Over the past few years liability insurers have been adding endorsements to attempt to limit their exposure for bodily injury claims on construction sites (not to mention for property damage).  One way that insurers have attempted to limit such exposure has been to amend their CGL policy’s “employer’s liability” exclusion to preclude coverage for bodily injury to employees of “any insured” -- as opposed to the standard language, which applies to preclude coverage for employees of “the insured.”  In this way, coverage may not be owed to general contractors, that are additional insureds under policies issued to subcontractors, for injuries to employees of the subcontractor. 

This is a common claim when there is a construction site injury.  Since the amended exclusion precludes coverage for bodily injury to employees of “any insured,” no coverage is owed to the general contractor – as an additional insured -- even though the injured party is not an employee of the GC.  In other words, it does not matter that the insured seeking coverage is not the employer of the injured party.  The injured party is an employee of the named insured (subcontractor), which qualifies as “any insured.”  There can be other variations of this scenario.  And there are sometimes issues whether this interpretation can be supported when a policy has a separation of insureds provision. 

Another tack insurers have taken has been to add exclusions that preclude coverage for bodily injury to an employee of any contractor at the site – period -- regardless of the employee’s relationship, or not, to a party seeking coverage.  That’s a broad exclusion for sure.

In Northfield Ins. Co. v. Herrera, No. 17-51080 (5th Cir. Oct. 24, 2018), the Fifth Circuit addressed an exclusion on this type and upheld the broad interpretation sought by the insurer.  A coverage dispute arose under the following circumstances.  Charles Herrera ran an elevator service company under the name Austin Elevator Consultants.  Austin Elevator and Herrera entered into a contract under which it would service, inspect, and maintain elevators in Austin Energy’s Sandhill Energy Center. 

Thomas McCoy, an Austin Energy employee, was injured on a Sandhill Energy Center (SEC) elevator.  He sued Herrera for negligence.  Northfield, Herrera’s general liability insurer, defended Herrera under a reservation of rights and filed an action seeking a declaratory judgment that it had no duty to defend or indemnify Herrera. 

Northfield argued that no coverage was owed to Herrera on the basis of the following exclusion:

This insurance does not apply to “bodily injury” to: ***
(3) Any person who is employed by, is leased to or contracted with any organization that:
(a) Contracted with you or with any insured for services; or
(b) Contracted with others on your behalf for services; arising out of and in the course of employment by that organization or performing duties related to the conduct of that organization's business; or ***

As Northfield saw it, the exclusion applied to the McCoy bodily injury suit as McCoy was an employee of Austin Energy, and, thus, was an employee of an organization that contracted with Herrera.  As Herrera saw it, the exclusion applied solely to so-called downstream employees, i.e., employees of a Herrera subcontractor.

The district court found in favor of Herrera, based on an interpretation of exclusion (3)(a) in the context of other provisions of the exclusion.  The court also “noted that Northfield’s ‘expansive reading’ of the exclusion would render its service ‘illusory,’ reasoning that ‘service-providing businesses like Herrera[‘s]’ purchase general liability insurance to cover bodily injuries to the employees of organizations that hire them.” 

The Fifth Circuit reversed, finding that the language of exclusion (3)(a) – focusing on the phrase “contracted with”--was clear.  While the court’s analysis included a detailed reading of the operation of paragraph (3)(a), in the context of other provisions of the exclusion – which I don’t address here, the court also noted that “[t]he policy does not indicate that the parties intended technical or industry-specific meanings for this phrase.”  Thus, giving the phrase its ‘plain, ordinary, and generally accepted meaning’ -- looking at dictionaries, leading treatises on grammar and word usage – the appeals court held that “[t]he phrase ‘contracted with’ can be used to refer to upstream and downstream relationships.”

Lastly, the Fifth Circuit also squelched the district court’s illusory coverage argument: “Finally, Herrera protests that excluding this claim will render the policy’s coverage ‘illusory’ because the elevator in question is a service elevator and, therefore, only used by Austin Energy employees.  Texas disfavors constructions of insurance contracts that render all coverage illusory.  But when an insurance policy will provide coverage for other claims, Texas courts are unlikely to deem the policy illusory.  Herrera will still be protected against claims brought by third parties, such as SEC’s vendors and visitors to the site.  He will also be protected from claims relating to his other job sites. Therefore, the policy’s coverage is not illusory.”