When stopgap provisions collide
In 2012 Kimes Steel, Inc., purchased two policies from First Mercury Insurance Company, a surplus lines carrier. A commercial general liability policy had a combined single limit of $1 million and employers liability (per accident); an excess policy had a limit of $5 million.
The CGL policy contained a standard exclusion for employers liability for injuries to employees. The standard exclusion was modified by an endorsement identified as “Stop Gap—Employers Liability Coverage Endorsement—West Virginia.” The excess policy included a standard follow form provision that incorporated the terms of the underlying policy.
The policies were in place when employee Jeffrey Russell was involved in a workplace accident at Kimes Steel on May 3, 2013. The accident resulted in severe injuries to Russell’s dominant hand and the amputation of a finger. On February 4, 2014, Jeffrey and Anita Russell filed a complaint alleging that Kimes Steel acted with “deliberate intention” as defined by a West Virginia statute. The Russells alleged that Kimes Steel required Jeffrey to perform his job duties without required safety equipment, instructions, and precautions for working with table saws and subjected him to a specific unsafe working condition that presented a high degree of risk and strong probability of serious injury or death.
First Mercury issued a denial of coverage letter to Kimes Steel on May 5, 2014. The letter stated that First Mercury would “not provide … a legal defense to the lawsuit, nor [would] it indemnify Kimes Steel as to any damages for which Kimes Steel may be liable to Jeffrey or Anita Russell.” First Mercury also filed an action seeking a declaration that the policies provided no coverage for the Russells’ claims. The court dismissed this action. In June 2014, the Russells amended their complaint by adding a declaratory judgment claim against First Mercury alleging that First Mercury was obligated to provide a defense and indemnification to Kimes Steel under the policies. In October 2014, Kimes Steel filed a cross-claim against First Mercury asserting breach of contract and bad faith arising from First Mercury’s denial of coverage to Kimes Steel with respect to the Russells’ claims.
On March 18, 2015, the court entered an agreed order vacating a previously entered scheduling order and staying discovery ofthe underlying Russell tort claim allegations pending resolution of the coverage issues. Subsequently First Mercury moved for partial summary judgment on the coverage issues. Kimes Steel and the Russells responded by also filing separate motions for partial summary judgment as to the coverage issues.
On May 18, 2016, the court denied First Mercury’s motion and granted the Russells’ motion on the basis that the stopgap endorsement to the CGL coverage was ambiguous with respect to covering the Russells’ deliberate intent action. The court also concluded that Kimes Steel had a reasonable expectation of coverage for the Russells’ claims, that the policy language rendered the stopgap coverage illusory, that First Mercury was estopped from denying coverage, and that First Mercury owed a duty to defend Kimes Steel. First Mercury appealed.
On appeal, the court noted that the language of the stopgap endorsement plainly indicated that the CGL policy provided Kimes Steel coverage for a deliberate intent action brought by an employee. However, the court said, the language that followed attempted to restrict coverage to “‘bodily injury by accident’ or ‘bodily injury by disease’ to your ‘employee’ to which this insurance applies … .” The court found this portion of the stopgap endorsement to be ambiguous and said it must be interpreted in favor of Kimes Steel, meaning that it provided coverage for the Russells’ deliberate intent claims.
With respect to the exclusions in the stopgap endorsement, the court pointed out that the endorsement provided coverage for deliberate intent actions, yet the exclusion to the endorsement denied such coverage. This ambiguity was construed against First Mercury and in favor of Kimes Steel. The court affirmed the trial court’s order that denied First Mercury’s motion for partial summary judgment and granted the Russells’ cross-motion and Kimes Steel’s motion for partial summary judgment on coverage issues.
First Mercury Insurance Company vs. Russell-Supreme Court of Appeals of West Virginia-October 19, 2017-No. 16-0596.
