Commercial general liability (CGL) policies that contain an exclusion for acts or omissions of independent contractors can cause coverage problems for an agent or broker’s commercial insureds.
In Massachusetts, there have been at least three reported appellate decisions where commercial insureds found that the CGL obtained by their broker or agent left them with no coverage for claims arising out of lawsuits involving alleged acts by independent contractors they had hired.
Some commercial general liability policies exclude claims arising out of acts or omissions by independent contractors
The CGL policies with an independent contractor exclusion most often appear in the excess and surplus markets but endorsements that exclude independent contractor liability also exist in admitted market CGL policies.
Such an endorsement excluding independent liability can leave a commercial insured without defense or indemnity for a claim arising out conduct of an independent contractor.
[The exclusion] excludes coverage for any claims—including those brought by members of the general public—arising out of the operations of independent contractors
For example, in the case of Monticello Ins. Co. v. Dion, 65 Mass. App. Ct. 46 (2005), an excess and surplus liability policy had an endorsement adding an “independent contractors exclusion” that provided the policy did not cover:
bodily injury’ . . . arising out of the operations performed for the named insured by independent contractors or acts or omissions of the named insured in connection with the insured’s general supervision of such operations.
The Appeals Court ruled in the Monticello case that Monticello Insurance’s insured, a sole proprietor operating a tree service business, had no coverage against a wrongful death claim brought by the estate of an independent machine operator killed when a tree being cut down fell the wrong way.
The independent contractor exclusion leads to E&O suit against insurance agent
Since the Monticello decision, there have other decisions under Massachusetts law upholding an independent contractor exclusions.
However, the most recent decision, Cable Mills, LLC v. Coakley Pierpan; Certain Underwriters at Lloyd’s, London, (“underwriters”) as third-party defendants, 82 Mass. App. Ct. 415 (2012), involved an errors & omission suit by a commercial insured against its insurance agency over the insured having no defense or indemnity coverage for a serious bodily injury claim suit brought by an independent contractor who was injured on the insured’s property.
Cable Mills consists of some three historic mill buildings on a nine-acre site along the Green River in in Williamstown, Massachusetts. The Cable Mills buildings and land have been under development since 2005.
As the project ramped up, Cable Mills’ insurance agent, Coakley Pierpan, placed a liability policy for the project’s vacant building through the excess and surplus market with underwriters at Lloyd’s, London. The underwriters’ policy had a six-month term from October 2005 to April 2006.
The underwriters’ policy obtained by Coakley Pierpan contained a broad independent contractor exclusion that stated:
This insurance does not apply to `bodily injury,’…for operations performed for you by independent contractors or your acts or omissions in connection with your general supervision of such operations.
Thus, the independent contractor exclusion in Cable Mills’ CGL policy essentially tracked the exclusion in the Monticello case, except the word “for” replaced the term “arising out of” and the word “you” replacing the term “named insured.”
Insured learns there is no defense or indemnity coverage for suit against it by an independent contractor hired on its behalf
In December, 2005, Cable Mills hired Feingold Alexander & Associates (Feingold) to provide architectural services for the project. Feingold, in turn, contracted with William Barry, to provide specialized structural engineering services.
While Mr. Barry was working at the Cable Mills site during the underwriters’ policy period, he sustained serious injuries as a result of falling through the floor at the site of the project. As a result of his injuries Mr. Barry sued a number of defendants including Feingold, who hired him, and Cable Mills who had hired Feingold.
The underwriters denied liability under the policy and refused to defend or indemnify Cable Mills against Mr. Barry’s lawsuit citing the independent contractor exclusion in its policy.
After this denial of coverage, Cable Mills sued its insurance agent, Coakley Pierpan, for negligence and violation of G. L. c. 93A (unfair and deceptive business practices) and c. 176D (unfair and deceptive practices in the business of insurance), alleging Coakley Pierpan failed to obtain the proper insurance coverage.
Appeals Court decision broadens application of the independent contractor exclusion
Coakley Pierpan’s errors and omissions carrier both defended the suit brought by Cable Mills and filed on Coakley Pierpan’s behalf a third-party complaint against the underwriters seeking a declaration that that the independent contractor exclusion attached to Cable Mills’ policy did, in fact, afford coverage to Cable Mills for the claim brought by Mr. Barry.
Coakley Pierpan argued to the Appeals Court that the plain language of the exclusion did not apply to Mr. Barry’s alleged injuries because Feingold, rather than Cable Mills, retained Mr. Barry as an independent contractor. Because Feingold hired Mr. Barry, any services provided by Mr. Barry were necessarily “performed for” Feingold, not Cable Mills, and thus fell outside the scope of the exclusion.
The Appeals Court rejected this argument and instead ruled that “performance of professional engineering services essential to the project, pursuant to a contract between the property owner and its architect, sufficiently fulfills the common meaning of ‘operations performed for you.’”
After the Appeals Court decision, the case was remanded to the Superior Court and settled.
Courts broadly interpret the independent contractor exclusion as denying coverage
Agents and brokers placing insurance for commercial insureds should carefully consider the interpretation of the independent contractor exclusion adopted by both the Appeals Court and a number of other state and Federal courts.
The Appeals Court’s reasoning treated the word “for”, as used in the independent contractor exclusion, “to include the ultimate beneficiary of the services as well as the hiring party.” Under that reasoning, the whole chain of independent contractor relationships is excluded from the insured’s policy.
Thus, as in the Cable Mills case, if an insured, whose CGL has an independent contractor exclusion, hires any independent contractor, whether in the trades or in the professions, and that trade person or professional subcontracts the work for the insured there is no coverage for any damages caused by anyone in that chain of independent contracts.
In fact, the Appeals Court in deciding Cable Mills, cited a contemporaneous Federal Appeals Court case, Certain Interested Underwriters at Lloyds, London v. Stolberg, 680 F.3d 61, 67 (1st Cir. 2012), that held that the independent contractor exclusion “…broadly excludes coverage for any claims—including those brought by members of the general public—arising out of the operations of independent contractors.”
Policies with an independent contractor exclusion put insureds at risk for an uncovered claim
Almost all commercial insureds in the ordinary course their businesses hire independent contractors to provide them some essential service. If those independent contractors cause bodily injury or property damage in the course of fulfilling their contract with the commercial insured any lawsuits that result may name the commercial insured who hired the independent contractor. If that commercial insured has purchased a CGL with an independent contractor exclusion that insured has a real and potentially costly coverage gap. As in the Cable Mills case, that coverage gap may result in an errors and omission claim against that insured’s broker or agent.
- Carriers whose have this independent contractor exclusion added to their policies do not provide a defense under a reservation of rights for a claim involving a claim resulting from actions by an independent contractor. These carriers simply disclaim all liability and their disclaimer have been upheld by the courts. E.g. As happened in the Monticello, Cable Mills and Stolberg cases cited above.
- Agents and brokers would be well advised not to place a commercial liability policy with an independent contractor exclusion if they can avoid it.
- If an agent or broker does place a commercial liability policy with an independent contractor exclusion, they should have the insured signs an acknowledgement that they understand the policy does not cover defense or indemnity for legal liability arising out of acts or omissions of independent contractors.
- Finally, if an agent or broker does place a commercial liability policy with an independent contractor exclusion, they may want to make sure that their agency’s errors and omissions insurance is in full force and effect and has adequate liability limits.