Insurance Recovery Law

Court Rejects Attempt to Broaden "Employer's Liability" Exclusion, Requiring Coverage

Why it matters: A New York federal court recently ruled that an "Employer's Liability" exclusion in a CGL policy applies only when an Insured or Named Insured is sued by its own employee, not when sued by an employee of another Insured or Named Insured covered by the same policy. In this case, the exclusion provided that there was no coverage for any suit arising out of bodily injury to an employee of "the Named Insured." The insurer argued that the exclusion precluded coverage for claims arising out of bodily injury to an employee of any insured under the policy. The policyholder countered that the exclusion must be construed more narrowly to apply only to an injury claim brought by its own employee. The court concluded that there was an ambiguity as to what the exclusionary language "employees of the Named Insured" means—does it refer to only the Named Insured who employed the injured worker or does it refer to any of the Named Insureds? Finding the exclusion ambiguous, the court applied the rule of contra proferentem and adopted the policyholder's interpretation, ruling the exclusion did not apply.

Detailed discussion: A number of contractors were involved in a construction project, including Hastings Development, Universal Photonics, Inc. (UPI) and others. Each contractor was listed as "Named Insureds" in a commercial general liability (CGL) policy issued by Evanston Insurance Company.

In 2014, Aaron Cohen, an employee of UPI, was injured while operating a mixing machine at the worksite. He filed suit against both Hastings and UPI.

Hastings turned to its insurer Evanston for coverage. Evanston denied coverage, arguing that the employer's liability exclusion applied because Cohen was an employee of a named insured (even though he was not employed by the specific named insured being sued, i.e., Hastings). In turn, Hastings argued "the phrase, 'the named insured,' refers narrowly to only the named insured who employed the injured employee and not to the other named insureds under the policy."

The employer's liability exclusion provides, in pertinent part:

This insurance does not apply to any claim, suit, cost or expense arising out of bodily injury to ... an employee of the named insured arising out of and in the course of employment by any insured, or while performing duties related to the conduct of the Insured's business ... (emphasis added).

The exclusion also states: "Wherever the word employee appears [in the exclusion], it shall also mean any member, associate, leased worker, temporary worker of or any person or persons loaned to or volunteering services to, any named insured" (emphasis added).

The court found that based on the referenced policy language, both parties' interpretation of the phrase "an employee of the Named Insured" was reasonable.

"Both the plaintiff [and the actual employer of the employee suing the plaintiff] are 'named insureds' under the policy and the phrase 'the named insured' is not defined by the policy. Thus, the phrase 'employee of the named insured,' could conceivably encompass employees of any of the named insureds, as the [insurer] contends, or be limited only to the named insured who employed the injured employee, as the plaintiff contends."

In reaching this conclusion, the court was influenced by "the broad definition of 'employee' as including any individual performing work on behalf of 'any Named Insured,'" which the court believed "appears to be in tension with the language in the exclusion precluding coverage to suits by 'employees of the Named Insured'" (emphasis in the original).

Finding that the policy language supports both parties' interpretations, the court concluded that the exclusion is ambiguous as a matter of law, requiring the court to construe the ambiguity in favor of the insured.

To read the order in Hastings Development, LLC v. Evanston Insurance Company, click here.

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An Insured's Lack of Knowledge Regarding the Existence of Its Own Policies Does Not Provide Reasonable Grounds to Justify Late Notice to Its Insurer

Why it matters: The Supreme Court of Appeals of West Virginia reversed an $8 million jury verdict and held that an insurance company had no coverage obligation to U.S. Silica for claims related to injuries from exposure to silica because notice of the claims was 30 years too late. U.S. Silica and its predecessors were named in several lawsuits seeking damages from injuries related to silica sand exposure beginning in 1975.

In 2005, U.S. Silica discovered three commercial general liability policies that had been issued to one of its predecessors between 1949 and 1958. Upon discovery of the policies, U.S. Silica immediately notified its insurer of the underlying claims and requested coverage. The insurer denied the request, claiming that U.S. Silica failed to comply with the policies' requirement to provide reasonable notice, but a jury ultimately awarded U.S. Silica more than $8 million. The insurer appealed and the court reversed the jury verdict. The court was not persuaded by the fact that prior to when U.S. Silica first gave notice it was unaware of the insurance policies' existence. The court held that although the question of reasonableness should typically be determined by a jury, "given the undisputed and egregious facts giving rise to the subject claims and the sophisticated nature of the parties involved," the delay of notice in the case was unreasonable as a matter of law.

