Interpretation of Contractor

The insurer commenced this action in diversity against the insured general contractor, seeking a declaratory judgment that it did not have a duty to defend or indemnify the insured in an underlying action brought by an employee of a painter. This case is United States Liability Ins. Co. v. Benchmark Const. Services, Inc., 31 F. Supp. 3d 315 (D. Mass. 2014).

This case arose from injuries suffered by a painter during the renovation of a home. The painter filed a lawsuit against the general contractor, Benchmark Construction. The contractor was insured under a general liability policy that originally contained an exclusion for bodily injury to an employee of the insured. This exclusion was later deleted in its entirety by an endorsement that excluded coverage for bodily injury to any employee, volunteer workers, temporary worker, or casual laborer arising out of or in the course of employment by any insured. The exclusion also applied to bodily injury to any contractor, subcontractor, or any employee of any contractor or subcontractor. The term “contractor” was not defined.

After the painter fell and filed a lawsuit against Benchmark, the insured tendered the lawsuit to its insurer, United States Liability Insurance Company. The insurer declined coverage based on the endorsement that excluded coverage for bodily injury to employees of contractors. The insurer filed a declaratory judgment action.

The United States District Court, Massachusetts, noted that a threshold question was whether the endorsement was ambiguous. The crux of the debate was whether the term “contractor” is susceptible to multiple reasonable interpretations and is thus, ambiguous. The insurer argued that a contractor unambiguously refers to anyone with a contract. The insured countered that such a definition is irrational because it renders other terms of the endorsement superfluous. The insured said a contractor can include a construction worker and a nonemployee independent contractor.

The court said that the broad definition of a contractor as anyone with a contract is rational, but it is irrational to read a contractor as a construction worker merely because the term is frequently used to refer to those who work in the building trades. The court went on to say that the injured worker was definitely an employee of an independent contractor, and the use of the word “any” in the endorsement is plain and unambiguous, meaning that the exclusion refers to the injured employee. Moreover, if the insured had wanted the endorsement to sweep less broadly, it could have had it amended to apply only to its contractors or subcontractors.

Because the word “contractor” was unambiguous and since the injured employee was an employee of the contractor within the wording of the exclusionary endorsement, the motion of the insurer for summary judgment was granted by the court.

Editor's Note: The U.S. District Court in its opinion in favor of the insurer made the point that mere redundancies in an insurance contract are no reason to find that an ambiguity exists. Moreover, the clear and unambiguous language in the exclusionary endorsement meant that the term “contractor” could not be limited to those in contractual privity, that is, the insured and its contractors and subcontractors. The endorsement clearly included employees of the contractor and so, the exclusion applied.

The Meaning of “Value”

A greenhouse brought an action for declaratory judgment against a tree extractor and stump extractor. After a default judgment was issued against the tree extractor, the greenhouse moved for summary judgment, and the stump extractor moved to dismiss for lack of subject matter jurisdiction. This case is Young v. Hood's Gardens, Inc., No. 29S02-1405-PL-314, 2015 WL 292519 (Ind. Jan. 22, 2015).

In September 2009, Hood contacted Discount Tree Extraction to remove a large tree. Discount Tree hired Young to take down the tree and remove the trunk. While working, Young was severely injured and rendered a paraplegic. The present case arose as a declaratory judgment action brought by Hood seeking to establish that it had no secondary liability toward Young because the value of the work done by the contractor was less than $1,000; this stance was prompted by the state workers compensation law. The workers compensation law in Indiana stated that when a person engages a contractor for the performance of work exceeding $1,000 in value but fails to take certain steps to assure that the contractor complies with the WC law, that person is secondarily liable to the same extent as the contractor for workers compensation benefits payable to an employee of the contractor injured in an accident arising out of and in the course of the contracted-for work.

The trial court ruled in favor of the greenhouse, and this appeal followed.

The Supreme Court of Indiana noted that the question it faced was whether the value that triggers secondary liability under state law is limited to the dollar amount paid in cash or may include the value of other property transferred in connection with the performance of services. In this instance, the contractor was paid $600 in cash and also received the wood from the removed tree. (Note that it was undisputed that the greenhouse did not obtain the requisite certificate from the contractor and that the contractor had no workers compensation insurance.)

