Different Interpretations of the Same Exclusion Come from Affiliated Insurance Companies
November 13, 2017
Recently, the United States District Court for the Western District of Texas stated it was “telling” that an insurer and its parent company offered different interpretations of the same exclusion. The case is Northfield Ins. Co. v. Herrera, No. A-16-CA-00553-SS (W.D. Tex. Nov. 6, 2017).
In this dispute over insurance coverage, Northfield Insurance Company (NIC) issued a commercial general liability (CGL) policy to the defendant in this case, Austin Elevator Consultants, doing business as Charles Herrera (Herrera). During the policy period, an elevator failed and Thomas McCoy (McCoy) suffered injuries. At the time of the injuries McCoy was an employee of Herrera, and he filed suit against Herrera and others for injuries he sustained due to the elevator failure. NIC asked the U.S. District Court for the Western District of Texas to declare that it had no duty to defend or indemnify Herrera in the lawsuit brought by McCoy.
NIC argues that it has no duty to defend because the bodily injury from the incident happened to McCoy who was employed by Austin Energy who contracted with Herrera “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” and thus falls within the workers compensation exclusion in the CGL policy.
The exclusion at issue stated, “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.
Herrera argued that the exclusion did not apply to the bodily injuries that were sustained in the incident because reasonably the Exclusion would only apply downstream to exclude coverage to Herrera and his employees and subcontractors, and applying the exclusion upstream to parties that Herrera did business with made the policy misleading. Herrera concluded his argument by arguing that the exclusion is ambiguous and should be interpreted in his favor as he is the insured.
The district court granted Herrera's motion for summary judgment, ruling that the Exclusion was unambiguous and that Herrera had offered “the only reasonable interpretation of the disputed language.” The court stated that the exclusion was transparent in that it was “intended to run downstream to employees and workers of Herrera's subcontractors.” The court mentioned that previous sections of the Exclusion prevented coverage for bodily injury to Herrera's employees, workers, and subcontractors performing duties related to his business, and by logical progression the next section excluded coverage for bodily injury to employees and workers of Herrera's subcontractors.
The district court decided that NIC interpreted the exclusion expansively, and that interpretation was unreasonable as it would render coverage illusory. If the court had applied NIC's interpretation, the exclusion would apply “upstream” to employees of any organization that Herrera had contracted with, including oral or written contracts, an application that would apply to any person employed by, leased to, or contracted with Herrera's customers. Such application would render the policy completely useless and undermine the purpose of carrying general liability insurance. The district court concluded that the exclusion did not preclude coverage to Herrera under the CGL policy.
Editor's Note:
This court stated specifically that they found it “telling” that the parent company of Northfield, Northland Insurance Company, had recently argued for the same interpretation of the exclusion as their opponent in this case, Herrera. In that lawsuit, the court determined that Northland's interpretation was correct, and that they had no duty to defend or indemnify their insured in the action in dispute. That case is Northland Ins. Co. v. Doval Remodeling, Inc., No. 1:13-cv-13192-GAO (D. Mass. March 18, 2015).