Consider this common scenario. A subcontractor's employee is injured on the job and sues the general contractor, an additional insured on the subcontractor's commercial general liability (CGL) policy. The employee does not sue the subcontractor because she is prevented from doing so under state workers compensation law. If the employee's complaint is silent as to the subcontractor's fault, how does the general contractor trigger additional insured coverage under the subcontractor's policy?
Many thanks to Christine M. Naassana, a summer associate at Ward Greenberg Heller & Reidy, LLP, for her assistance with this article.
Prior to 2004, the standard Insurance Services Office, Inc. (ISO), additional insured endorsement forms provided that an additional insured was covered for liability "arising out of" the named insured's operations. Courts generally construed "arising out of" broadly to merely require some causal connection between the underlying claims and the named insured's operations for coverage to be triggered (i.e., but for the named insured's operations, the alleged bodily injury or property damage would not have occurred). Thus, additional insured coverage applied regardless of whether the named insured was negligent. This standard easily is satisfied in the scenario above because the subcontractor's employee would not have been injured but for the subcontractor's operations for the general contractor.
In 2004, however, ISO revised the standard additional insured endorsements, replacing "arising out of" with language stating that additional insured coverage applied only to liability "caused, in whole or in part, by" the acts or omissions of the named insured. Most courts have interpreted this language as requiring proximate causation (i.e., that the named insured must be at least 1 percent at fault to trigger additional insured coverage).
How the Duty to Defend Is Determined
For claims implicating state workers compensation laws, whether an additional insured is entitled to a defense may depend on what information the court considers in determining whether the duty to defend is triggered. In some jurisdictions, insurers must consider facts outside of the underlying pleadings. There, an additional insured sued by an employee of the named insured need only point to evidence showing a possibility that the named insured was at least partially responsible to trigger additional insured coverage.
Consider a recent case from New York's Appellate Division, M&M Realty of N.Y. LLC v. Burlington Ins. Co., 170 A.D.3d 407 (1st Dept. 2019). In that case, M&M Realty hired L&M Restoration to perform work at M&M's building. When M&M was sued by an employee of L&M who was injured on the job, M&M tendered the suit to L&M's insurer for defense. The insurer denied coverage, asserting that the underlying complaint did not allege that the plaintiff's injuries were "caused, in whole or in part, by" L&M. The trial court held that M&M was not entitled to a defense because the underlying complaint did not allege that L&M's acts or omissions caused the plaintiff's accident.
The Appellate Division reversed, holding that "the known facts suggest a reasonable possibility of coverage, i.e., a reasonable possibility that the underlying injury was caused, in whole or in part, by L&M's acts or omissions." Id. at 408. Thus, even though the underlying complaint was silent as to whether the named insured was at least partially at fault (because the named insured was immune from suit under New York's workers compensation law), the court held that additional insured coverage was triggered because facts outside the pleadings showed a possibility that the named insured was at least partially at fault.
In other jurisdictions, however, the duty to defend is based solely on the allegations of the underlying complaint. This is often referred to as the four-corners or eight-corners rule (i.e., the duty to defend is determined by the four corners of the complaint, or the four corners of the complaint plus the four corners of the insurance policy). In these jurisdictions, an additional insured sued by an employee of the named insured faces a dilemma. If the duty to defend is based solely on the allegations of the complaint, and the complaint is silent as to the named insured's potential fault because the named insured is immune from suit, when, if ever, is coverage triggered for the additional insured?
Some courts have rigidly applied the four-corners or eight-corners rule in this context and held that the additional insured is not entitled to coverage, despite evidence suggesting a possibility that the named insured was at least partially at fault. For example, in Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589 (5th Cir. 2011), the Fifth Circuit Court of Appeals, applying Texas law, held that an insurer had no duty to defend an additional insured where the complaint was silent as to the named insured's potential fault. In that case, an employee of a subcontractor was injured on the job and sued the general contractor. The general contractor tendered the claim to the subcontractor's insurer as an additional insured. The insurer denied coverage on the ground that the complaint did not allege that the plaintiff's injuries were caused, in whole or in part, by the subcontractor. The subcontractor, however, was immune from claims by the employee under Texas's workers compensation law. The district court, after a trial by written submission on stipulated facts, held that a jury would have found that the subcontractor was at least 1 percent at fault. Thus, facts extrinsic to the underlying complaint conclusively demonstrated that the subcontractor was partially at fault.