Young argued that the value of the contractor's work consists of the total amount of consideration exchanged by the parties. In other words, the value in this case was the $600 in cash plus the value of the wood received by the contractor. The greenhouse counters that the court should focus on the contract price only, adding that any additional benefits the contractor might have realized from salvaging the wood is extra-contractual in nature and not considered by the parties at the time the contract was formed, and that the value of services is determined by the benefit conferred on the business only.

Applying the principles of statutory interpretation, the court ruled that the value includes both direct monetary payment as well as any ancillary consideration in goods and services received by the employer for the work. The court found that the legislative intent of the WC statute was to enhance the availability of compensation benefits for workers injured during their employment with employers not providing such coverage. Therefore, to best serve the legislative objective, permitting the $1,000 trigger to be satisfied by both direct monetary payment as well as any ancillary consideration received by the employer for the work is the course to choose.

The court reversed the grant of summary judgment to the greenhouse and remanded for further proceedings.

Editor's Note: This case is presented not because of a coverage dispute between an insured and an insurer but because of an interpretive ruling on the meaning of “value,” which can affect opinions on how much an insurer would pay under various insurance policies. The Indiana Supreme Court held that value is commonly understood to encompass more than mere contract price. Value is intended to convey both direct monetary payment as well as any ancillary consideration received.

Discussion of Water Damage

The insured suffered massive water damage and its insurer denied coverage. The dispute centered mainly on the question of what caused the water damage. This case is Park Ridge Presbyterian Church v. American States Insurance Company, Case No. 11 C 5321, 2014 WL 4637433 (N.D. Ill. Sept. 17, 2014).

The insured, Park Ridge Church, had three buildings on its property. The buildings contained architectural features to deal with water, such as weep holes and storm drains. The insured had a property policy with American States containing an exclusion section that listed certain types of water damage that were excluded from coverage; an exception allowed coverage for loss caused by water that backs up or overflows from a sewer, drain, or sump. The policy also contained an anti-concurrent causation clause.

In 2010, there was a massive storm and a subsequent power outage at the church. The members of the church later found large amounts of water in the well walkways and stairs and realized that the basement was flooded. The church contacted its insurer about the damage, reporting that there had been a power outage causing the ejector pumps in the basement to fail. Because the pumps were not operating to evacuate water from the basement, the basement had filled with water. The insurer denied coverage, explaining that its investigation of the incident determined that the cause of loss was surface water and water under the ground infiltrating the building through door openings and walls; the insurer said pump failure was not the cause of loss.

The church filed a lawsuit seeking coverage and relying on its expert opinion regarding the cause of the water damage.

The United States District Court for the Northern District of Illinois noted first that the parties disputed whether there was a flood within the meaning of the policy. The court deferred to the plain meaning of the term “flood” and said a flood is a rising and overflowing of a body of water that covers land not usually under water, and floodwater is water that escapes from a watercourse in large volumes and flows over adjoining property in no regular channel. In this instance, the water did not escape from a body of water and there was no nearby stream or river that could have caused the flood, so the court ruled that the insurer could not pursue its flood exclusion argument.

The court then took up the issue of the anti-concurrent causation clause. The church argued that a rider attached to the policy deleted the exclusion for water backup and thus, deleted the anti-concurrent causation clause. The court found that the rider clearly stated that the policy was amended only as shown and all other text and provisions remained as written. Therefore, the rider did not eliminate the pertinent clause.

The next issue concerned the surface water exclusion. The insured and the insurer disputed whether water that accumulates in water wells and window wells is properly characterized as surface water under the terms of the policy. If this is so, the coverage is excluded.

The court noted that surface water means water derived from natural precipitation that flows over or accumulates on the ground without forming a definite body of water or following a defined watercourse. The insured argued that when the water entered the wells, it lost its character as surface water because it formed a definite body of water after following a defined watercourse. The insurer responded that the wells were not created with the intention of diverting water and that the primary purpose was to provide light to the building. The court said that it found the water was surface water and the wells did not constitute definite bodies of water or defined water courses. Thus, the church could not effectively sustain this argument.