Detailed discussion: U.S. Silica mines and processes silica sand. The company and its multiple predecessors had been named in numerous silica claims seeking damages for injuries allegedly caused by exposure to silica sand, with the first lawsuits filed in 1975.

In September 2005, U.S. Silica found three commercial general liability policies issued by Travelers Insurance Company. The policies were in effect from 1949 to 1958.

U.S. Silica immediately sent Travelers a letter informing the insurer of the silica claims and requesting coverage under the policies. Travelers denied the request, and U.S. Silica filed suit in West Virginia state court. A jury returned a verdict in favor of U.S. Silica and ordered Travelers to reimburse the company more than $8 million. Travelers appealed.

Travelers argued that U.S. Silica breached the notice provision in the policies, which stated: "If claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, summons or other process received by him or his representative."

The court of appeals agreed. "Given that compliance with such a notice provision is a condition precedent to the existence of coverage under the subject policy, resolution of the notice issue necessarily determines the outcome of the instant declaratory judgment proceeding," the court ruled.

The court stated a two-step inquiry was required to determine whether U.S. Silica's late notice foreclosed coverage. First, the court considered the length of the delay and whether the delay was reasonable. If the delay is deemed reasonable, the burden shifted to the insurer to demonstrate prejudice from the notice.

U.S. Silica did not make it to the second step, however, as the court found the 30 years between the initial lawsuit and notice to Travelers unreasonable as a matter of law. U.S. Silica argued that as soon as it found the policies in 2005, it notified the insurer, but the court held those were not the operative dates.

While the issue of reasonableness would normally be a question of fact for the jury, the court ruled the delay was so egregious under the facts of the case that it could be determined as a matter of law.

To read the opinion in The Travelers Indemnity Company v. U.S. Silica Company, click here.

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Loss of Product Caused by Faulty Design of Bottle Caps Triggers Defective Workmanship Exclusion

Why it matters: A Massachusetts appellate court held that the loss of a bottled energy drink that was destroyed after quality control testing indicated that there was a risk of spoliation due to defective bottle caps was not covered under an "all risks" policy because the loss was excluded by a "faulty workmanship" exclusion. The insured produced an energy drink that was "shelf stable," meaning that it did not require refrigeration until after the bottle was opened. During production testing, a high percentage of bottles failed testing due to a defect in the bottle cap. As a result, the insured destroyed almost 2 million bottles. The insurer denied coverage and the court agreed. The court held that when a company assumes the obligation of completing its work in accordance with plans and specifications and fails to perform properly, it cannot recover under an all-risks policy for the cost of making good its faulty work. The court rejected the insured's position that while the exclusion might preclude coverage for the bottle caps, it did not operate to bar coverage for the loss of the product inside the bottles. The court reasoned that the losses cannot reasonably be characterized as separate. Instead, a problem with the bottle caps directly rendered the entire product damaged. The loss of that product falls squarely within the exclusion language for "faulty workmanship, material construction or design, from any cause."

Detailed discussion: H.P. Hood LLC entered into a contract with Abbott Laboratories to manufacture a milk-based specialty drink that would require refrigeration only after the bottle was opened.

To ensure that the drink would not go bad on the shelf, Hood needed bottles that would stay hermetically sealed after they left the bottling plant and made their way to eventual users. The company used a "secure seal test" to evaluate the bottles.

Hood began production in May 2009 and within days multiple bottles failed the secure seal test. Hood and Abbott agreed that none of the almost 2 million bottles from the production run could be marketed and the bottles were destroyed. Hood eventually discovered that the liner in the bottle caps became more slippery over time, affecting the amount of torque needed to seal the bottles properly.

Pursuant to an "all risks" property insurance policy issued by Allianz Global Risks US Insurance Company, Hood requested reimbursement for its losses. The insurer denied coverage, arguing that a policy exclusion for "faulty workmanship, material, construction or design, from any cause" precluded coverage.

Hood filed suit in Massachusetts state court. Siding with the insurer, a trial court dismissed the suit and an appellate panel affirmed.

