Northfield Insurance Company, which had issued a commercial general liability insurance policy to Mr. Herrera, asked the U.S. District Court for the Western District of Texas to declare that it had no duty to defend or indemnify Mr. Herrera.

The parties filed cross-motions for summary judgment.

In arguing for coverage, Mr. Herrera argued that paragraph 3(a) of the “contracted persons” exclusion applied only to so-called “downstream” employees, that is, to his subcontractors and their employees.

For its part, Northfield argued that paragraph 3(a) of the exclusion ran downstream and upstream, thus also excluding coverage for injuries to employees of businesses who hired Mr. Herrera, such as Austin Energy.

The district court agreed with Mr. Herrera, granted his motion, and denied Northfield's.

The district court read paragraph (3)(a) in the context of the preceding paragraphs and observed that the first two paragraphs excluded coverage for bodily injury to Mr. Herrera's employees and workers, and to Mr. Herrera's subcontractors performing duties related to his business. “Following the logical progression,” the district court reasoned, the next paragraph unambiguously excluded coverage for bodily injury to employees and workers of Mr. Herrera's subcontractors (paragraph (3)(a)) and their subcontractors (paragraph (3)(b)).

The district court also noted that Northfield's “expansive reading” of the exclusion would render its service “illusory,” reasoning that “service-providing businesses like [Mr.] Herrera['s]” purchase general liability insurance to cover bodily injuries to the employees of organizations that hire them.

Northfield appealed to the Fifth Circuit.

The Northfield Policy

The “contracted persons” exclusion to the Northfield policy provided:

This insurance does not apply to “bodily injury” to:

(1) Any person who is an “employee”, “leased worker”, “temporary worker”, “volunteer worker” of you or any insured arising out of and in the course of:

(a) Employment by you or any insured; or

(b) Performing duties related to the conduct of your or any insured's business;

(2) Any person who contracted with you or with any insured for services arising out of and in the course of performing duties related to the conduct of your or any insured's business;

(3) Any person who is employed by, is leased to or contracted with any organization that:

(a) Contracted with you or with any insured for services; or

(b) Contracted with others on your behalf for services; arising out of and in the course of employment by that organization or performing duties related to the conduct of that organization's business. . . . 

The Fifth Circuit reversed and remanded for entry of judgment in favor of Northfield.

In its decision, the circuit court focused on the phrase “contracted with [Herrera] for services” and, giving it its “plain, ordinary, and generally accepted meaning,” ruled that the phrase “contracted with” could be used to refer to “upstream and downstream relationships.” Therefore, it found, Northfield's proffered interpretation was reasonable.

Moreover, the Fifth Circuit continued, unlike paragraph (2), which limited its application to persons “performing duties related to [Mr. Herrera's] business,” paragraph (3)(a) used broader language, applying to employees of organizations when they were “performing duties related to the conduct of that organization's business” (emphasis added). In the circuit court's view, it would not be necessary to modify the language in paragraph (3)(a) if the exclusion only ran downstream because any work performed by Mr. Herrera's subcontractor was “necessarily related to his work.” Work performed by employees of those who hired Mr. Herrera might not be related to Mr. Herrera's own work, the Fifth Circuit pointed out.

Therefore, the Fifth Circuit found, the modification of paragraph (3)(a)'s language to demonstrate the parties' intent that it apply more broadly further supported the conclusion that paragraph (3)(a) reasonably could be read to apply to upstream contractors.

The Fifth Circuit was not persuaded by Mr. Herrera's contention that excluding his claim rendered the policy's coverage “illusory” because the elevator in question was a service elevator and, therefore, only used by Austin Energy employees, concluding that he still would be protected against claims brought by third parties, such as SEC's vendors and visitors to the site, and against claims relating to his other job sites.

The case is Northfield Ins. Co. v. Herrera, No. 17-51080 (5th Cir. Oct. 24, 2018). Attorneys involved include: For NORTHFIELD INSURANCE COMPANY, Plaintiff – Appellant: Martin R. Sadler, Esq., Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, Houston, TX. For CHARLES HERRERA, doing business as Austin Elevator Consultants, Defendant – Appellee: Curtis John Kurhajec, Naman, Howell, Smith & Lee, P.L.L.C., Austin, TX.