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Vol. 5, Iss. 8
July 27, 2016

Independent Contractor Exclusion: Another Court Says Not So Fast


I’ve been talking about this issue a lot on these pages. Insurers face enormous exposure for bodily injuries on construction sites. Recently, they have been attempting to reduce this exposure (along with their property damage exposure – see First Manifestation, Loss in Progress and similarly named endorsements).

Increasing efforts on the bodily injury front have come about in the form of endorsements that preclude coverage for bodily injury sustained by an employee of a contractor or subcontractor. However, under some of these endorsements, the injured party need not have been working for a subcontractor that was retained by the insured. Rather, the exclusion applies if the injured party was employed by any contractor or subcontractor on the project. Since the people most likely to be injured on a construction site, especially one closed to the public, are employees of a contractor – some contractor, any contractor, even one with nothing to do with the insured -- it is easy to see the breadth of such an exclusion.

In general, insurers have been winning cases where such exclusions have been at issue. But not all. In some cases, the breadth of the exclusion has not gone unnoticed by the court. Atain Specialty Inc. Co. v. Lusa Construction, Inc., No. 14-4356 (D.N.J. June 21, 2016) is one of them.

Carlos Araujo, an employee of JKL Construction, was injured on a construction site while installing a plumbing line for masonry work. JKL was a subcontractor for Lusa Construction, which was itself a contractor for general contractor Waterside Construction.

Araujo filed suit. Lusa sought coverage under its general liability policy from Atain. Waterside was an additional insured under Lusa’s policy. So far nothing out of the ordinary.

Lusa’s CGL policy contained an Employer’s Liability exclusion as follows: “‘Bodily Injury’ to an ‘employee’, subcontractor, employee of any subcontractor, ‘independent contractor’, employee of any ‘independent contractor’, ‘leased worker’ or ‘volunteer worker’ of the insured arising out of and in the Course of employment by or service to the insured for which the insured may be held liable as an employer or in any other capacity.”

The policy defined Independent Contractor as: “one that contracts to do work or perform a service for another and that retains control over the means or methods used in doing the work or performing the service. ‘Independent contractor’ includes, but is not limited to, subcontractors and any employees of a subcontractor, and employee of an independent contractor, and ‘employees’ of the insured, agents, representatives, volunteers, spouses, family members or the insured or any Additional Insureds added to this policy.”

Atain denied coverage to Lusa on the basis of the Employer’s Liability exclusion -- Mr. Araujo was an employee of JKL, a subcontractor of Lusa’s. Enter Crum & Forster, the insurer of Waterside. C&F tendered the defense and indemnification of Waterside to Atain. Atain again asserted the Employer’s Liability exclusion and denied coverage.

Atain filed an action seeking a declaratory judgment that it did not owe coverage to Lusa or Waterside. The court had an easy time concluding that the Employer’s Liability exclusion precluded coverage for Lusa: “It excludes coverage for ‘Bodily Injury’ to an ... employee of any subcontractor ... of the insured arising out of and in the Course of employment by or service to the insured for which the insured may be held liable ... in any other capacity.” Mr. Araujo was an employee of JKL, which was a subcontractor of Lusa. Case closed.

Turning to Waterside, it wasn’t so cut and dry. JKL was not a subcontractor of Waterside as they never contracted with each other. But no matter, according to Atain -- JKL was an independent contractor. The court described the issue this way: “[W]hether the Employer’s Liability exclusion defines ‘independent contractor’ to include only those who contract with the insured, or more broadly as those who contract with anyone to do work that eventually benefits the insured.”

The court adopted the narrower approach: “The Employer’s Liability provision excludes coverage for employees of ‘independent contractor[s] ... of the insured.’ The language ‘of the insured’ modifies ‘independent contractor.’ It imposes some requirement that the independent contractors be tied to the insured. This requirement cannot merely be that the benefit accrue to the insured, as that is already stipulated in subsequent language: ‘arising out of and in the Course of employment by or service to the insured....’”

Since JKL contracted with Lusa, not Waterside, JKL did not qualify as an independent contractor of Waterside. Therefore, the Employer’s Liability exclusion did not preclude coverage for Waterside.

Although it could have, the court did not stop at the policy language. It went a step further – noting that the alternative interpretation of independent contractor “takes on an absurdly broad scope, encompassing anyone who contracts with anyone else. The language is at best ambiguous, and the Court generally construes ambiguous insurance policy exclusions narrowly.”

Therein lies the challenge for insurers that seek to impose broad Employer’s Liability exclusions. Despite what the policy language may dictate, a court may also believe that an exclusion, that applies to anyone who contracts with anyone else, is “absurdly broad.”

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