Enforcing Injury-to-Independent-Contractor Exclusions in CGL Policies

Claims professionals must have a firm grasp on the nuances of the terms “independent contractor” and “subcontractor” when grappling with injury-to-independent-contractor exclusions in commercial general liability (CGL) policies. These provisions typically exclude claims arising from bodily injury to an insured’s independent contractors or employees of the independent contractors. 

Growing numbers of insureds are arguing that third-party claimants are “subcontractors” rather than “independent contractors” in order to obtain coverage for the third-party claims, while avoiding application of the injury-to-independent-contractor exclusions. Because little case law interpreting these exclusions exists, it can be a challenge to effectively address claims that could potentially fall under these exclusions, and to place your company in an optimal position to win summary judgment in a possible coverage action.

Independent Contractor Versus Subcontractor

Courts have provided some guidance about how to define both “subcontractor,” and “independent contractor.”  A subcontractor is “one who has entered into a contract, express or implied, for the performance of an act with a person who has already 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 an underlying 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 a contract from the earlier contractor or another subcontractor, as in 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 responsible only for the performance of what he agrees to do, in the way in which he agrees to do it, and is not subject to direction or control as to every detail of the work, he is an independent contractor.” (McDermott’s Case, 283 Mass. 74, 76 (1933))

Though these definitions are helpful, they do not determine whether a third party should be considered an “independent contractor” or a “subcontractor” under the injury-to-independent-contractor exclusion. To understand the relationship between the two terms, think of a simple rectangle. A rectangle is a two-dimensional figure with four contiguous sides. Those sides may be of varying length as long as the four sides make an enclosed figure. A square is also a two-dimensional figure with four contiguous sides. However, all four of a square’s sides must also be identical in length. That is, a square is simply a special type of rectangle. Every square is a rectangle. However, not all rectangles have all fours sides of identical length. Therefore, not all rectangles are squares.

The terms “independent contractor” and “subcontractor” have a similar relationship. An independent contractor works free from the direction or control of every detail of the work under a written or verbal contract, while a subcontractor is an independent contractor who performs a portion of the duties of a contract that another individual or entity already contracted them to perform. So, a subcontractor is a type of independent contractor. However, while every subcontractor is an independent contractor, not every independent contractor is a subcontractor. That is to say, the subcontractor is the “square,” and the independent contractor is the “rectangle” in this analogy.

The issue of clearly defining the distinction between the two terms arose in a recent coverage action in Massachusetts. The insured chose not to hire a general contractor for the renovation of their restaurant in downtown Boston, and contracted directly with the electrical and the air-conditioning installation companies to perform the work instead. 

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

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

In a decision on the parties’ cross-motions for summary judgment, the Superior Court judge held that the injury–to-independent-contractor exclusion precluded coverage for the third-party claims. The decision rested on two grounds; first, the judge said that someone can be a “subcontractor” only if at least two contracts exist. A contractor had to contract with the owner (or another contractor) for the work, and the subcontractor had to contract for some or all of the duties assumed by the contractor in the first contract. In essence, the judge dictated that you must count the contracts. If there is only one contract for the job duties in question, you cannot have a subcontractor. (See Memorandum and Order on Cross Motions for Summary Judgment 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’s argument that the electrical company was a “subcontractor.”

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

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

Hedging Your Bets to Avoid Questions of Fact

To deny coverage under an injury-to-independent-contractor exclusion, usually the insurer must prove that the injured party was functioning as the insured’s independent contractor (or as an employee of the insured’s independent contractor, depending upon the exclusion). The issue of whether the injured party was subject to the insured’s direction and control concerning the details of their work will often be a question of fact to be decided by the fact-finder during trial. Thus, a dispute about whether the third party was functioning as an independent contractor could obligate a carrier to defend the insured under a reservation of rights while the issue is decided in the underlying litigation. There is a way, however, for the insurer to deny coverage while avoiding this factual inquiry. 

The independent contractor analysis seeks to answer the following question: Was the third-party claimant functioning as an independent contractor or an employee at the time of the occurrence? If the insured argues that the third-party claimant was not an independent contractor, then they would in effect be claiming that the injured party functioned as its employee.

CGL policies often contain exclusions for claims of bodily injury to the insured’s employees. These injury-to-employee exclusions exist because there are separate workers’ compensation policies to address this type of risk. If the third-party claimant was found to be the insured’s employee because of their right to direct and control the details of the third party’s work, then the injury-to-employee exclusion would likely preclude coverage for the claim.

Therefore, if the insurer denies coverage under both an injury-to-independent-contractor exclusion and an injury-to-employee exclusion, then the insured is caught between the proverbial rock and a hard place—either way the insured argues, coverage of the claim would be precluded. While there is a question of fact as to whether the third party is the insured’s independent contractor, that question is no longer “material” because the answer to the question makes no difference in determining the coverage issue. The insurer no longer has the burden of proving that the third party was an independent contractor, and does not have to wait for the underlying action to resolve the issue before denying coverage.

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

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

These analyses will put you in a better position to deny coverage of a claim of bodily injury to your insured’s independent contractor or subcontractor (when appropriate) and to succeed on a motion for summary judgment denying your insured’s claim for coverage.