The concept of resident relative status has been tested in litigation in varying circumstances and fact patterns. The article of the month reviews the outcomes of legal actions in an attempt to give guidance in understanding the concept of resident relative status and its effect on coverage. Also presented are factors determining the status of household members, the issues of separation and divorce and the status of children in such situations, and the status of guests or temporary residents.

For more information on this subject, see Resident Relatives.

Furnishing of a Temporary Worker

The commercial auto insurer brought an action against its insured seeking a declaration that it was not obligated to indemnify the insured for a worker's injuries. This case is Canal Insurance Company v. National House Movers, 777 S.E.2d 418 (2015).

National House Movers (NHM) is a small house-moving company. It hires workers on a project-by-project basis, depending on the needs of a particular job. In 2012, NHM was called upon the move a house and Johnson, who worked for NHM off and on over the years, asked NHM if help was needed for the move. NHM responded that one more worker probably would not hurt so Johnson asked Jones to assist. While sitting on the roof of the house to prevent the house from hitting any wires along the route of the move, Jones came in contact with an overhead power line and was severely burned.

Because NHM did not qualify for workers compensation insurance, Jones filed a lawsuit against NHM. NHM was insured by Canal insurance under a commercial auto policy. Canal filed a declaratory judgment action contending that the policy excluded coverage for the injuries suffered by Jones. The trial court ruled in favor of the insured and Canal appealed.

The Court of Appeals of South Carolina noted that the auto policy excluded coverage for bodily injury sustained by an employee arising out of and in the course of the employee's duties with NHM. The policy defined an employee and in the definition, noted that a temporary worker is not an employee. A temporary worker was defined as a person who is furnished to the employer to substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions. Canal argued that Joes was an employee and the insured countered that Jones was a temporary worker.

The court said that in order to ascertain whether Jones was a temporary worker, it must use a two-step analysis: first, it must determine whether the insured hired Jones to meet seasonal or short-term workload conditions; and second, if so, it must determine whether Johnson's idea to hire Jones satisfied the policy requirement that the temporary worker by furnished to the insured.

Both parties stipulated that Jones was one of the casual employees who worked only when short-term working conditions involving moving or raising a house required extra help. Thus, said the court, the first prong of the temporary worker definition is fulfilled. As for whether Jones was furnished, the court noted that the policy did not define the phrase “furnished to you”, and so, the court had to resort to the usual and customary meaning of “furnish” to aid in determining the phrase's meaning. The court found that most courts support the conclusion that a third party must be involved when one is furnished to another, and so in this instance, the phrase “furnished to you” unambiguously requires third party involvement.

The court furthermore found that the phrase “furnished to you” as used in the policy failed to specify who the third party must be; the language is capable of different meanings. A reasonable interpretation is that the temporary worker could be furnished to NHM by any person or company, including another employee of the employer; accordingly, the phrase is ambiguous. Based on the ambiguity, the policy is interpreted in favor of the insured and NHM is thus entitled to indemnity coverage by Canal Insurance.

The ruling of the trial court was affirmed.

Editor's Note: The Court of Appeals of South Carolina decides that in this instance, the worker was a temporary worker within the meaning of the policy and so, the insured was entitled to indemnity coverage. The court also made note of the fact that the vast majority of jurisdictions concluded that the phrase “furnished to you” necessarily means a third party is involved in furnishing the temporary worker to the employer, and third party involvement did not have to be restricted to an employment or staffing agency.

Primary Versus Excess Coverage

North Pacific Insurance Company sued Travelers Casualty Insurance Company seeking a declaratory judgment that Travelers must reimburse North Pacific for the cost of defending and indemnifying a common insured. This case is North Pacific Insurance Company v. Travelers Casualty Insurance Company of America, 2016 WL 69819.

Talamantes owned a commercial building and leased the building to 3 Sheets. 3 Sheets operated a sports bar in the building. Talamantes was insured by Travelers and 3 Sheets was insured by North Pacific. Talamantes was listed as an additional insured on the North Pacific policy.

Hooper was a customer at the bar in August 2011. While inside the bar, he fell against a window and crashed through to the sidewalk. An employee of the bar was standing outside at this time and went to assist Hooper. As she was doing so, a large piece of the window glass dropped from above, slicing through her left arm down to the bone. The employee sued Talamantes, alleging that the window was not made of safety glass and had not been treated in any way to prevent it from shattering. Talamantes tendered the claim to Travelers and then Travelers tendered the claim to North Pacific, invoking additional insured coverage. North Pacific settled the claim for $200,000 and then sought reimbursement from Travelers.

North Pacific argued that Travelers must completely reimburse North Pacific because the North Pacific policy does not provide coverage for Talamantes. North Pacific also argued that it was entitled to reimbursement for half of the expenses because of the other insurance clauses in the two policies. Travelers denied any duty to contribute. And North Pacific filed this lawsuit.

The United States District Court for the Western District of Washington said that the first issue before it was whether the North Pacific policy provides coverage to Talamantes with respect to the underlying lawsuit. To resolve the issue, the court turned to the language in the North Pacific policy. The policy names Talamantes as an additional insured for liability arising out of the ownership, maintenance, or use of that part of the premises leased to 3 Sheets. The key here, said the court, is the meaning of “arising out of.”

Under Washington law, the court found that “arising out of” has a broad meaning in the insurance context. The phrase is unambiguous and encompasses more than “caused by” or “resulted from”. It requires only a causal contribution and means less than “proximately caused by”. In this case then, the court decided that Talamantes's liability did in fact arise out of the ownership, maintenance, or use of the premises leased to 3 Sheets.

