CONTRACTS CREATE INSURABLE CONSEQUENCES
An insurance policy is a contract that creates its own operating environment. Various insuring agreements, conditions, exclusions, and definitions come together to build a little world of protection. It becomes a place where protection is triggered by a set of circumstances. Coverage extends, normally, to a small set of persons who suffer certain losses.
Below is a full account of a court dispute where uncertainty arose. Specifically, it involves what parties were covered and how a business agreement resulted in expanded insured status.
INSURED CONTRACT CREATES ADDITIONAL INSURED STATUS
Under a “Trade Contractor Agreement,” Gilbane Building Company (Gilbane) was to be protected as an additional insured under coverage by general contractor, Empire Steel Erectors, L.P. (Empire). Empire was insured under a Commercial General Liability policy issued by Admiral Insurance Company (Admiral) when a loss occurred, revolving around the agreement.
Michael Parr was an Empire employee, working at a construction site. He was seriously injured when he fell while using a ladder that had been installed by a subcontractor that was hired by Gilbane. Parr’s suit alleged that the ladders were negligently installed and maintained. Prior to going to trial, where Parr sought $1 million in damages, the suit was settled for $165,000.
At the time the suit was filed, Gilbane notified both Empire and Admiral. Gilbane also requested a legal defense and coverage for the claim. The insurer, citing its policy language, denied the claim. Gilbane then filed a motion for summary judgment, requesting a finding that, in denying its status as an additional insured, the other parties were guilty of contract breach. The various parties then filed additional motions, essentially countering whether any duty of defense and indemnification were owed in light of policy language and the assertion that Parr’s injury triggered those duties.
Note: The case DID NOT consider whether coverage was owed under the trade contract itself. While the defendants argued that no coverage was due under Texas law, Gilbane pointed out that it did not file for coverage under that specific agreement. The court ruled the point moot.
The court spent considerable time on a key issue. The CGL Policy included an additional insured endorsement that granted additional insured status to parties that are created under the policy’s definition of an “insured contract.” The defendants argued that, besides the policy language, the policy should be interpreted to include consideration of Texas law that, in its opinion, would find the TCA unenforceable; therefore, it would be ineligible as an insured contract, eliminating the possibility of additional insured status for Gilbane. The court rejected this argument. It decided that reliance on the policy language controls the issue and the insurer should have written such consideration into its policy language. Therefore, according to the policy’s plain language, Gilbane qualifies as an additional insured.
Another issue considered by the court was the argument that Parr’s injury did not trigger a duty to defend. The gist of the argument was that the policy language requires the named insured (Empire) to have to bear some level of direct or indirect responsibility for causing the loss. The defendants pointed out that Parr did not make allegations against Empire, nor did he name Empire as a party to the suit. Gilbane countered that state law barred Parr from doing so since a Worker’s Compensation policy was in force.
The court studied several other cases it considered relevant to this issue. After investigating, it concluded that, while Parr’s action of using a ladder while wearing muddy boots may indicate that he bore some responsibility for the loss, it did not eliminate a cause of action against the defendants. Parr’s complaint included a negligence allegation that Gilbane failed to maintain working elevators, forcing Parr to use a ladder and the injury arose from that circumstance. However, the court also recognized that, under the loss circumstances, Texas law may find that one or more of the defendants may be immune from suit; however, that was a separate question that did not affect a duty to defend.
While the court recognized that a finding of a need to indemnify was affected by policy language that required a ruling of fault on the part of an insured (including a party acting on the insured’s behalf, such as a subcontractor) in causing a loss, those considerations did not affect the broader duty to defend. The court denied all party motions with regard to ruling on a duty to provide coverage for the loss (as it found that to be a matter for trial); it found in favor of Gilbane’s summary motion that “additional insured” status existed and that it was owed a legal defense against Parr’s underlying claim.
Gilbane Building Company, Plaintiff, v. Empire Steel Erectors, L.P. and Admiral Insurance Company, Defendants. No. H-08-1707. USDISTCT, Southern District of Texas, Houston Division. February 23, 2010.Defendants’ Motion Denied, Plaintiff’s Motion Denied in part, and Affirmed in part.
Who Is Protected?
Who is covered under an insurance policy is largely determined by the definition of who qualifies as an insured. Without a precise explanation, post-loss situations could be chaotic. That is one reason why policies are designed to control the coverage obligation.
Read here to see a what is meant by a covered person under a policy’s definitions section. The excerpt is from AAIS Commercial Liability Coverage Form Analysis under PF&M found in Advantage Plus.
The first group of defined insureds is based on the type of business entity entered on the Declarations:
- Individual: The individual and his or her spouse are insureds. However, they are insureds only with respect to the conduct of the business for which the named insured is the sole owner.
- Partnership or Joint Venture: The named insured, its partners, members and their spouses are insureds. However, they are insureds only with respect to the conduct of the named insured’s business.
- Organization That Is Not a Partnership or Joint Venture: The named insured and all its executive officers and directors are insureds. However, each is an insured only within the scope of their duties for the organization. The named insured’s stockholders are also insureds but only for their liabilities as stockholders.
The next group qualifies as insureds, regardless the type of business entity:
- The named insured’s real estate manager. This can be a person or organization but if a person, he or she cannot be an employee of the named insured.
- If the named insured is an individual and dies the business may continue, so others become insureds. The named insured’s legal representative is an insured but only while acting within the scope of duties as such.
Any person having custody of the named insured’s property at the time of the named insured’s death is an insured but only with respect to liability arising out of the maintenance or use of that property and that person stops being an insured as soon as the legal representative is appointed.
The legal representative takes on all the named insured’s rights and duties under this coverage.
- The following are insureds when using the named insured’s mobile equipment but only if the use is with its permission:
- An employee of the named insured while using the equipment during the course of employment. If a fellow employee is injured, the employee that caused the injury is NOT an insured.
