Claims professionals must have a firm grasp on the nuances ofthe terms “independent contractor” and “subcontractor” whengrappling with injury-to-independent-contractor exclusions incommercial general liability (CGL) policies. These provisionstypically exclude claims arising from bodily injury to an insured’sindependent contractors or employees of the independentcontractors.

Growing numbers of insureds are arguing that third-partyclaimants are “subcontractors” rather than “independentcontractors” in order to obtain coverage for the third-partyclaims, while avoiding application of theinjury-to-independent-contractor exclusions. Because little caselaw interpreting these exclusions exists, it can be a challenge toeffectively address claims that could potentially fall under theseexclusions, and to place your company in an optimal position to winsummary judgment in a possible coverage action.

Independent Contractor Versus Subcontractor

Courts have provided some guidance about how to define both“subcontractor,” and “independent contractor.” Asubcontractor is “one who has entered into a contract, express orimplied, for the performance of an act with a person who hasalready contracted for its performance,” according to Holt v.Bugbee Co. v. Melrose, 311 Mass. 424, 426 (1942). “[T]he term‘subcontractor’ by its very nature presupposes the existence of anunderlying contract,” as defined by the case Southworth Milton,Inc. v. Pytko Constr. Corp., 21 Mass. L. Rep. 659 at * 7(2006). In other words, a subcontractor takes a portion of acontract from the earlier contractor or another subcontractor, asin the case of Texaco Exploration and Production, Inc. v.Amclyde Engineered Products, Inc., 448 F.3d 760, 778(5^th Cir. 2006).

The definition of “independent contractor,” on the other hand,is more general: “[i]f the person doing the work is responsibleonly for the performance of what he agrees to do, in the way inwhich he agrees to do it, and is not subject to direction orcontrol as to every detail of the work, he is an independentcontractor.” (McDermott’s Case, 283 Mass. 74, 76(1933))

Though these definitions are helpful, they do not determinewhether a third party should be considered an “independentcontractor” or a “subcontractor” under theinjury-to-independent-contractor exclusion. To understand therelationship between the two terms, think of a simple rectangle. Arectangle is a two-dimensional figure with four contiguous sides.Those sides may be of varying length as long as the four sides makean enclosed figure. A square is also a two-dimensional figure withfour contiguous sides. However, all four of a square’s sides mustalso be identical in length. That is, a square is simply a specialtype of rectangle. Every square is a rectangle. However, not allrectangles have all fours sides of identical length. Therefore, notall rectangles are squares.

The terms “independent contractor” and “subcontractor” have asimilar relationship. An independent contractor works free from thedirection or control of every detail of the work under a written orverbal contract, while a subcontractor is an independent contractorwho performs a portion of the duties of a contract that anotherindividual or entity already contracted them to perform. So, asubcontractor is a type of independent contractor. However, whileevery subcontractor is an independent contractor, not everyindependent contractor is a subcontractor. That is to say, thesubcontractor is the “square,” and the independent contractor isthe “rectangle” in this analogy.

The issue of clearly defining the distinction between the twoterms arose in a recent coverage action in Massachusetts. Theinsured chose not to hire a general contractor for the renovationof their restaurant in downtown Boston, and contracted directlywith the electrical and the air-conditioning installation companiesto perform the work instead.

After an employee of the electrical company was severely injuredduring the renovations and sued the insured, the restaurant soughtcoverage under a CGL policy that contained the following exclusion:“This insurance does not apply to any claim arising from injury toan independent contractor or to an ‘employee’ or ‘temporary worker’of an independent contractor hired by you or by anysubcontractor.”

The insurer denied coverage under the exclusion, prompting therestaurant to file a declaratory judgment claim seeking coveragefor the third-party bodily injury claim. The restaurant claimedthat the exclusion did not apply because it acted as a generalcontractor, and the electrical company was a “subcontractor,” notan “independent contractor.” The insured also claimed that theterms “subcontractor” and “independent contractor” were ambiguousbecause they were not defined by the policy.