On appeal, the Fifth Circuit held that the insurer had no duty to defend. The court held that it was constrained by Texas's strict adherence to the eight-corners rule, which provides that "the duty to defend may only be determined by the facts alleged in the [complaint] and the coverage provided in the policy." Id. at 596. Applying that rule, the court found that the complaint "does not affirmatively allege any facts implicating the negligence of [the named insured]." Id. at 599. The court refused to create an exception to the eight-corners rule where the absence of allegations of the named insured's negligence was a result of the named insured's immunity under the state workers compensation law, even where "everyone involved in the suit knows the true facts." Id. at 601. In so doing, the court recognized that its holding "presents a seemingly difficult hurdle for additional insureds to trigger coverage while navigating difficult workers' compensation and contributory negligence issues." Id.
The court noted, however, that, "[a]s a practical matter … parties sometimes amend their pleadings to trigger coverage on the verge of settlement," thus suggesting that the "difficult hurdle" faced by the additional insured could be overcome if the underlying plaintiff amended his complaint. Id. In addition, while the court held that there was no duty to defend the additional insured, it held that the insurer did have a duty to indemnify because the trial court had determined that the named insured subcontractor was, in fact, partially at fault.
In contrast, in Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660 (3d Cir. 2016), the Third Circuit held that an additional insured was entitled to a defense despite the fact that the underlying complaint did not allege any negligence by the plaintiff's employer, the named insured. The court recognized that the complaint's silence as to the named insured's negligence was "understandable in light of the Workers' Compensation Act's grant of tort immunity to employers for workplace injuries to their employees," Id. at 677, but also acknowledged that it was bound by Pennsylvania's four-corners rule, which, like the Texas eight-corners rule, requires that the duty to defend be determined based solely on the allegations of the complaint.
The court, however, held that it was consistent with the four-corners rule to consider the workers compensation law as "an interpretive constraint," requiring that a complaint be construed more liberally in favor of an additional insured in situations where the workers compensation law applied than it otherwise would. Id. at 679. Thus, "[i]n cases in which the Act is relevant, a liberal construction of the factual allegations of the underlying complaint often may result in the complaint triggering coverage where the same allegations might appear insufficient in the absence of the Act." Id. The court explained the following.
The Four Corners Rule—even under Pennsylvania's strict construction—does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts. Quite the opposite, knowledge that an injured employee has a claim under the Workers' Compensation Act must be factored into a determination of whether his allegations in an underlying tort complaint potentially trigger an obligation on an insurer to provide coverage for a defendant in the underlying case. If an insurer fails to account for the Act it may construe the factual allegations of an underlying complaint too narrowly, and "the insurer who refuses to defend at the outset does so at its own peril."
Id. (citations omitted)
The court also recognized that a contrary approach—ignoring the effects of the workers compensation law—"risks leaving an insured party without the coverage to which it is entitled." Id.
Can Coverage Be Triggered by the Additional Insured's Third-Party Claims?
While workers compensation law may grant immunity to an employer from suits by the injured employee, that immunity typically does not extend to third-party indemnification and contribution claims by defendants against the employer. This raises the question of whether an additional insured's third-party claims against the named insured employer, which allege fault on the part of the named insured, are sufficient to trigger additional insured coverage.
Here, again, courts have taken different positions. In National Union Fire Ins. Co. v. NGM Ins. Co., 2011 U.S. Dist. LEXIS 147266 (D.N.H. Dec. 21, 2011), the court held that such third-party claims could trigger coverage. In this case, the named insured, a landscaping company, was performing work for the additional insured when an employee of the named insured was injured while operating a piece of equipment. The employee sued the additional insured, alleging that it was negligent in allowing hazardous and dangerous conditions on its property and was silent as to the named insured's negligence. The additional insured asserted third-party indemnification and contribution claims against the plaintiff's employer, the named insured. The insurer denied coverage for the additional insured, arguing that the complaint did not allege that the plaintiff's injuries were "caused, in whole or in part, by" the named insured. The court, noting that the additional insured's third-party claims suggested that the plaintiff's injuries could have been attributable to the named insured, held that the insurer "has not shown that the lack of allegations against [the named insured] in the complaint precludes its obligation to provide a defense to the [additional insured]." Id. at *13.
In so holding, the court also noted that there was evidence that the named insured may have been at least partially at fault, as the parties stipulated that another employee of the named insured was operating the controls for the equipment when the plaintiff was injured. Id. at *12.
Other courts have held that an additional insured cannot use a third-party complaint to trigger coverage. Some courts applying this rule have reasoned that an additional insured is a plaintiff in a third-party claim, not a defendant, and, therefore, such claims cannot trigger a duty to defend. For example, in Continental Cas. Co. v. Westfield Ins. Co., 2017 U.S. Dist. LEXIS 61889 (E.D. Pa. Apr. 24, 2017), the court stated the following.
