A federal court determined that coverage is unavailable to a general contractor who did not purchase the required workers compensation coverage. The case is Frederick Mut. Ins. Co. v. Ahatov, 274 F. Supp. 3d 273 (E.D. Pa. 2017).
The Underlying Injuries
Concept Development Group, Inc. was hired by Michael Dubinsky to build a house on his property. Though the agreement was made in January 2013 and construction began almost immediately, it was not formally documented until August of the same year, more than six months later. Concept hired J. Tull Mechanical to install the home’s HVAC system.
In February 2013, Suhrob Ahatov, an employee of Tull, landed on the concrete basement floor after falling through an “unguarded hole” on the first floor. After Ahatov filed for workers compensation benefits, a workers compensation judge determined that “Concept was [his] ‘statutory employer’ at the time of the accident,” meaning Concept would be responsible for Ahatov’s benefits if Tull, his actual employer, could not fulfill that obligation. Unfortunately, no workers compensation policy was in effect for either Tull or Concept when Ahatov was injured, so his benefits were paid by the Uninsured Employers Guaranty Fund.
Ahatov and his wife later filed suit against Concept, Tull, Dubinsky, and multiple other individual and corporate defendants for negligence, loss of consortium, and having insufficient workers compensation coverage.
The Frederick Policy
Though Concept did not have workers compensation coverage, it did have a Contractors Special Policy from Frederick Mutual Insurance. That policy had been purchased for a specific project, with a one-year policy period beginning January 9, 2013, roughly one month before Ahatov’s accident. Frederick agreed to defend Concept under a reservation of rights but refused to do so for Dubinsky. Frederick later sought a declaratory judgment that neither Concept nor Dubinsky were entitled to defense or indemnity from Frederick, and neither was any other party, against Ahatov’s claims.
Frederick cited three policy exclusions that the company claimed precluded coverage for Concept in the underlying lawsuit: one for “bodily injury of an employee that occurs in the course of employment,” the second for “bodily injury that should be covered under workers' compensation,” and the third for “cross-liability,” which “precluded coverage for bodily injury to an insured.”
Bodily Injury in the Course of Employment
To support its argument for the application of the exclusion for bodily injury suffered by an employee “in the course of employment,” Frederick cited Inman v. Nationwide Mutual Insurance Company, 641 A.2d 329 (Pa. Super. Ct. 1994). In that case, the injured employee’s employer had also neglected to purchase a workers compensation policy. The employer’s insurer had denied coverage based on similar exclusions to those asserted by Frederick in the instant case. An insurer, ruled the court, is not liable for benefits when an insured’s employee actually receives workers compensation benefits, or when the insured was required to purchase workers compensation coverage but had not done so. Finding otherwise, according to the Inman court, “would encourage employers to ignore their obligation to obtain workers' compensation insurance and rely on their general liability policy.”
Since Concept, like the insurer in Inman, had not purchased workers compensation coverage as it should have, the policy exclusion applied.
Bodily Injury Under Workers Compensation
Ahatov was employed by Tull at the time of his fall. However, since Tull had failed to purchase workers compensation coverage, the responsibility for that coverage transferred to the project’s general contractor, Concept. Like Tull, however, there was no workers compensation policy in effect for Concept on the day Ahatov was injured.
When Ahatov’s case was in the workers compensation court, the WCJ stated that Pennsylvania workers compensation law imposed on Concept a legal duty “to pay benefits to the Claimant [Ahatov], as the statutory employer of the Claimant.” But, as was stated above, Concept had not done so. Since Concept should have paid workers compensation benefits to Ahatov, the policy exclusion applied.
Cross-Liability
This exclusion simply stated that Frederick would not provide coverage for “bodily injury…to an insured.” The policy definition for “insured” stated that the term included “...’your’ ‘employees’, for acts within the scope of their employment by ‘you’....”
There was not a question that Ahatov had been injured in the course of employment. Neither was there a question of his status as an employee of Concept, because the WCJ had already determined that he was a “statutory employee” of Concept at the time he was injured. Since Ahatov was a (statutory) employee of Concept when he was injured within the scope of his employment, he came within the definition of “insured” under the Frederick policy. Therefore, coverage was precluded.
Status as an “Insured”
Dubinsky, the property owner whose house Concept was building, also sought coverage under the Frederick policy, claiming he “should be deemed an ‘insured’ or an ‘additional insured’ under the Policy” because Concept had specified that the policy was for their work on his house. The Frederick policy stated it was necessary to have “a written contract or agreement [where] such person or organization [has been] added to 'your' policy as an additional insured” in order for an additional “person or organization” to be considered an “additional insured” entitled to coverage under the policy.
Dubinsky argued that the Builder’s Agreement he had signed with Concept was such an agreement. However, the judges reminded Dubinsky that the agreement to which he referred had been signed in early August 2013, a full six months after Ahatov was injured in his fall. Even then, no part of the Builder’s Agreement specifically named Dubinsky as an additional insured on the Frederick policy.
Next, Dubinsky reminded the court that the breadth of an insurer’s duty to defend is broader than its duty to indemnify, so he should be entitled to a defense, even if he was not entitled to actual indemnity. Frederick asserted, and the court agreed, that this argument “completely ignored” the bedrock principle of the duty of defense: the duty is not triggered unless “the party seeking a defense is an insured under the Policy.” As noted in the preceding paragraphs, Dubinsky was not considered an “insured” just because the work on his house was the subject of the policy, and there was no endorsement specifically naming him as an additional insured. Since he was not an insured, it was impossible to trigger the duty of defense.
Conclusion
Frederick was not obligated to provide either defense or indemnity to any of the defendants. Three separate exclusions precluded coverage for Concept, and Dubinky wasn’t entitled to any kind of coverage because he was not an insured under the Frederick Policy. The court granted summary judgment in favor of Frederick.
Editor’s Note: Concept’s Frederick policy stated that the company did not cover “benefits [that] are or are required to be provided by the ‘insured’ under a workers' compensation…or like law” (emphasis added). It did not matter whether those benefits were actually paid by the insured, or if they came from another source.
Even though Ahatov actually received his benefits from the state unemployed workers guaranty fund, it didn’t change the fact that they were still “required to be provided by the ‘insured’” through workers compensation coverage. Therefore, the policy exclusion applied.