(Contractor Exclusion Ambiguous, Such That a Duty to Defend Owed Under Liability Policy for Construction Site Accident)
(October 2024) - In California Specialty Insulation, Inc. v. Allied World Surplus Lines Ins. Co., 102 Cal.App.5th 1 (May 17, 2024), the California Second District Court of Appeal affirmed the trial court's entry of summary judgment in favor of California Specialty Insulation, Inc. ("CSI") against Allied World Surplus Insurance Company ("Allied World") in connection with a dispute over whether coverage was afforded under an Allied World liability policy for an underlying lawsuit involving a construction jobsite accident. Allied World denied coverage of CSI in connection with the lawsuit based on a "Contractor" exclusion endorsement in its policy.
The parties' dispute arose out of a personal injury lawsuit filed by an employee of Air Control Systems, Inc. ("Air Control") against CSI. Air Control had contracted with the owner of the property where the accident occurred to perform improvement work. Air Control also contracted with CSI to perform insulation work on the property. Air Control's employee was injured when a forklift operated by a CSI employee ran into a ladder that the Air Control employee was on, causing him to fall approximately 20 feet to the ground and sustain injuries.
Initially, Allied World agreed to defend CSI against the lawsuit filed by the Air Control employee, but later withdrew from such defense based on a Contractor exclusion endorsement in the its policy. Allied World contended that the exclusion applied to any injury claims brought by employees of a contractor. The exclusion states as follows:
As an addition to the list of exclusions from coverage for bodily injury liability, the policy set forth an endorsement titled "Bodily Injury to Any Employee or Temporary Worker of Contractors Exclusion" (Contractor Exclusion). Relevant here, the Contractor Exclusion stated the policy did not apply to "'Bodily injury' ... to any 'employee' or 'temporary worker' of any contractor or subcontractor arising out of or in the course of the rendering or performing services of any kind or nature by such contractor or subcontractor." Neither the endorsement nor the policy as a whole defined the term "contractor."
Based on Allied World's declination of coverage, CSI filed a declaratory relief action against Allied World arguing that the Contractor exclusion did not apply to bar coverage of the underlying lawsuit and seeking a declaration that Allied World was obligated to defend and indemnify CSI against such lawsuit. Subsequently, the parties filed cross-motions for summary judgment addressing coverage of the underlying lawsuit under the Allied World policy. The trial court denied Allied World's motion and entered judgment in favor of CSI. The trial court found that the Contractor exclusion was ambiguous and could be reasonably interpreted to apply to claims brought by employees of contractors who contracted directly with CSI, as opposed to employees of any contractor on a jobsite.
In affirming the trial court's decision, the Court of Appeal reasoned as follows:
The Contractor Exclusion states in relevant part that the policy does not cover "'odily injury' ... to any 'employee' or 'temporary worker' of any contractor ... arising out of or in the course of the rendering or performing services of any kind or nature by such contractor ... ." While the policy does not define "contractor," that alone does not make the term ambiguous. (See State of California v. Continental Ins. Co., supra, 55 Cal.4th at p. 195.) Rather, the term is ambiguous only if "'it is capable of two or more constructions, both of which are reasonable.'" (Ibid.)
Allied World contends the term "contractor" unambiguously means anyone who has "contracted to work on a construction project." It cites dictionary definitions, arguing these show "the ordinary and popular meaning of 'contractor' is a person who has signed a contract to perform repair or improvement work, typically on a construction project." (See Coast Restaurant Group, Inc. v. Amguard Ins. Co. (2023) 90 Cal.App.5th 332, 339 [307 Cal. Rptr. 3d 133] ["we may resort to dictionary definitions, taking care to 'consider the policy context in which the word or term was used and attempt[ing] to put [our]self in the position of a layperson and understand how he or she might reasonably interpret the particular language'"].) CSI concedes Allied World's definition is reasonable, but argues the term "contractor" can also be reasonably read as "anyone hired by the insured pursuant to contract." CSI contends this more narrow reading of the term is consistent with the policy as a whole, particularly a separate but similar exclusion from coverage for bodily injuries of employees (but not contractors) of the insured. (See Minkler, supra, 49 Cal.4th at p. 322 ["The existence of a material ambiguity in the terms of an insurance policy may not, of course, be determined in the abstract, or in isolation. The policy must be examined as a whole, and in context, to determine whether an ambiguity exists."].) For its part, the trial court determined both of these interpretations were reasonable, explaining the term could also reasonably mean "any party to a contract" or "a person in contractual privity with the insured."
Allied World argues that, in crediting all four of these interpretations as reasonable, the trial court strained to find ambiguity and ultimately erred by failing to apply the "clear and explicit" language of the exclusion. In making this argument, Allied World focuses on the modifier "any," contending its placement next to "contractor" establishes the exclusion "is not limited to a subset of contractors, such as those hired by CSI." Rather, Allied World argues, the full phrase "any contractor" shows the exclusion applies to employees of "every contractor" or "all contractors." Emphasizing that point, Allied World asserts the word "'any' illuminates the meaning of 'contractor'" in so far as the word "signals that injuries to an employee of a 'contractor'—however reasonably defined—are excluded from coverage."