When a company assumes the obligation of completing its work in accordance with plans and specifications and fails to perform properly, it cannot recover under an all-risk policy for the cost of making good its faulty work.

Hood argued that application of the exclusion should be limited to the bottle caps, while the rest of the losses—such as the loss of the product inside the bottle—should remain covered.

The court rejected Hood's position. The court concluded: "Whatever else can be said about the case before us, it is not one where an excluded occurrence involving initial property damage led to other property damage of a different kind. To the extent that Hood suffered property damage potentially subject to coverage, that loss was directly caused by, and completely bound up in, the increased risk of future spoilage indicated by the secure seal testing. Both conceptually and practically, the losses entailed here cannot reasonably be characterized as 'separable.' Instead, a problem with the bottle cap liners directly rendered the entire product unsaleable. The loss of that product falls squarely within the exclusion language."

To read the decision in H.P. Hood LLC v. Allianz Global Risks US Insurance Company, click here.

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Costs Incurred to Repair Property Other Than Insured's Defective Work Itself Are Covered Damages

Why it matters: A Florida federal court ruled that an insurer owes $23 million in indemnification to its insured, a general contractor, for repairs made to fix deficient subcontractor work at a luxury condominium tower because the repairs addressed ongoing damage to nondefective property. The court held that even though the CGL policy does not provide coverage for the repair of defective work itself, it does require coverage for repairs if the work causes damage to an otherwise nondefective completed property, which was evident in this case. The court reasoned that even if the predominant objective of the repair effort was to fix the instability caused by the defective subcontractor work, it is undisputed that the same effort was required to put an end to ongoing damage to otherwise nondefective property, e.g., damage to stucco, penthouse enclosure, and critical concrete structural elements.

Detailed discussion: Pavarini Construction Company was the general contractor for construction of a large condominium complex in Florida. Pavarini hired a subcontractor for the installation of concrete masonry unit walls and certain reinforcing steel and a second subcontractor for the supply and installation of reinforcing steel within the cast-in-place concrete columns, beams, and sheer walls.

The work performed by both subcontractors was seriously deficient. A significant amount of reinforcing steel was either omitted entirely or improperly installed throughout the building, including within important concrete structural elements, resulting in destabilization throughout the building. Stucco debonded and cracked on the walls, concrete elements cracked, and the penthouse enclosure on the roof also cracked, leading to water intrusion.

When the building owners served Pavarini with a formal demand to repair all of the damage, the company turned to American Home Assurance Company and ACE American Insurance Company. ACE denied coverage. American Home ultimately chipped in $2 million.

Pavarini incurred more than $25 million in costs relating to the remediation efforts. Pavarini argued that none of the costs included the repair of defective work itself but were for damage to otherwise nondefective building components. In response, ACE told the court that the bulk of the repair work was a repair of the defectively installed steel.

The U.S. District Court agreed with Pavarini.

The policy defined "property damage" as "all physical injury to tangible property, including all resulting loss of use of that property," and includes "[l]oss of use of tangible property that is not physically injured." It also excluded from coverage "[p]roperty damage to 'your work' arising out of it or any part of it and included in the products-completed operations hazard." The "your work" exclusion did not apply, however, "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

The question, therefore, was whether the subcontractors' defective work caused covered "property damage," the court stated, answering in the affirmative. "[I]f the defective work causes damage to otherwise non-defective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the penthouse enclosure, and cracking in the critical concrete structural elements, [Pavarini] is entitled to coverage for the repair of that non-defective work."

In the case of the condominium building, "in order to adequately repair the non-defective project components, the building had to be stabilized," the court concluded. "Even if the predominant objective of the repair effort was to fix the instability caused by the defective subcontractor work, it is undisputed that the same effort was required to put an end to ongoing damage to otherwise non-defective property, e.g., damage to stucco, penthouse enclosure, and critical concrete structural elements. Thus, the ACE policy provides for indemnification."

The court rejected Pavarini's request for consequential damages (delay costs, overhead expenses, and lost profits), stating that under Florida law, CGL policies do not cover damages that are purely economic in nature. But the court did permit attorneys' fees and prejudgment interest to be determined at a later date.

To read the order in Pavarini Construction Company v. ACE American Insurance Company, click here.

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