The Joinder Complaint cannot trigger Westfield's duty to defend because Goldenberg is a plaintiff with respect to those claims, not a defendant. Moreover, under the plain language of the H&R Policy … Westfield's duty to defend and indemnify can only be triggered by 'damages because of "bodily injury" … [and t]he Joinder Complaint does not itself allege damages because of bodily injury or property damage; rather, it references the damages alleged in the [underlying] complaint and seeks indemnification and contribution.
Id. at *23, citing Dale Corp. v. Cumberland Mut. Fire Ins. Co., 2010 U.S. Dist. LEXIS 127126 (E.D. Pa. Nov. 30, 2010).
Other courts have reasoned that considering an additional insured's own third-party claims in determining whether there is a duty to defend the additional insured would be "self-serving" and "promote gamesmanship and manipulation of insurance coverage" by additional insureds. See, e.g., Pekin Ins. Co. v. Johnson-Downs Constr., Inc., 87 N.E.3d 295 (Ill. App. Ct. Nov. 6, 2017) ("[An additional insured] cannot present its own complaint to bolster its position that a claim of vicarious liability is present in the underlying case. Therefore, we instruct the trial court not to consider [the additional insured's] third-party complaint in its determination of Pekin's duty to defend."); Erie Ins. Exch. v. BNSF Ry., 2014 Ill. App. Unpub. LEXIS 2470 (Ill. App. Ct. Nov. 6, 2014) (accepting insurer's argument that consideration of additional insured's third-party complaint would "encourage gamesmanship and manipulation of insurance coverage.")
Merits of the Different Approaches
There are pros and cons on both sides of whether to allow consideration of an additional insured's third-party claims in determining whether there is a duty to defend claims by an employee of the named insured.
The argument articulated in Continental Cas. Co. v. Westfield Ins. Co.—that an additional insured's third-party claims cannot trigger coverage because the additional insured is a plaintiff with respect to those claims—appears to misapprehend the significance of the third-party claims. While CGL policies do not cover an insured's affirmative claims, the additional insured is not seeking coverage for its third-party claims; it is seeking a defense of the plaintiff's claims. The third-party indemnification and contribution claims merely show that there is a possibility that the named insured may be at least partially at fault with respect to the plaintiff's injuries.
The argument raised in the Pekin Ins. Co. and Dale Corp. cases, however, reflects a legitimate concern that additional insureds could file meritless third-party claims alleging the named insured's negligence for the purpose of triggering the insurer's duty to defend. However, with respect to claims where the named insured is immune from suit by the plaintiff under state workers compensation law, there are a number of factors that mitigate this concern. The lack of allegations against the named insured in the underlying complaint is understandable given workers compensation immunity, and it is common for the named insured to, in fact, be at least partially at fault (for example, if the plaintiff was negligent, or if the employer failed to properly train or supervise, or take adequate safety precautions to protect, the employee).
Also, additional insureds and their attorneys who file frivolous claims are subject to sanctions, which should deter meritless claims. In addition, while there is potential that an insurer could be forced to defend a frivolous claim, it is a fundamental aspect of liability insurance that an insurer's duty to defend extends even to claims that are groundless, false, or fraudulent.
The alternative solution suggested by the court in Gilbane—that the underlying plaintiff could simply amend her complaint on the eve of settlement to include allegations of the named insured's fault in order to trigger coverage—would seem to invite a different type of gamesmanship. It also potentially would leave an additional insured without a defense for some or all of the underlying lawsuit and would condition an additional insured's defense on the whims of the underlying plaintiff.
Not allowing consideration of an additional insured's third-party claims in circumstances where the workers compensation law prohibits claims against the named insured employer also risks turning a policy that contains a duty to defend into an indemnity policy. For example, in Gilbane, there was uncontroverted proof that the named insured employer was at least partially at fault and, accordingly, the court held that the insurer had a duty to indemnify the additional insured, even though it had no duty to defend. This result turns on its head the fundamental maxim that the duty to defend is broader than the duty to indemnify.
Ultimately, each approach has its pros and cons. Under one, insurers may have to defend claims that they otherwise would not have to defend. Under the other, additional insureds may be deprived of a defense to which they are entitled. However, in cases where a named insured employer is immune from suit because of state workers compensation laws, allowing consideration of the additional insured's third-party indemnification and contribution claims against the named insured arguably is a better approach to giving effect to the policy.
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