In a decision on the parties’ cross-motions for summaryjudgment, the Superior Court judge held that theinjury–to-independent-contractor exclusion precluded coverage forthe third-party claims. The decision rested on two grounds; first,the judge said that someone can be a “subcontractor” only if atleast two contracts exist. A contractor had to contract with theowner (or another contractor) for the work, and the subcontractorhad to contract for some or all of the duties assumed by thecontractor in the first contract. In essence, the judge dictatedthat you must count the contracts. If there is only one contractfor the job duties in question, you cannot have a subcontractor.(See Memorandum and Order on Cross Motions for SummaryJudgment at * 7, J.D. Venture Corp. v. Western World Ins.Co., Suffolk County, Massachusetts Superior Court, C.A. No.08-1023BLS2.) Accordingly, the judge rejected the insured’sargument that the electrical company was a “subcontractor.”

The second ground for the ruling is equally important. The judgeheld that “[a]ll subcontractors are independent contractors,but independent contractors may or may not besubcontractors.” (See Memorandum and Order at *6.) Accordingly, counting the number of contracts was in someways superfluous.

Since a subcontractor is an independent contractor, theallegation that the injured party was the employee of asubcontractor bought the insured nothing, because the injured partywas still an “employee of an independent contractor” under theexclusion.

Hedging Your Bets to Avoid Questions ofFact

To deny coverage under an injury-to-independent-contractorexclusion, usually the insurer must prove that the injured partywas functioning as the insured’s independent contractor (or as anemployee of the insured’s independent contractor, depending uponthe exclusion). The issue of whether the injured party was subjectto the insured’s direction and control concerning the details oftheir work will often be a question of fact to be decided by thefact-finder during trial. Thus, a dispute about whether the thirdparty was functioning as an independent contractor could obligate acarrier to defend the insured under a reservation of rights whilethe issue is decided in the underlying litigation. There is a way,however, for the insurer to deny coverage while avoiding thisfactual inquiry.

The independent contractor analysis seeks to answer thefollowing question: Was the third-party claimant functioning as anindependent contractor or an employee at the time of theoccurrence? If the insured argues that the third-party claimant wasnot an independent contractor, then they would in effect beclaiming that the injured party functioned as its employee.

CGL policies often contain exclusions for claims of bodilyinjury to the insured’s employees. These injury-to-employeeexclusions exist because there are separate workers’ compensationpolicies to address this type of risk. If the third-party claimantwas found to be the insured’s employee because of their right todirect and control the details of the third party’s work, then theinjury-to-employee exclusion would likely preclude coverage for theclaim.

Therefore, if the insurer denies coverage under both aninjury-to-independent-contractor exclusion and aninjury-to-employee exclusion, then the insured is caught betweenthe proverbial rock and a hard place—either way the insured argues,coverage of the claim would be precluded. While there is a questionof fact as to whether the third party is the insured’s independentcontractor, that question is no longer “material” because theanswer to the question makes no difference in determining thecoverage issue. The insurer no longer has the burden of provingthat the third party was an independent contractor, and does nothave to wait for the underlying action to resolve the issue beforedenying coverage.

In summary, when faced with a claim involving injury to apossible independent contractor or subcontractor of your insured,remember the three analyses outlined above:

• Count the contracts to distinguish between a subcontractor andan independent contractor.
• Use the rectangle and square analogy to show that the thirdparty is still an independent contractor even if he or she is alsoa subcontractor.
• If your policy contains an injury-to-employee exclusion, thenuse that exclusion as another basis for the denial of coverage. Bydenying coverage under both exclusions, you will not have to provethe third party was functioning as an independentcontractor.

These analyses will put you in a better position to denycoverage of a claim of bodily injury to your insured’s independentcontractor or subcontractor (when appropriate) and to succeed on amotion for summary judgment denying your insured’s claim forcoverage.