Workers’ Compensation Undercuts Employer Liability Exclusion, U.S. Appeals Court Rules

Since workers’ compensation shields an employer from liability, an insurer may not be able to rely on an employer liability exclusion in a commercial general liability policy to avoid claims. That’s the potentially costly message a federal appeals court has sent to Security National Insurance Co. (SNIC).

The Third Circuit Court of Appeals revived a $30 million claim against SNIC over employer liability coverage for a construction accident at a Philadelphia apartment building in which workers were injured when a third-floor fire escape balcony collapsed.

SNIC attempted to escape the employer liability claims for the accident with an exclusion in its policy and succeeded at the district court level in 2021. However, the insurer’s fortunes have now been reversed on appeal.

The federal appeals court in Philadelphia last week vacated the 2021 district court ruling. In remanding the case, the appeals court found that the language in SNIC’s policy around additional insureds that allowed it to apply the exclusion is ambiguous and thus the language must be construed against the insurer.

The policy defines an additional insured as a party listed on the schedule of additional insureds. The lower court ruled that was sufficient to find that an employer is an additional insured and, therefore, subject to SNIC’s employer liability policy and its exclusion.

However, the appeals court found that is not sufficient. The policy requires that to be considered an additional insured, an entity must also be liable for the acts or omissions that caused the accident — a requirement that cannot be met where workers’ compensation cancels an employer’s liability for work injuries.

Case Background

A property owner, 4207 Chester Ave. LLC, hired Altman Management Co. to manage its property. Altman, in turn, enlisted AM Marlin Construction to repair a leak in the building’s ceiling. AM Marlin workers were standing on a third-floor fire escape balcony when the balcony collapsed. Among the workers injured was Argenis Reyes, who “fell multiple stories to the ground and suffered significant injuries, including . . . permanent paralysis.”

AM Marlin was the named insured under the commercial general liability policy issued by SNIC. The policy listed both Chester Ave. and Altman as additional insureds “but only to the extent that Chester Ave. or Altman was held liable for AM Marlin’s acts or omissions arising out of” their ongoing operations performed for AM Marlin.

Chester Ave. was also the named insured under a commercial general liability policy issued by Westminster American Insurance Co., which provided insurance that was excess to that provided by SNIC, an AmTrust Financial affiliate.

Following the accident, Reyes asserted that Chester Ave. and AM Marlin were responsible for his bodily injuries and other damages.

Westminster tendered Chester Ave.’s defense and indemnity with respect to Reyes’ claims to SNIC, asserting that Chester Ave. was an additional insured under the policy’s additional insureds endorsement, which, according to Westminster, provided coverage to Chester Ave. for “liability arising out of AM Marlin’s work at Chester Ave.’s property.”

Positions

SNIC, in first denying coverage., stated that Chester Ave.’s liability coverage was not triggered because AM Marlin did not perform any work for Chester Ave. on the property’s fire escape balcony that collapsed.

SNIC later argued that coverage was foreclosed by the employer’s liability exclusion. Specifically, SNIC asserted that this provision excluded coverage for bodily injury to an employee of “any insured” and that the exclusion therefore precluded coverage for Reyes’s bodily injuries because he was an employee of Altman, which was an additional insured under the SNIC policy.

After SNIC declined coverage, Chester Ave., Westminster American and Reyes sued SNIC. They asserted eight claims for relief and sought declaratory judgments that SNIC be required to defend and indemnify Chester Ave. and reimburse Westminster for the costs of Chester Ave.’s defense. They asked the court to require SNIC to pay its policy limit and indemnify Chester Ave. for its $24.6 million settlement with Reyes and another worker, and that SNIC pay the $1 million limit on AM Marlin’s liability policy. Another count sought indemnification for another related $5 million settlement.

Contrary to what SNIC argued, the plaintiffs contend that Altman is not an additional insured and that, consequently, the exclusion is inapplicable to the bodily injury claims. They rely on the provision that states that an insured “include[s] the person or organization shown in the Schedule, but only to the extent that the person or organization shown in the Schedule is held liable for [AM Marlin’s] acts and omissions arising out of [AM Marlin’s] ongoing operations performed for that insured.”

District Court

The federal district court for Eastern Pennsylvania sided with SNIC. This court reasoned that the liability exclusion applied because the apartment management company Altman was listed as an additional insured on the construction firm’s policy.

Furthermore, according to the district court, whether Altman was—or can be—held liable for AM Marlin’s acts or omissions speaks only to the scope of the coverage afforded by the policy, not whether Altman qualifies as “any insured” under the policy.

However, the federal appeals court came to a different conclusion. It ruled that Altman is not an insured simply because it is listed as an additional insured. That’s because, as the plaintiffs point out, there is other policy language indicating a party must also be held liable for the acts or omissions of the underlying claim to qualify as an additional insured.

Even more, since by law the state’s workers’ compensation act is the exclusive remedy for employees in claims against their employer, the employer cannot be held liable and thus is not an insured subject to the liability exclusion, the appeals court explained in vacating the lower court ruling.

In the appeals court’s view, an entity becomes an insured under AM Marlin’s policy when it is listed in the schedule, “but only to the extent” that the person or organization is held liable for the acts or omissions arising out of AM Marlin’s ongoing operations performed for the insured. As the appellants claim, Altman is not an additional insured because it cannot be held liable for the injured workers’ claims since it already paid workers’ compensation following the incident.

The circuit court reads the workers’ compensation statute as shielding Altman from additional liability. “Plainly, Altman’s workers’ compensation payments effectively supplanted all other forms of liability that it could have had,” the opinion states.

Accordingly, because Altman is not “held liable” for AM Marlin’s acts due to the workers’ compensation law, it is not an additional insured. Because it is not an additional insured, SNIC cannot use the employer liability exclusion to preclude coverage for the liability claims.

The court noted that its opinion only addresses that Altman is and cannot be liable for AM Marlin’s acts given its workers’ compensation payments, as that is the “crux of the issue.” But it offers no opinion on whether Altman may be liable for AM Marlin’s acts for any other reason not previously raised, especially since such an inquiry also turns on whether AM Marlin’s acts arose out of work it performed for Altman.