The court said that the liability-causing accident originated from inside the leased premises and so, a causal connection exists between the liability and the bar, and this causal connection is sufficient to establish that Talamantes's liability arose out of the use of the leased premises. The North Pacific policy did provide additional insured coverage to Talamantes.

The court then considered whether Travelers must reimburse North Pacific under the other insurance clauses. North Pacific claimed both policies provided excess coverage and thus, Travelers must partially reimburse North Pacific. Travelers countered that the North Pacific policy provides primary coverage and the Travelers policy provides excess coverage, so Travelers need not reimburse North Pacific. The court noted that the Travelers policy is excess over any other insurance that is available to the insured when the insured is added as an additional insured under any other policy. The North Pacific policy is excess over any other insurance that insures for direct physical loss or damage. The court decided that the North Pacific policy was primary.

The court said that the North Pacific policy differentiates between damages and damage and this distinction is key. The North Pacific other insurance clause pertains to direct physical loss or damage, rather than damages and this means the clause applies to property coverage. This case revolved around a liability issue and not a property issue. Therefore, the North Pacific other insurance clause is not applicable.

Because the North Pacific policy is primary and the Travelers policy is excess, the court ruled that Travelers does not need to reimburse North Pacific for the defense or settlement of the underlying lawsuit until the North Pacific policy is exhausted. Summary judgment was granted to Travelers.

Editor's Note: The U.S. District Court, W.D. Washington, analyzes the “arising out of” language and the “other insurance” clauses in the policies to decide the primary versus excess dispute.

Reservation of Rights Issues

The insurer brought an action against the named insured's adult child, driver, injured passenger, and his parents for a declaratory judgment that a controlled substances exclusion relieved the insurer of the duty to defend and indemnify the child who allegedly permitted and encouraged the use of controlled substances at a party. This case is Erie Insurance Exchange v. Lobenthal, 114 A.3d 832 (2015).

The Boyds filed an underlying lawsuit against Lobenthal pursuant to injuries sustained by Kory Boyd in a motor vehicle accident. The complaint alleged that Lobenthal engaged in negligent, careless, reckless, outrageous, willful and wanton conduct and concerted tortious conduct in that she permitted the possession and consumption of controlled substances at a property owned by Lobenthal's parents. The parents' homeowner insurer filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Lobenthal. The trial court granted summary judgment in favor of the insurer and this appeal followed.

The Superior Court of Pennsylvania noted the following issues for its review: whether Erie ever reserved its right to deny a defense and indemnification to Lobenthal when its reservation of rights letters were expressly limited to claims against the parents of Lobenthal; whether Erie satisfied its obligation to provide timely notice to Lobenthal when it addressed its reservation of rights letters to her parents and sent a copy to Lobenthal's attorney; whether Erie satisfied its obligation to provide timely notice to Lobenthal when it knew from the four corners of the complaint that it may apply the controlled substances exclusion, but did not provide her with notice to that effect until after the insurance defense counsel had gotten the covered claims dismissed; whether Erie played fast and loose by withholding its reservation of rights under the controlled substances exclusion until it had first obtained an order dismissing all claims that fell within the coverage of the policy resulting in prejudice to Lobenthal; and whether Lobenthal established a sufficient basis for a grant of summary judgment against Erie.

The insurer had sent two reservation of rights letters, one in April 2011 and the other in February 2012. Both letters were addressed only to the named insureds, the parents of Lobenthal; neither letter mentioned Lobenthal, who by the way, had attained majority status in 2010. These letters reserved Erie's right to disclaim coverage and liability for any judgment that may be rendered against the parents. And, only the second letter referenced the controlled substances exclusion in the policy.

The action against the parents was voluntarily discontinued in 2011, but no reservation of rights letter was ever sent to the daughter. The court said that she was an adult and was clearly entitled to notice.

Erie argued that notice was sent to the attorney and so, this can be imputed to the daughter. And, the insurer said, as a resident of her parents' household, it is unlikely that the daughter was not made aware of the reservation of rights letters. However, the court declared that it would not impute notice to the daughter based on the fact that the letter was sent to counsel, where the letter was addressed to the parents, and where the letter made no reference whatsoever to the daughter. By the same token, the court refused to attribute notice to the daughter based on the fact that she was living with her parents at the time. She was an adult at the time the lawsuit was filed and there is no evidence that she actually read the letter.

The court then addressed the timely notice issue and found that the 2012 reservation of rights letter was untimely. The underlying complaint was filed in June 2011 and Erie was on notice that the complaint allegations fell under the controlled substances exclusion. Yet, Erie waited until February 2012 to send a reservation of rights letter. The insurer waited until over three months had passed from disposition of its preliminary objections and the only remaining claim related to the daughter's alleged furnishing of controlled substances, which was clearly excluded from coverage. Had the daughter been informed of the insurer's intention to deny coverage when the lawsuit was filed, she could have engaged separate counsel and managed her own defense. Therefore, the court decided that when the insurer fails to clearly communicate a reservation of rights to an insured, prejudice may be fairly presumed.

For these reasons, the court determined that the daughter was entitled to notice of Erie's reservation of rights to disclaim liability. Notice to the parents, and to the defense counsel was ineffective as to the daughter; moreover, the reservation of rights letter, sent about seven months after the complaint was filed, was untimely. The ruling of the trial court was reversed and remanded.

Editor's Note: The Superior Court of Pennsylvania rules that the reservation of rights letter should have been sent to the actual insured involved in the claim. The letter was sent to the insured's parents and even though she was living with the parents, she was an adult. Notice to the parents would not be attributed to the daughter.