The remaining issue for the court dealt with the source of the water damage. Was the damage caused only by the pump failure and subsequent drain back up or also by an excluded force such as ground or surface water? The cause of the water damage was a genuine dispute of material fact with each side's expert having different opinions on the cause. The court decided that there was inadequate information regarding the relative amounts of water that caused the damage and there was not enough evidence to identify the predominate cause. This issue was referred to a jury to decide should a trial be used by the parties to settle the lawsuit.

In summary, the motion by the insurer for summary judgment was denied; the application of the anti-concurrent causation clause and the fact that the water in the wells was surface water were established for trial. The insured's motion was denied, although the case will be tried before a jury to which the insurer will not be able to argue the flood exclusion. Finally, if the parties proceed to trial, the parties should focus on the relative amounts of harm caused by each water source.

Editor's Note: The U.S. District Court did not decide which party should prevail in this coverage dispute, but the case is presented to show an analysis of how this court views the meaning of flood and surface water and the application of the anti-concurrent causation clause in connection with an exclusion for damage by water back up.

Illusory Coverage and Stacking

The insured brought a putative class action against a classic auto insurer, alleging that the insurer provided illusory coverage in violation of the state unfair trade practices act. This case is Grudkowski v. Foremost Ins. Co., 556 Fed. App. 165 (3d Cir. 2014).

Grudkowski purchased insurance from Foremost for two classic vehicles. The vehicles were covered under separate policies, each of which provided $300,000 in uninsured motorists (UM) coverage and $300,000 in underinsured motorists (UIM) coverage. Although state law provided for stacking of UM and UIM coverage across multiple policies, the statute did allow the insured to reject stacking. Grudkowski did not sign the rejection form.

The insurance policies did contain provisions that limited UM and UIM coverage to accidents that actually involve covered vehicles, thereby making stacking effectively unavailable. The insured filed the lawsuit over this point, alleging that she and the putative class were harmed by having paid for stacking insurance coverage that was not included in their policies. The district court ruled in favor of the insurer and this appeal followed.

The United States Court of Appeals, Third Circuit, noted that Grudkowski claimed a breach of contract. However, the court found that the complaint was not clear that the insurer had actually breached a duty imposed by the contract. Foremost sold antique auto policies that do not allow for inter-policy stacking, so it was not plausible that Foremost breached a contractual duty when it did not provide stacked coverages.

Grudkowski also argued that the policy restrictions on stacking violated the state motor vehicle law. The court noted that in previous cases, state courts held that where the antique car insurance policies extended UM and UIM coverage to only accidents involving the covered antique car, an insured may not complain that his reasonable expectations were frustrated by such clear policy limitations. In other words, limiting coverage in antique car insurance policies is consistent with public policy and the goals of the state motor vehicle financial responsibility law; it is a reasonable preclusion of coverage.

Because the limited antique insurance Foremost sold was permissible under state law and because the contract clearly limited coverage, the court concluded that Grudkowski failed to state a breach of contract claim upon which relief could be granted. The dismissal of this claim by the district court was warranted.

Grudkowski also alleged that she and the putative class justifiably relied on Foremost's representation that they would receive stacked UM and UIM coverages. The court said that where the policy language preventing stacking is clear and the insurer was lawfully charging for insurance in accordance with state law, the insured's remedy is to bring the matter to the attention of the legislature or the insurance commissioner. Moreover, Foremost's actions were consistent with the law and any misrepresentation that may have transpired through the conveyance of the form was corrected by the other provisions of the policy that clearly and unambiguously limited coverage; these provisions disclosed that stacking was unavailable.

The court also upheld the dismissal of Grudkowski's claims of unjust enrichment and bad faith. Because the relationship between Grudkowski and Foremost was governed by valid insurance contracts, unjust enrichment could not provide the insured a basis for relief. Because the insured's allegations concerned the sale of policies that allegedly provided illusory coverage, and not Foremost's actions in discharging its obligations under those policies, Grudkowski was not entitled to relief under bad faith statutes.

The order of the district court dismissing Grudkowski's claims was affirmed.

Editor's Note: The insured claimed that the insurance policy's language limiting UM and UIM coverage was in violation of state law that permitted stacking and thus, she was paying for illusory coverage. The U.S. Circuit Court held that state law did allow limiting such coverage and the insurer complied with the law in clear and unambiguous policy language.