This argument is not persuasive. As an initial matter, we disagree with Allied World's suggestion that, regardless of the precise definition of "contractor," the exclusion will apply because the exclusion states it applies to "any contractor." For example, if we find CSI's preferred interpretation reasonable and agree with its position that the term "contractor" means "anyone hired by CSI pursuant to contract," the exclusion does not apply. Moreover, in stressing the importance of "any," Allied World avoids the primary issue of how to define "contractor." Allied World is correct that the phrase "any contractor" is interchangeable with the phrases "every contractor" and "all contractors." But none of these phrases helps resolve the ambiguity in so far as the term "contractor" remains undefined and subject to multiple reasonable interpretations. (See North American Building Maintenance, Inc. v. Fireman's Fund Ins. Co. (2006) 137 Cal.App.4th 627, 641 [40 Cal. Rptr. 3d 468] [explaining the word "any" did not help interpret an undefined policy term, "capacity," that "any" modified].)
We also reject Allied World's contention that CSI seeks to improperly insert words into the Contractor Exclusion by defining "contractor" as "anyone hired by CSI pursuant to contract." CSI is not rewriting the policy by offering a reasonable interpretation of an undefined term. It is instead providing reasonable meaning to policy language where that meaning is otherwise uncertain. The same is true for every reasonable interpretation of an ambiguous term, including Allied World's reading of the term "contractor" to mean "anyone contracted to work on a construction project" or anyone "who has signed a contract to perform repair or improvement work, typically on a construction project."
In sum, the term "contractor," as used in the Contractor Exclusion, is susceptible of more than one reasonable interpretation. These interpretations include the parties' respective readings of "anyone performing construction work pursuant to contract" and "anyone hired by CSI pursuant to contract." Because reasonable people may differ as to the meaning of the term "contractor," the term is ambiguous.
Based on its determination that the term "contractor" as used in the Contractor's exclusion was ambiguous, the Court of Appeal interpreted such term according to the insured's objectively reasonable expectations and found that the Contractor exclusion did not apply to bar coverage of CSI for the underlying lawsuit. The Court of Appeal reasoned as follows:
To resolve the ambiguity in the term "contractor," we must interpret the term in a manner that protects the insured's objectively reasonable expectations. (Minkler, supra, 49 Cal.4th at p. 321.) To do that, we examine the term in context and interpret the exclusion narrowly against the insurer. (Id. at p. 322.)
As noted, CSI contends the term "contractor" means anyone CSI hired other than its employees. CSI contends this narrower reading of the term best aligns with its objectively reasonable expectations as the insured. Namely, CSI explains that in purchasing the policy it expected to be "protected from liability for accidental bodily injury arising out of the conduct of its insulation business, unless the injury was sustained either by a CSI employee or by an employee of a CSI contractor." For the uncovered injuries, CSI notes, it maintained workers' compensation insurance and had the ability to require the same form of insurance be maintained by anyone it hired to perform work on its behalf. In contrast, CSI continues, it "could not exercise the same control over all contractors in the world and thus had no objectively reasonable expectation that injuries to contractors unrelated to CSI would be excluded from coverage." CSI contends these expectations are consistent with, and supported by, the purpose of commercial general liability insurance.
The same analysis applies here. As the California Supreme Court has stated, a commercial general liability policy is meant to "'"provide the insured with the broadest spectrum of protection against liability for unintentional and unexpected personal injury or property damage arising out of the conduct of the insured's business."'" (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 654 [3 Cal. Rptr. 3d 228, 73 P.3d 1205]; see id. at p. 649 [the insuring language of a commercial general liability policy "'connotes general protection for alleged bodily injury caused by the insured'" and "establishes a reasonable expectation that the insured will have coverage for ordinary acts of negligence resulting in bodily injury"].) . . .
Defining the term "contractor" more narrowly also comports with the policy as a whole. With this reading, the Contractor Exclusion aligns with the separate "Employer's Liability Exclusion," which states the policy does not cover work-related bodily injuries of employees of the insured. Thus, read together, the exclusions separately apply to preclude coverage for injuries of employees of the insured (Employer's Liability Exclusion) and injuries of employees of the insured's contractors (Contractor Exclusion)—that is, as CSI points out, injuries the insured can alternatively cover through its workers' compensation insurance or the workers' compensation insurance of anyone it hires to perform work on its behalf. Moreover, as CSI also points out, reading "contractor" to mean "anyone with a contract," as Allied World proposes, would render the Employer's Liability Exclusion surplusage because CSI would qualify as a contractor for which the Contractor Exclusion would apply. (See Yahoo Inc., supra, 14 Cal.5th at p. 69 "Courts will favor an interpretation that gives meaning to each word in a contract over an interpretation that makes part of the writing redundant"]; see also ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co. (1993) 17 Cal.App.4th 1773, 1785 [22 Cal. Rptr. 2d 206] ["In California, however, contracts—even insurance contracts—are construed to avoid rendering terms surplusage"].)
Allied World argues this surplusage concern is unfounded because the policy does not refer to CSI as a "contractor" and instead uses the words "you" and "your" to refer to the named insured. But Allied World does not cite anything in the policy's provisions that precludes describing CSI with other terms. And the language in the policy implies CSI is a "contractor." For example, under an "Additional Insured" endorsement, the policy explains the insurance afforded to additional insureds does not apply to bodily injury occurring after "[t]hat portion of 'your work' out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project." (Italics added.) In this context, the phrase "another contractor" clearly means a contractor in addition to CSI.
In sum, based on the reasonable expectations of the insured, "contractor," as it is used in the Contractor Exclusion, means "anyone hired by the insured pursuant to contract," or more simply, "CSI's contractor." Under this definition, Standiford was not a contractor's employee because CSI did not hire his employer, Air Control. Therefore, the Contractor Exclusion does not apply to preclude Allied World's defense and coverage obligations for purposes of Standiford's negligence claim.
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