When an injured employee files a lawsuit against some third party, such as a project owner or general contractor, the third party will then often sue the employer for being at least partially at fault. These kinds of lawsuits are commonly referred to as third party actions or third party over actions. The article of the month discusses the nature of third party over actions, explains the obstacles under both contractual liability and additional insured coverage, addresses the defenses of employers in not providing coverage, and examines some case law where coverage has been granted despite the obstacles that commonly apply.

See Third Party Over Actions.

Total Pollution Exclusion Examined by District Court

The United States District Court for the Western District of New York was presented with an insurance coverage dispute centering on the applicability of the total pollution exclusion. This case is Cincinnati Insurance Company v. Roy's Plumbing, 2016 WL 3212458.

Roy's Plumbing, the insured, is in the business of plumbing, heating, and cooling in Niagara Falls. The insured was sued in an underlying litigation wherein underlying plaintiffs alleged that the insured negligently performed inspections and construction work at homes near Love Canal. The complaint alleged that the insured recklessly, negligently, and/or carelessly disturbed, exposed, and discharged a substantial amount of contaminated sediment, resulting in the discharge of myriad hazardous chemicals onto and into the property and homes of the underlying plaintiffs.

Roy's Plumbing was insured by Cincinnati Insurance and forwarded the lawsuit to Cincinnati. The insurer sent a brief email disclaiming coverage and invoking the total pollution exclusion. Cincinnati then filed this action seeking a determination that it had no duty to defend or indemnify Roy's Plumbing in the underlying lawsuit.

The United States District Court noted that the total pollution exclusion precluded coverage for bodily injury or property damage that would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, release, or escape of pollutants at any time. The insurer said that the total pollution exclusion is clear and unambiguous; the insured countered that the exclusion is ambiguous and should be construed against the insurer. The court then examined the more specific arguments put forth by the insured and the insurer.

Roy's Plumbing first argued that the exclusion is ambiguous because it is overly broad. The insured said that the insurance policy was intended to provide coverage to the insured during the course of its regular business and that a broad construction of the exclusion would effectively negate coverage. Moreover, the insured continued, the insurer was aware that the insured's business included handling of sewage and so, the policy should be construed to cover injuries claimed in the underlying lawsuit. The court did not agree.

The court examined several precedents set by New York courts and found that the state courts generally limited the pollution exclusion to those cases where the damages alleged are truly environmental in nature, or where the underlying complaint alleges damages resulting from what can accurately be described as the pollution of the environment. The court said that the allegations in the underlying complaint fall squarely within the context of environmental pollution. The numerous specific allegations, including the description of the injuries, make clear that the substances that were dispersed or discharged are traditional environmental pollutants. Accordingly, the court ruled that the total pollution exclusion in the policy was unambiguous, not overly broad, and that it applied to the claims at issue in the underlying litigation.

The insured also argued that at least some of the injuries alleged in the underlying lawsuit are the result of sewage, not of hazardous waste, and that injuries caused by sewage are not specifically excluded under the total pollution exclusion wording. The insured said that the underlying complaint alleged that the insured's negligent work on the sewer resulted in the discharge of contaminated sediment and myriad hazardous chemicals, and that these allegations assert, at the core, that exposure to the same sewage that the insured deals with every day caused the injuries. Thus, Roy's Plumbing contended that whether the injuries were ultimately related to exposure to pollutants as opposed to exposure to simple sewage was not established. The court found this argument to fail.

The court said that the allegations in the underlying complaint alleged the cause of the injuries and property damage to be exposure to hazardous substances, pollutants, and contaminants. The fact that sewage is not specifically named in the total pollution exclusion was of no moment to the court. A pollutant is defined as any solid, liquid, gaseous, or thermal irritant or contaminant and the court ruled that under this broad definition and under New York law, it is the substance's ability to cause injuries resulting in contamination and irritation, rather that the specific identification of the substance in the exclusion, that is significant. The court ruled that the total pollution exclusion would apply because it is the polluting character of the contaminated sediment and myriad hazardous chemicals that gave rise to the underlying litigation.

