few key lessons for upstream parties to learn from Vivify's
mistakes. First, clear contract requirements are a key starting point. Having
specific requirements invites discussion about compliance and forces all of the
parties to think critically about their obligations and to carefully examine
their insurance programs.
Second, upstream risk managers must implement appropriate vetting protocols
to review a subcontractor's insurance program to ensure that they align
with the terms of the intentionally crafted subcontractor agreement. If an
upstream party is contractually requiring additional insured coverage as a risk
transfer mechanism, it must do its part to confirm the mechanism is functional.
Acquiring and reviewing a complete copy of the policy is oftentimes
impractical, but targeted requests for key provisions and endorsements that
most closely align with the primary risk transfer goals can address the most
significant concerns.
Third, when reviewing policies, upstream and downstream parties alike must
make it a point to understand how the endorsements attached modify the standard
terms of their policies. The employee exclusion on the ISO CG 00 01 form is
tailored to ensure coverage remains for an additional insured,
but the broadened manuscript form completely negates that intent. As the
Illinois Appellate Court expressed, "Vivify could have protected itself by
reading the policy to ensure that it satisfied the subcontract. We cannot
rewrite an insurance policy to suit Vivify's needs." A party will be
better protected if it understands the implications of its policy terms and
endorsements prior to any loss so that it may make any necessary changes to
ensure it has the coverage it intended to procure and make those changes before
it's too late.
Lastly, recognize that, in many cases and for many issues, the nuanced
obligations of the trade contract will not influence the terms/obligations of
the additional insured insurer, nor the court interpreting those requirements.
Those obligations are largely, if exclusively, governed by the policy. A
disconnect between the trade contract requirements and the downstream policy is
more likely to tee up a breach of contract dispute between the upstream and
downstream parties.