For more information on the service, such as claims eligible for arbitration and jurisdiction of the arbitration committee, see NAMIC Property Casualty Conference Claim Arbitration Service.

The Extent of Coverage for Employees of a Contractor

The insurer commenced an 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 Insurance Company v. Benchmark Construction Services, 797 F.3d 116 (2015).

Homeowners hired Benchmark, a general contractor, to renovate their home. The homeowners had hired an architect to design the renovation plans and the architect in turn hired Sara Egan d/b/a Painted Design to apply decorative painting to one of the interior walls. Egan sent her employee, Bailey, to the task. While Bailey was applying the paint, she fell from a ladder that was positioned on top of scaffolding.

Bailey sued Benchmark alleging that she was injured in the fall, that Benchmark owed her a duty of care, and that Benchmark negligently erected and maintained the ladder and scaffolding. Benchmark had no contractual relationship with the architect, Egan, or Bailey. Benchmark sought coverage from its insurer, United States Liability but the insurer declined coverage. The insurer claimed that an endorsement to the general liability policy excluded Bailey's injuries from coverage. The insurer sought a declaratory judgment that it had no duty to defend or indemnify Benchmark. The district court entered judgment for the insurer and this appeal followed.

The United States Court of Appeals, First Circuit, noted that the endorsement the insurer claimed prevented coverage in this instance excluded claims for work-related bodily injury to contractors, subcontractors, and their workers and employees. The court also noted that the district court held that since Bailey was a decorative artist working for Egan, who had a contract with the architect, she was the employee of a contractor and the exclusion applied to her claims.

The Circuit Court heard the argument from Benchmark that the policy excludes the claims of a contractor's employee only if the employee is injured while performing services for which the insured has some responsibility. The insurer countered that the exclusion uses deliberately broad language to reflect that an insured might become liable to a worker on a job site with whom the insured has no contractual relationship. The court said that construing the provisions as Benchmark suggests limits the exclusion to bodily injury that befalls employees of contractors that Benchmark hires. Such a limitation, continued the court, is consistent with Massachusetts common law that limits a general contractor's particular duty to a subcontractor's employee according to whether the former retains the right to control the work in any of its aspects, including the right to initiate and maintain safety measures and programs.

In this instance, the court found that the facts showed that Benchmark did not hire Bailey's employer, nor was Bailey somehow performing work within Benchmark's general contract. Hence, even if Bailey was a contractor's employee, as the district court held she was, the exclusion does not apply to the claims because Benchmark could not become liable for her services.

The insurer stressed that although Bailey did not have a contractual relationship with Benchmark, the exclusion applies because she was employed by a contractor, she was injured on the job, and Benchmark's alleged negligence in maintaining the site may expose Benchmark to liability for her injuries. The court responded that the exclusion applies only if the insured may become liable for the injured party's services. Since, Benchmark could not have become liable for the decorative painting, the exclusion does not apply to Bailey's claims and United States Liability Insurance has a duty to defend and indemnify Benchmark in the underlying personal injury lawsuit. The court reiterated that Bailey neither worked directly for Benchmark, nor was Benchmark anywhere in her chain of employment. Dividing the world into those who work for the insured and the general public, Bailey is squarely in the latter camp. Hence, her claims are of the sort that Benchmark could reasonably expect to be covered under the policy.

The court ruled that the claims fall within the bounds of insurance coverage and so, the insurer has a duty to defend and indemnify Benchmark. The opinion of the district court was reversed.

Editor's Note: The U.S. Court of Appeals, First Circuit, rules that an exclusion for bodily injury to contractors and contractors' employees was limited to someone with a contract with the insured under the terms of the policy. It was reasonable for the insured to expect that the exclusion applies only to bodily injury that might befall employees of contractors that the insured hired or to which it had some contractual responsibility.

Coverage under a Designated Premises Endorsement

This matter came before the court on motions for summary judgment. This case is Western Heritage Insurance Company v. Cyril Hoover, 2016 WL 1242091.

Hoover applied for a commercial general liability policy with Western Heritage Insurance to cover his business premises; Hoover provides cab services to those with medical needs. The policy issued by Western Heritage contained a limitation to designated premises or project endorsement that was supposed to limit coverage under the policy to the premises listed in the declaration page; the policy also excluded products-completed operations coverage. Hoover was required to secure separate coverage for commercial auto risks since his general liability policy contained an auto exclusion.

Malkuch and Slater were driving in Oregon and were involved in an auto accident; Malkuch had borrowed a car from his father-in-law for the trip. Slater sustained serious injuries and he sued Hoover, claiming that Hoover was liable because the accident occurred while Malkuch and Slater were on their way to Arizona to pick up a tow truck for the benefit of Hoover. Slater claimed that Malkuch was working for Hoover at the time of the accident and so, the doctrine of vicarious liability applied.

