Misapplication of the Employers Liability Exclusion in CGL Policies: Precluding Coverage for Nonemployer Insureds (Part 2)

On November 4, 2015, the Second Circuit Court of Appeals issued a ruling in Endurance American Specialty Ins. Co. v. Century Surety Co., 2015 U.S. App. LEXIS 19194 (2d Cir. Nov. 4, 2015), which said that the employers liability exclusion unambiguously excluded coverage for an additional insured that had been sued by an employee of the named insured. Of critical note, the employers liability exclusion at issue had been modified by an "Action Over Exclusion" endorsement that substituted "the named insured" for "the insured" as follows.

"Bodily injury" to:

(1) An "employee" of the named insured arising out of and in the course of:

(a) Employment by the named insured; or

(b) Performing duties related to the conduct of the named insured’s business….¹

The insurer, Endurance American Specialty Insurance Company, issued a commercial general liability (CGL) policy to a subcontractor, Pinnacle Construction & Renovation Corp., which agreed to add the general contractor, Hayden Building Maintenance Corp., as an additional insured on Pinnacle’s policy. An injured Pinnacle employee sued Hayden, who, in turn, sought coverage under the Endurance policy. Endurance denied coverage based on the employers liability exclusion because the injured person was a Pinnacle employee and Pinnacle was the named insured.

The trial-level court in Endurance initially concluded that the exclusion did not apply, honing in on the separation of insureds provision.² That court explained that the employers liability exclusion "is used in general liability policies to avoid duplication of an employer’s workers compensation insurance by excluding coverage for claims by an injured employee against his own employer."³ The trial court further noted that "separation of insured provisions require that each insured be treated as if separately covered by the policy and indeed as if he (additional insured) had a separate policy of his own."⁴

The trial court’s logic is sound and its conclusion is appropriate, but only in the context of the standard employers liability exclusion referring to "the insured" and not "the named insured." In fact, the Second Circuit Court of Appeals agreed with that logic but was constrained to reverse the decision by the modified—but plain—language because the policy had only one "named insured."

While the decision has a superficially negative outcome for additional insured coverage, it adds value in two key ways. First, the case is a reminder for upstream and downstream parties alike to be aware that this type of modified language (also including the potentially problematic "any insured") is being used in the market. Second, the Second Circuit reinforces that the standard language—"the insured"—should not have the same effect as "the named insured."

Another Case, Same Issue

Less than a week before Endurance, a district court in New York was faced with a similar employers liability exclusion using "the named insured" as opposed to "the insured." In Hastings Dev., LLC v. Evanston Ins. Co., 2015 U.S. Dist. LEXIS 147558 (E.D.N.Y. Oct. 30, 2015), the insurer denied coverage to a named insured on the policy who was sued by an employee of a different named insured. The Hastings court reasoned that the exclusion was ambiguous—and, thus, there was coverage—because, on the one hand, the exclusion applied to claims by an employee of "the named insured," suggesting the exclusion only applied to the direct employer, but "employee" was defined to include individuals who work on behalf of "any insured."

The Hastings court ultimately reached the correct result based on the policy’s language, but clearly wrestled with competing arguments, even acknowledging that the insurer had presented a reasonable interpretation.

Conclusion

The key takeaway is that application of the employers liability exclusion, in any given scenario, is likely to be a quintessential insurance coverage debate that turns on a single word. Policyholders—especially those in bodily injury litigation-rich environments like New York—would do well to be keenly aware of the relevant language in their practice policies and in those policies providing additional insured coverage.

Acknowledgment

The author would like to thank and acknowledge the coauthor of this Commentary, by Nicole C. Bikakis, an attorney with Saxe Doernberger & Vita, P.C., in Hamden, Connecticut.

¹ Id. at *2 (emphasis in original).

² Endurance Am. Specialty Ins. Co. v. Century Sur. Co., 46 F. Supp. 3d. 398 (S.D.N.Y. 2014), rev’d by 2015 U.S. App. LEXIS 19194 (2d Cir. Nov. 4, 2015).

³ Id. at 415 (emphasis added).

⁴ Id. at 416 (internal quotations and citations omitted).