Insured farmers brought an action against its insurer, alleging breach of contract based on the insurer's denial of coverage for a claim of injuries suffered by the employee of an independent contractor. As a matter of first impression, the Supreme Court of Indiana had to decide if the insured was responsible for paying for the injuries since the contractor did not have workers compensation coverage. This case is Everett Cash Mutual Insurance Company v. Taylor, 926 N.E.2d 1008 (2010).

The Taylors owned a farm and bought a farm personal liability policy from Everett Cash Mutual Insurance Company. The Taylors employed an independent contractor (Sherlock Contract Painting) to paint a house, grain bin, and barn. While painting, Sherlock employee Collis sustained injuries when he was shocked by an electrical wire and fell from a ladder. Collis filed for workers compensation benefits but then discovered that Sherlock had no such coverage. Thus, the injured employee sought payment from the

Taylors pursuant to Indiana Code section 22-3-2-14(b). This provision in the law imposes liability upon a person who hires a contractor without verifying that the contractor carries workers compensation insurance for the injury or death of any of the contractor's employees. The Taylors did not verify whether Sherlock had workers compensation insurance.

When the Taylors sought coverage under their farm personal liability policy for Collis's claim, the insurer denied coverage. The Taylors filed a lawsuit against Everett Cash and the trial court ruled in favor of the Taylors . An appeals court reversed that decision and the case ended up in front of the Indiana Supreme Court.

The argument from the Taylors was that the claim by Collis was a straightforward premises liability claim and coverage for such a claim is the purpose of their farm liability policy. The insurer countered that the claim is a workers compensation claim and such a claim is excluded by the policy terms. In this regard, the insurer said that the policy defines an occurrence as an accident and that the claim here arose not from an accident but from the Taylors ' failure to verify the workers comp coverage and to get a certificate of such coverage as required by the law. The Supreme Court rejected the argument of the insurer. The court said that while it was true that the Taylors did not get a certificate of compliance, the claim by Collis was filed as a result of an accident in which he suffered bodily injury. This was an occurrence within the meaning of the policy definitions.

The court then examined the workers comp exclusion on the policy. It acknowledged that the exclusion could be read to apply, as the insurer contended, to this situation; the insurer contended that the damages sought by Collis are benefits payable or are required to be provided by an insured under the workers compensation law. On the other hand, the court said, a reasonable person could interpret the exclusion differently. The exclusion could be interpreted to apply to employers who are directly within the application of the workers compensation act, that is, those employers who are charged with procuring workers comp insurance for their own employees.

Under the facts of this event, the Taylors would not be required to have workers compensation coverage since the law excluded farm or agricultural employees from the benefits of the statute and Collis was not a farm or agricultural employee. Therefore, it would be beyond the ordinary understanding of the workers compensation system for the Taylors to even think that an exclusion regarding workers comp benefits could preclude them from having protection from a lawsuit by someone injured in an accident on their property.

The judgment of the trial court was affirmed by the Supreme Court.

Editor's Note: The situation where an insured homeowner or landowner hires an independent contractor to work on the owner's premises and fails to certify that the contractor has workers compensation insurance can cause problems for the owner. If a worker is injured on the premises and the contractor does not have workers comp coverage, the landowner could be at risk for paying for the employee's injuries and then finding out that his liability policy excludes coverage for such payments. The issue is guided by individual state law since workers compensation is involved and in this case, the Indiana Supreme Court sided with the landowner; the insured landowner was not affected by the workers compensation exclusion on his liability policy and he had the liability coverage promised by his policy.

As a side note, the court said that the insurer could have included language that excluded from coverage insureds who fail to exact a workers compensation certificate from a contractor as required by state law. However, since the insurer did not do so, this failure meant the claim was covered by the liability policy. This is another example of policy language failing to equate with the intentions of the insurer.

Natural Gas Constitutes a Pollutant?

