United States: One Little Word: New York Federal Court Rejects Attempt To Broaden Employer's Liability Exclusion

Last Updated: November 19 2015
Article by Stephen G. Foresta

So much depends on a single word! Recently, a New York federal court refused to construe an employer's liability exclusion in a CGL policy to bar coverage for a bodily injury suit brought by the employee of an insured parent company against a subsidiary insured under the same policy as the parent. Considering both the language and purpose of the exclusion, this was the right outcome. But it might have come out the other way if one three-letter word in the policy had been different.

In Hastings Development, LLC v. Evanston Insurance Co., the insured subsidiary sought coverage under its CGL policy for a suit brought against it by an employee of its parent company (which also was insured under the policy), after the employee was injured while operating a mixing machine owned by the subsidiary in a building the subsidiary also owned. The employee alleged that the subsidiary was both negligent and reckless in operating the mixing machine. Initially, the employee also alleged that his employer, the parent company, was vicariously liable for the subsidiary's alleged negligence, but later dismissed the claim against his employer after receiving workers compensation benefits.

Evanston, the plaintiff's CGL insurer, denied coverage based on an employer's liability exclusion in the policy. The exclusion provided that there was no coverage for any suit 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 insurer moved to dismiss on the basis of this exclusion, and the plaintiff cross-moved for summary judgment. The insurer argued that the exclusion applied because the underlying claimant was an employee of a Named Insured under the policy. The plaintiff-policyholder argued that the exclusion did not apply because the underlying claimant was not its employee (but rather an employee of its parent company) and the exclusion only bars coverage for suits by an employee against his or her own employer.

Applying New York law, the court determined that both parties' interpretations of the exclusion were reasonable. The court reasoned that the phrase "an employee of the Named Insured" in the exclusion "could conceivably encompass employees of any of the Named Insureds . . . or be limited only to the Named Insured who employed the injured employee." The court relied on a prior case in which a court held that a similarly-worded exclusion did not bar a suit brought against a general contractor by an employee of a subcontractor, reasoning that the purpose of an employer's liability exclusion is to bar coverage when workers' compensation coverage otherwise applies–which it doesn't in a suit against an entity other than the injured employee's employer. The court distinguished another case that involved a similar exclusion but referred to "any insured," rather than "the Named Insured." On the other hand, the court noted, the exclusion defined "employee" to refer to employees of "any Named Insured" – i.e., the definition of "employee" in the exclusion supported an argument that the exclusion applied to suits brought by employees of any Named Insured, while the exclusion otherwise referred only to employees of the Named Insured.

This, the court held, created an ambiguity as to whether the exclusion barred suits only by employees of the insured seeking coverage or, more broadly, by employees of any insured. Having determined that no extrinsic evidence submitted by the parties shed light on the meaning of the exclusion, the court applied the principle of contra proferentem and construed the ambiguity in favor of the insured.

This is an appropriate result given the purpose of an employer's liability exclusion and the ambiguous language of the exclusion in that case. The court properly declined to expand the exclusion beyond its purpose. But this also is a cautionary tale for policyholders. When purchasing or renewing their CGL policies, policyholders should take a close look at the wording of the employer's liability exclusion to ensure it is properly limited and will not potentially provide a basis for an insurer to deny coverage down the road if the policyholder is sued by an employee of a co-insured. Also, policyholders that face such legal action should review the language of their policies closely to determine whether they have coverage (or a coverage problem) based on the language of their exclusion. As Hastings Development exemplifies, the outcome may come down to whether the exclusion uses one three-letter word or another: "the" or "any" (Named Insured).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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