Hoover sought coverage under his general liability policy but the insurer brought this action seeking a declaratory judgment that it owed no coverage for the offsite auto accident based on the designated premises endorsement and the auto exclusion.

The United States District Court for the Western District of Washington noted the argument of the insurer that the general liability coverage is limited only to bodily injury arising out of the designated premises in Washington and so, the losses from an auto accident that occurred 500 miles away in Oregon do not fall within the scope of coverage. Hoover countered that the policy cannot be restricted to a mere premises liability policy since the policy does not exclude losses claimed under either a vicarious liability theory or under an agency theory. The court agreed with Hoover.

The court said that language in a designated premises endorsement must be clear and unequivocal in order to convert a general liability policy to a premises liability policy. In this instance, the court reviewed the designated premises endorsement from Western Heritage and found it did not meet that clear and unequivocal language test. The court pointed out that the endorsement is incorporated by reference into the policy on the declarations but that the declarations page did not list the designated premises. The insured was thus not sufficiently put on notice. In addition, the court said that the decision to purchase the tow truck is sufficiently connected to the premises such that it could fall within the scope of the policy since the decision to purchase the tow truck was made on the premises. Based on this, the court denied the insurer's motion for summary judgment to the extent that it seeks an order declaring the injuries are excluded from coverage.

The insurer also argued that since the injuries arose out of an auto accident, the policy's auto exclusion bars coverage. Hoover countered that there are questions of fact pertaining to the cause of the accident and this precludes the court from determining whether the exclusion applied. The court agreed with Hoover and said that there was no way for the court to properly analyze the exclusion without a factual determination of whether Malkuch was an employee and whether he was acting within the scope of his employment at the time of the accident. Thus, summary judgment for any party as to the auto exclusion was not appropriate at this time.

The court denied the request for summary judgment by the insurer.

Editor's Note: The U.S. District Court rules that for a designated premises endorsement to be effective in limiting liability coverage to a certain premises, the language in the endorsement has to be clear and unequivocal so as to properly give notice to the insured of the limitation. In this instance, the court found the language did not meet this test.

Electronic Data Coverage

The insured fast food restaurant operators brought an action against the insurer seeking a declaration that the insurer ad a duty to defend and indemnify the insured in an underlying action arising from handling of electronic credit card data. This case is RVST Holdings v. Main Street America Assurance Company, 136 A.D.3d 1196 (2016).

The insureds operate fast food restaurants and store customers' credit card information on their computer network. The network was infiltrated by unknown individuals who unlawfully obtained the credit card information and then used that information to make numerous fraudulent charges. Nonparty Trustco Bank subsequently commenced an action against the insureds alleging that the insureds had negligently failed to exercise reasonable care in safeguarding the information of Trustco cardholders, which, in turn, caused Trustco to sustain damages related to its reimbursement of the fraudulent charges.

The insureds sought coverage from Main Street America but the insurer declined to defend or indemnify the insureds, asserting that the policy excluded coverage of third-party claims arising out of the loss of electronic data. The insureds filed a lawsuit and the trial court entered summary judgment in favor of the insureds. This appeal followed.

The Supreme Court, Appellate Division, Third Department, New York noted that the insurer's duty to defend its insured is exceedingly broad, but that an insurer need not provide a defense when it can demonstrate that the allegations of the underlying complaint solely and entirely are within policy exclusions. In this instance, the insurer argued that it had no duty to defend because the claims against the insureds arose out of the theft and misuse of electronic data stored on the insureds' computer network—a claim that is not covered by the liability section of the policy. The court said, therefore, that the question before it was whether the policy clearly and unmistakably excludes from coverage damages flowing from stolen electronic data.

The court found that the policy covered damages because of property damage and that property damage was defined as physical injury to tangible property. Moreover, the policy stated that for the purposes of the insurance, electronic data is not tangible property. The policy also contained an exclusion for damages arising out of the loss of electronic data. Based on this clear and unambiguous policy language, the court ruled that Trustco's claim for damages was not a claim for property damage and is excluded from coverage. Accordingly, the insurer had no duty to defend the insureds.

The ruling of the trial court was reversed.

Editor's Note: The Supreme Court, Appellate Division reviewed the policy language and found that, while the policy did apply to property damage claims, a claim for damages based on alleged negligent handling of electronic data was not covered because the definition of property damage was not met. Property damage was injury to tangible property and the policy clearly stated that electronic data was not property damage.