The Barretts, as assignees of Atlanta Gas Light Company (AGL), appealed from a trial court's order dismissing a claim against the excess liability insurer, National Union Fire Insurance Company of Pittsburgh . The Barretts argued that the trial court erred in holding: that natural gas constitutes a pollutant as that term is defined in the insurance policy; and that Mr. Barrett's injuries arose out of the release or dispersal of natural gas as opposed to the negligence of AGL's employees. The Court of Appeals of Georgia reviewed the case in Barrett v. National Union Fire Insurance Company of Pittsburgh, 2010 WL 1855764 (Ga.App.).

Mr. Barrett was an employee of Coosa Valley Contractors, a company that installs natural gas pipelines. The company had entered into a contract with AGL to install or to assist with the installation of main gas lines, service gas lines, and gas meters. Barrett was assisting two employees of AGL with the installation of three taps on a main gas line when a completion plug fell into a valve. The AGL employees tried to extract the plug but failed and then Barrett tried. Barrett went into the excavation ditch where the gas line was located and after about two hours extracted the plug. During this time, natural gas accumulated under the rain poncho that Barrett was wearing, creating an oxygen-deficient atmosphere. As a result of his exposure, Barrett suffered a permanent and disabling brain injury.

The Barretts sued AGL, alleging that his injuries resulted from the negligent and reckless conduct of AGL's employees. Specifically, the Barretts alleged that Barrett was working under the supervision of both of the employees and that while each employee had received safety training for work with natural gas lines, neither gave Barrett any training. Moreover, Barrett said that he was told that working with natural gas would not hurt him. The primary insurer of AGL paid its policy limits but the excess carrier, National Union, denied coverage. National Union said that the claim was excluded from coverage under its policy by the pollution exclusion. The Barretts then filed a lawsuit against the excess insurer and the dispute ended up in the appeals court.

National Union argued that Barrett's injury arose out of his exposure to natural gas and that such gas was a pollutant as that term is defined in the excess policy; that is, natural gas is an irritant or contaminant. The trial court agreed with National Union but the appeals court said that there is nothing in the current record showing that natural gas is generally defined or viewed as an irritant or contaminant. Indeed, the court said, the allegations of the complaint indicate that exposure to natural gas is not necessarily dangerous and does not automatically result in injury so long as the supply of oxygen is not impeded. And, in the absence of any such evidence, the appeals court said there was no basis for concluding that natural gas is a pollutant as defined in the policy. (Moreover, in a side note, the court stated that CERCLA specifically excludes natural gas from the definitions of a pollutant or contaminant; and, the state of Georgia excludes natural gas from its definition of hazardous substance.)

The court then declared that, even if natural gas is a pollutant within the meaning of the policy definition, the current record raises a question as to whether Barrett's injuries “arose out of” the discharge, dispersal, release, or escape of natural gas. The court said that when the phrase “arising out of” is found in an exclusionary clause of an insurance policy, state courts have interpreted the phrase narrowly, applying a “but for” test traditionally used to determine cause-in-fact for tort claims. So the question for the court in this case was: do the allegations of the complaint show that Barrett's injuries would not have arisen but for the release of the natural gas? The court found no “but for” causal link. The record before the court did not show that the mere presence of the natural gas, standing alone, caused the injury to Barrett; the record indicates that one could work in the presence of any gas that was released from the gas line with out sustaining an injury. Therefore, the court could not say that the injuries suffered by Barrett arose out of the release of the gas.

The appeals court found that the trial court erred in holding that the claims asserted in the complaint by Barrett were excluded from coverage under the National Union policy. The trial court ruling was reversed.

Editor's Note: This case offers two items of note. The court said that natural gas is not considered a pollutant, and the phrase “arising out of” is narrowly interpreted using the “but for” test. These points are based on Georgia law (although the court did cite CERCLA information) and so, are not universally accepted law. But, whenever any court offers an interpretation of “pollutant” and the phrase “arising out of”, this adds to the clarification of the meaning of these words, words that are the cause of many coverage disputes between the insured and the insurer.