The court granted the insurer's motion for summary judgment and held that Cincinnati had no duty to defend or indemnify the insured in the underlying litigation.

Editor's Note: The U.S. District Court examined New York legal precedents on the application of the total pollution exclusion in this case, and found the exclusion clearly applied based on the facts of the claim and the allegations in the underlying complaint against the insured.

Independent Contractor Exclusion

This case concerns an insurance coverage dispute regarding the obligation of the insurer to defend and indemnify certain parties to an underlying personal injury action pending in New York State Supreme Court. (In the underlying action, Richardson has sued Franchise Contractors, seeking damages for an injury he suffered in the course of his work on a construction project.) This case is Century Surety Company v. Franschise Contractors, 2016 WL 1030134.

WFG hired Franchise to act as general contractor in the construction of a cancer treatment facility. Franchise subcontracted with Pearl Drywall Finishing to perform interior sheetrock installation and taping work in the construction. Century Surety was the insurer for Franchise and had issued a liability policy with an endorsement modifying the coverage. The endorsement was entitled Exclusion—Bodily Injury to Independent Contractors (the Independent Contractor Exclusion). This exclusion stated that the insurance does not apply to bodily injury to any independent contractor or the employee of any independent contractor while such independent contractor or employee is working on behalf of any insured.

On November 15, 2011, Richardson was employed by the subcontractor Pearl as a drywall taper on the construction project. He fell from a scaffold and sustained injuries and then sued Franchise, alleging negligent supervision of the project. Franchise sought coverage from Century but the insurer disclaimed coverage, asserting that coverage was excluded because Pearl was an independent contractor and so, the bodily injury suffered by Richardson, an employee of Pearl, falls squarely within the independent contractor exclusion. Century then filed this lawsuit seeking a declaration that it was not obligated to defend or indemnify Franchise in the underlying action.

The United States District Court for the Southern District of New York first discussed the claim by Franchise that the independent contractor exclusion was ambiguous. The court examined the exclusion and concluded that the provision is unambiguous, saying that if an independent contractor or its employees were injured in the course of working for Franchise, that injury would not be covered by the Century policy. The court noted that Franchise did not propose, and the court could not conceive of, another reasonable interpretation of the exclusion. Franchise claimed that the exclusion is ambiguous because the term “independent contractor” was not defined in the policy. The court replied that the mere fact that a contractual term is undefined does not render it ambiguous per se. Moreover, a body of state law relied on the ordinary meaning of the term and all of the parties to this lawsuit employed definitions of the term that are substantially the same. Thus, the court concluded that because there is no objectively reasonable alternative meaning of the term “independent contractor”, the exclusion is not ambiguous.

The court also rejected Franchises contention that the exclusion is ambiguous because it fails to define the word “subcontractor” or distinguish between subcontractors and independent contractors. The court said that this contention led to the operative question, that is, was Pearl, the employer of Richardson, an independent contractor? In this sense, the court held that the presence or absence of the word “subcontractor” in the policy, and any ambiguity produced as a result, is beside the point. Franchise's insistence that subcontractor and independent contractor are distinct categories is best viewed as an argument that Pearl was not in fact an independent contractor. The court turned to that issue next.

Century maintained that the application of the independent contractor exclusion is straightforward. Pearl was Franchise's independent contractor and Richardson was Pearl's employee. Franchise countered that Pearl was a subcontractor and not an independent contractor because the parties referred to Pearl as a subcontractor and because Franchise controlled Pearl's work. Franchise said that Richardson was the employee of a subcontractor and that is distinct from the employee of an independent contractor and therefore, outside the scope of the independent contractor exclusion. The court disagreed with this idea.

The court said that to the extent Franchise suggests that subcontractor and independent contractor are mutually exclusive concepts, this suggestion is incorrect. The court said it could find no reason why a subcontractor cannot also be an independent contractor. The fact that Franchise understood Pearl to be a subcontractor in no way proves it was not an independent contractor since the term independent contractor clearly can include a subcontractor. The court noted that New York courts and New York construction law reflect that subcontractors are generally independent contractors.