- Non-employees but only if they have no insurance coverage and the liability is due to the operation of the equipment. Organizations or persons legally liable for that non-employee’s conduct are also insureds. They are not insureds for any damage they cause to their employer’s owned or rented property, to property that employer is occupying or to property for which their employer is responsible.
- Insured status based on mobile equipment use described above does not apply for any loss that involves damage to the named insured’s owned or rented property, to property the named insured is occupying or to property for which it is responsible.
- The named insured’s employees. This is limited to only for acts that are performed within the scope of their employment. It is further restricted with employees not being insureds for bodily injury, personal injury or advertising injury to either the named insured or a fellow employee. Also, they are not insured for property damage to property owned by, rented to or loaned to employees or to partners, members or the partners or members spouses. Executive officers are not considered employees in this section.
- Any newly acquired or formed organization of the named insured. This applies only when the named insured has a majority interest in it. Newly formed or acquired joint ventures or partnerships are not insureds.
The newly acquired or formed organization is not an insured for any of the following:
- When it carries or has in some way other comparable coverage available to it
- After the policy period in which it was formed or acquired ends or 90 days after its formation or acquisition, whichever comes first
- For any bodily injury or property damage occurring before the date of acquisition or formation
- For any personal injury or advertising injury offense committed before the date of acquisition or formation.
Unless a partnership or joint venture is listed as a named insured on the declarations no person or organization is an insured in relation to the partnership or joint venture’s conduct either past or present.
Circumstances Can Expand Coverage Responsibility
Coverage obligations don’t merely rest under a policy’s definitions of an insured. That status may also be granted, sometimes even unintentionally, via an insured’s operations. While not a daily or even a frequent occurrence, businesses commonly make agreements with other parties. Some of these agreements can expand the risks of loss.
Expansion is often due to one business accepting legal responsibility for harm that, otherwise, would belong to another party. Insurance companies are aware of this and, typically, policy language is designed to avoid or at least minimize increased exposures. A term, insured contract, is used to address assumptions of additional liability for harm or loss caused to others.
See a discussion below of an insured contract from Gordis on Insurance found in Advantage Plus.
COVERAGE A–BODILY INJURY AND PROPERTY DAMAGE LIABILITY EXCLUSIONS
There is no coverage for claims arising out of actions expected or intended from the standpoint of the insured. This exclusion does not apply, however, to bodily injury resulting from the use of reasonable force to protect persons or property.
The policy does not apply to bodily injury or property damage for which the insured is obligated to pay damages because liability was assumed in a contract or agreement. The exclusion does not apply, however, to liability for damages the insured assumed in an “insured contract” (defined below) or for which he or she would have been liable in the absence of the contract or agreement.
There are six types of insured contracts: lease; sidetrack agreement; easement or license except for construction or demolition activities within 50 feet of a railroad; obligation to a municipality except when doing work for the municipality; elevator maintenance agreement; and specific tort obligations.
If the contracts include a requirement that defense of assumed liability be provided, those defense costs are also paid but as part of damages. The defense costs can be paid outside of the limits if the guidelines to be so provided in the Supplementary payments are met.
Alcoholic Beverage or Liquor Exclusion
This exclusion is applicable only if the insured is in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages. The policy does not cover bodily injury or property damage for which the insured may be held liable by reason of causing or contributing to the intoxication of any person, furnishing alcoholic beverages to a person under the legal drinking age or under the influence of alcohol, or because of a statute or ordinance relating to the sale, gift, distribution or use of any alcoholic beverage.
Workers Compensation and Employers Liability
Why Policies Are Wary Of Expanded Responsibility
There are various reasons that insurance policies include different limits and constraints. One reason is that insurers are, in most instances, in the business of making a profit and that requires a great deal of work. Also, policies have to be affordable to those that purchase coverage. Pricing, policy language, exclusions, underwriting, and coverage limits all work to maintain a viable product.
Here is a discussion of contractual liability from Emarketing for Agencies found in Advantage Plus.
A business that harms another party or damages/destroys property that belongs to another party may be sued or prosecuted. Larger businesses protect against their liability to third parties with a Commercial General Liability (CGL) policy. An insurance company provides a CGL under some assumptions about the type of losses it is willing to cover. One issue that can undermine a CGL is contractual liability. Contractual liability involves responsibilities that a covered business voluntarily agrees (in writing) to take over from another party.
A CGL’s design and cost assumes that it only has to protect the party that is listed on the policy. Taking on some other business’ liability means that the policy is being asked to either defend or pay for the injuries or damages caused by an entity that it doesn’t “know”. Further it is being asked to do so without any additional premium. Therefore, CGLs exclude most instances of contractual liability. An exception exists for situations that, while part of a contract, would otherwise have been eligible for coverage.
A company that decides to step-in for another company has to make careful arrangements to handle a loss it has assumed. It may try to take care of the situation by endorsing (changing) its CGL by adding the name of the other party as an additional insured. Or, when the insured company is a property owner and the other party is a contractor, the property owner may buy a special form of coverage called Owners and Contractors Protective Liability.
Regardless the coverage arrangement, not every situation will be covered. You need to read the CGL or Owners and Contractors Policy language to determine what situations are insured. A loss has to be a type that is eligible under the CGL or OCP. Further, the contractual arrangement has to be related to the type of operation insured by such policies.
Example: You own a printing company and you, in writing, agree to cover your friend’s plumbing business if they are sued by one of your customers. Neither a CGL nor an OCP would help, because the written agreement has no relationship to your operations.
A smart move is to discuss your business relationships with an insurance professional. It’s a solid way to be sure that your business liability is handled efficiently and economically. This often means that the best strategy is to have every party take care of their own insurance needs.