Additional Insured Coverage and the “Arising Out Of” Language

The Court of Appeals of New York has added its opinion on the issue of the meaning of the phrase “arising out of”. This case is Regal Construction Corporation v. National Union Fire Insurance Company of Pittsburgh, 2010 WL 2195252 (N.Y.). (Note that this decision is subject to revision before publication in the New York Reports.)

New York engaged URS Corporation (URS) as the construction manager for a renovation project at Rikers Island . URS hired Regal Construction to serve as a prime contractor for general construction at the project. Regal was required by contract to obtain a general liability policy and name URS as an additional insured. This was done and URS was covered as an additional insured “only with respect to liability arising out of Regal's ongoing operations performed for URS”.

Regal's project manager, LeClair, was walking through the facility with Regal's superintendent and an employee of a subcontractor. LeClair stepped on a joist, slipped and fell, causing a back injury. LeClair said that an unnamed person from URS told him that URS employees had painted the joist and LeClair claimed this was the cause of his slip and fall. LeClair sued New York and URS. URS forwarded a copy of the complaint to Regal and its insurer, INSCORP, demanding defense and indemnification based on the additional insured clause of the general liability policy. Regal and INSCORP commenced a declaratory judgment action against URS and its insurer, National Union, seeking a declaration that URS was not entitled to coverage. The trial court ruled in favor of URS and this appeal followed.

The appeals court noted that it has interpreted the phrase “arising out of” in an additional insured clause to mean “originating from, incident to, or having connection with”; it requires only that there be some causal relationship between the injury and the risk for which coverage is provided. In this instance, LeClair was walking through the work site when he slipped, and although Regal and INSCORP contend that LeClair's injury did not arise from Regal's demolition and renovation operations performed for URS, the focus of the inquiry for this court was the general nature of the operation in the course of which the injury was sustained. Accordingly, the court found that the injury did arise out of Regal's operations and fell within the scope of the additional insured clause.

The court saw a connection between the accident and Regal's work since the injury was sustained by Regal's own employee while he supervised and gave instructions to a subcontractor regarding work to be performed. URS's potential liability for LeClair's injury arose out of Regal's operations and so, URS is entitled to a defense and indemnification according to the terms of the liability policy. The order of the trial court was affirmed.

Editor's Note: Many additional insured endorsements supplied by ISO declare that the additional insured is an insured only with respect to liability arising out of the named insured's ongoing operations. The phrase “arising out of” has become the subject of varying judicial interpretations. This court emphasizes that the phrase means there has to be some causal connection between the injury and the operations of the insured. Most courts say that the phrase means “originating from, growing out of, or flowing from”, and most courts use the “but for” test as noted in the previous case from Georgia. The “arising out of” language does not require proximate causation, but if the injury would not have occurred but for the injured person being on the premises of the named insured or but for the injured person coming in contact with the named insured's operations, the named insured's general liability policy will be providing defense and indemnity.

Information From the States

The Insurance Services Office (ISO) has made the following information from various states available.

Effective July 1, 2010, Virginia repealed a section of its code that held that no insurance policy shall contain any provision that deemed the policy to be invalid due to the absence of the signature or countersignature of an agent or company representative.

Rhode Island has revised a law to require that if a policy is cancelled using a short-rate table, the insurer shall provide a short-rate table within the cancellation provisions of the insurance policy so that an insured can make an informed decision when cancelling a policy midterm.

New Hampshire revises the time at which a policy becomes effective and expires from noon to 12:01 AM (midnight, Standard Time).

Effective May 21, 2010, Colorado law states that, in interpreting a liability insurance policy issued to a construction professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.

Another section in the Colorado law states the following: a provision in a liability insurance policy issued to a construction professional excluding or limiting coverage for one or more claims arising from bodily injury, property damage, advertising injury or personal injury that occurs before the policy's inception date and that continues, worsens, or progresses when the policy is in effect is void and unenforceable if the exclusion or limitation applies to an injury or damage that was unknown to the insured at the policy's inception date. However, this section of the law only applies to policies that cover occurrences of damage or injury during the policy period and that insure a construction professional for liability arising from construction-related work.