As to the allegation that Franchise controlled Pearl's work to such an extent that Pearl was not an independent contractor, the court did not find any authority distinguishing subcontractor from independent contractor on this basis. Also, the discovery obtained in the underlying court action belies the contention that Franchise directed and controlled the means and methods of work performed by Pearl. It was undisputed that no one but Pearl gave Richardson specific instructions about where or how to work on any day, or gave direction as to how to set up the scaffold on the day of the accident. These facts clearly indicated to the court that Pearl was an independent contractor with control over the methods and means its employees used to perform their work. Franchise never intervened into how Pearl employees actually completed the work. So, based on the record, Pearl performed the work according to its own methods without being subject to Franchise's control and the court found that no genuine issue of fact had been raised as to Pearl's status as an independent contractor.

The court ruled that Century's motion for summary judgment was granted.

Editor's Note: The U.S. District Court examines the independent contractor exclusion and finds that it applies in this instance because an analysis of the facts and the law determines that the injured employee, was indeed, an employee of an independent contractor.

Negligent Entrustment and UM Coverage

This is an appeal from a district court's judgment dismissing a complaint filed against the insurer. This case is Checkley v. Allied Property and Casualty Insurance Company, 2016 WL 66058.

Branner invited sixteen-year-old Checkley to go four-wheeling. Branner was driving but then asked Checkley to drive so that Branner could text his girlfriend. Checkley agreed and while driving down a dirt and gravel road swerved to avoid an animal and struck tree. Checkley fractured his hip socket.

Checkley and his mother field a claim with GEICO, the insurer of the vehicle. GEICO denied coverage. The Checkleys then filed a claim with their insurer, Allied, under the uninsured/underinsured motorist (UM/UIM) coverage. Allied denied the claim, asserting that the policy excluded from the definition of an uninsured motor vehicle any motor vehicle operated by the insured or a relative. Thus, the insurer stated, the policy excluded UM/UIM coverage when the insured or a relative (Checkley) was driving the vehicle at the time of the accident.

The Checkleys sued but the district court dismissed all of the claims against the insurer. This appeal followed.

The United States Court of Appeals, Tenth Circuit, noted that the Checkleys claimed a breach of contract on the part of Allied. The Checkleys argued that applying the exclusion would violate Colorado law requiring coverage since the law mandates that UM/UIM coverage be offered in every insurance contract. The Checkleys said the statute requires the contract to include coverage because they are legally entitled to collect against Branner under the theory of negligent entrustment. The insurer countered that negligent entrustment was recognized only in drunk driving cases, so the terms of the insurance policy do not conflict with Colorado law. The court agreed with the insurer.

The court said that a case-by-case approach to negligent entrustment is the standard requiring courts to analyze and consider whether policy factors preclude the application of the doctrine. The court also noted Restatement (Second) of Torts §390 explained that one who accepts and uses a chattel knowing that he is incompetent to use it safely is usually in such contributory fault as to bar recovery. Thus, the Restatement normally bars recovery under a negligent entrustment theory when the person to whom the chattel is supplied realizes his incompetence. In this instance, Checkley knew he was not licensed to drive the vehicle and so he cannot recover because he knew of his own inexperience.

As to the UM/UIM statute, the court said that the purpose of the statute was to compensate an innocent insured for loss caused by financially irresponsible motorists, but at the same time, the law does not require indemnification under all circumstances. The court said that the law is designed to protect an insured from losses caused by third parties and not losses caused by the insured himself. In this instance, Checkley was not an innocent driver harmed by a third party; rather, he caused the accident himself.

Based on the fact that Checkley knew he was inexperienced and unlicensed and the fact that he, and not some third party, caused the accident, the Circuit Court affirmed the ruling of the district court.

Editor's Note: The U.S. Tenth Circuit Court of Appeals rules that, despite Colorado law requiring UM/UIM coverage be offered in every insurance contract, there are exceptions. The coverage can be excluded in cases of negligent entrustment and a denial of coverage in such cases will not be seen as a breach of contract on the part of the insurer.