As a recent decision from the Eleventh Circuit highlights, when purchasing insurance for workplace bodily injuries, policyholders need to be mindful of how all of their policies fit together, keeping an eye out for policy language that insurers may exploit to manufacture unexpected and unintended gaps in coverage.
Covering the workplace
Typically, employers seek three types of coverage to manage liabilities arising from accidents in the workplace: workers’ compensation coverage, employer’s liability coverage, and comprehensive general liability (“CGL”) coverage. These three types of policies are designed to work together, with workers’ compensation coverage providing protection against most bodily injury claims sustained by employees while working; CGL coverage providing protection against most bodily injury claims asserted by third parties; and employer’s liability coverage filling in any coverage gaps for bodily injury claims brought by employees. To avoid duplicative coverage, employer’s liability policies typically include a workers’ compensation exclusion and CGL policies typically include both a workers’ compensation exclusion and an employer’s liability exclusion.
The intent of these coverages (and exclusions) is to meet the twin goals of ensuring seamless coverage to the employer without having to pay for needless overlapping of coverage. As one treatise explains:
The intent of the employment exclusion [in a CGL policy] appears to be to avoid duplication of coverage provided under Workers’ Compensation and Employers Liability policies. Accordingly, any interpretation of the commercial general liability exclusion that bars coverage for claims not covered under a Workers’ Compensation and Employers Liability policy would appear to deny coverage erroneously and to create a gap in coverage that almost surely was not intended by the policyholder.
See 21-132 Appleman on Insurance Law & Practice Archive § 132.5 (2nd 2011).
Unfortunately, such intentions may not always align with its insurer’s resolve to avoid paying claims. Just last month, the Eleventh Circuit rejected an insurer’s attempt to improperly expand the scope of a CGL policy’s employer’s liability exclusion. That decision provides helpful ammunition for policyholders to resist similar efforts, and serves as a useful reminder to avoid complacency and watch out for potential ambiguities when purchasing coverage.
The Eleventh Circuit gets it right
In James River Insurance Co. v. Ultratec Special Effects Inc., No. 20-11568, 2022 U.S. App. LEXIS 1120 (11th Cir. Jan. 13, 2022), the Eleventh Circuit was confronted with the question of whether a CGL policy provided coverage for bodily injuries arising from an explosion at a pyrotechnics plant in Alabama. Tragically, two employees were killed and one employee was severely injured in the explosion.
The representatives of the decedents and the injured employee brought suit for damages against the employer as well as several other insureds under the employer’s CGL policy, including a parent company, an individual employee, and an associated business. The policyholders tendered the claim to the CGL carrier, James River, for a defense of the parent company, the individual, and the associated business, none of whom were the “employer” of the injured parties. However, James River disclaimed its coverage obligations, arguing that the employer’s liability exclusion in the CGL policy barred coverage for all insureds – even for those that did not have an employment relationship with the underlying plaintiffs.
In support of its argument, James River relied on language in the employer’s liability exclusion that excluded coverage for claims arising out of bodily injury to the employees of any insured. According to James River, the phrase “any insured” in the exclusion must be read as encompassing employment by “any one of the insureds,” regardless of whether the insured seeking coverage had an employment relationship with the injured party. Because the underlying plaintiffs were employed by “one of the insureds,” James River argued coverage was precluded for all insureds.
The Eleventh Circuit rejected James River’s gambit, faithfully applying the governing law consistent with the reasonable expectations of policyholders. The court held that the phrase “any insured” was ambiguous, in that it could be read to mean “any one of the insureds” collectively or each insured individually. The court further held that the separation of insureds provision in the policy – which states that the insurance applies “separately to each insured against whom claim is made or ‘suit’ is brought” – heightened this ambiguity. The court rightly construed this ambiguity against James River (the policy’s drafter), and held James River had a duty to defend all of the insureds that did not have an employment relationship with the three injured/deceased parties.
While the James River court correctly limited the scope of the employer’s liability exclusion consistent with the purpose and intent of the exclusion, policyholders should be vigilant when purchasing or renewing coverage to avoid such disputes. As James River makes clear, insurers will take advantage of potential ambiguities in coverage terms in an attempt to avoid their coverage obligations and, thereby, undermine their insured’s reasonable expectations.
Accordingly, when placing coverage, policyholders (along with their coverage counsel) should carefully review all of their policies to ensure they are receiving the seamless coverage they intended to purchase for all their insureds, and resist insurers’ efforts to insert improperly broad exclusions into their policies. It is always easier to clarify the scope of coverage before a claim arises. But if an insured faces an unexpected denial because of a poorly-worded policy, James River provides a useful blueprint to securing the intended scope of coverage.