Why a contractor would accept and pay for a commercial liability policy that excluded almost all job-related liability risks is a mystery. But in a recent Federal court decision, United States Liability Insurance Company v. Benchmark Construction Services, Inc. (Copy at end of post), a contractor apparently did exactly that. Even the Federal judge in deciding against coverage for the contractor questioned why the parties would enter into an insurance contract with the coverage provisions this policy had.
General contractor buys excess and surplus general liability policy with unique endorsement that guts coverage
Benchmark Construction Services, Inc. of Middleboro, renovates residences. In 2009, Benchmark started a $429,500 contract to renovate a custom home in Newton according to a set of architectural plans. Benchmark contracted directly with the owners. The owners contracted separately with the architect.
At the request of the owners, the architect hired a company, Painted Design to apply Venetian plaster to various interior walls and to do other decorative painting work. Painted Design’s contract with the architect for plaster and painting work had no relation to Benchmark’s remodeling contract with the owners. Benchmark had no contractual connection relating to the remodeling job with either the architect or the painting company the architect hired, Painted Design.
During the term of this remodeling contract, Benchmark had in force a commercial general liability policy with a $1 million liability limit and a $2 million aggregate. The policy’s declaration page showed the $8700 premium calculated based upon: “1. Carpentry – construction of residential property not exceeding three stories in height; 2. Contractors – subcontracted work – in connection with building construction, reconstruction repair or erection – one or two family dwellings; and, Electrical Work – within buildings.”
[pullquote]the Court can discern no reason why the parties would choose…to have coverage depend on whether an injured party was performing subject to a contract at the time he or she was injured… [/pullquote]
Benchmark’s local broker in Bridgewater apparently obtained this policy through an excess and surplus broker in New Jersey, Sovereign Group International. Sovereign placed Benchmark’s policy with the United States Liability Insurance Company, a company whose website’s contractor section states: “Our product is designed for General Contractors engaged in new construction or remodeling work on custom homes, commercial offices and mercantile buildings.”
US Liability issued Benchmark’s commercial general liability policy on ISO forms but with endorsements apparently unique to US Liability and its affiliated companies, Mount Vernon Fire, U.S. Underwriters Insurance Company and Mount Vernon Specialty.
One particular endorsement added to Benchmark’s policy that US Liability designated as “Endorsement L-500” had as its title: “Bodily Injury Exclusion – All Employees, Volunteer Workers, Temporary Workers, Casual Laborers, Contractors, and Subcontractors.”
Sued by an injured decorative painter Benchmark seeks coverage from US Liability
Benchmark had finished its renovation contract, but on March 5, 2010, Benchmark was on the property, at the owners’ request, installing some molding in a stairway to the basement of the house.
While Benchmark worked on installing this molding, an artist employed by Painted Design came to the property to work on the decorative paint project. The artist, a Ms. Bailey, apparently tried to paint from a ladder that was placed on top of a wheeled scaffolding and fell injuring herself.
Ms. Bailey sued Benchmark, alleging in her complaint, that Benchmark was acting at the time of her injury as a general contractor and, therefore, Benchmark had a duty to her, “to construct and maintain the …site in a reasonable and safe manner, in compliance with all [Federal and states laws and regulations] and good and accepted construction practices…” In her suit, Ms. Bailey claimed $230 thousand in damages including $80 thousand in medical bills, as well as an additional award for conscious pain and suffering resulting from her fall.
Benchmark tendered Ms. Bailey’s suit to US Liability requesting defense and indemnity under Benchmark’s commercial general liability policy. US Liability immediately sent Benchmark a disclaimer of any duty to defend or indemnify Benchmark from the Bailey claim.
US Liability disclaims liability based on endorsement excluding almost all, if not all, work-place related suits that Benchmark would face as a contractor
The primary policy endorsement that US Liability cited to deny Benchmark any benefits under its commercial general liability coverage was the L500 endorsement that US Liability had appended to Benchmark’ commercial general liability policy and that Benchmark had either not read or had read and not understood its import.
The L500 endorsement replaced the more or less standard “Employer’s Liability” exclusion contained in the ISO portion of Benchmark’s policy. The L500 endorsement not only excluded coverage for claims brought by an injured employee, as the standard Employer’s Liability exclusion had, but it also separately excluded:
Bodily injury to any contractor, subcontractor or any employee, volunteer worker, temporary worker or casual laborer of any contractor or subcontractor arising out of or in the course of the rendering or performing services of any kind or nature whatsoever by such contractor, subcontractor or employee, volunteer worker, temporary worker or casual laborer of such contractor or subcontractor for which any insured may become liable in any capacity.
Thus, as written, the US Liability L500 endorsement basically excluded coverage for any claim against Benchmark made by any person injured if that person was providing any services, paid or unpaid, regardless of whether that person is in any way related to Benchmark or any of Benchmark’s contractors or their subcontractors.
In other words, Benchmark wound up with a commercial general liability policy for its contractor exposures that essentially excluded a major, if not the major, liability risk that a contractor faces: suits brought by injured workers who work for other contractors or subcontractors on or off a job-site.
Federal judge deciding case questions the L500 endorsement but rules the endorsement is not ambiguous and therefore enforceable against Benchmark
Approximately, six months after issuing its denial letter to Benchmark, US Liability filed a declaratory judgment in the United States District Court for Massachusetts. The purpose of the suit was to have the District Court rule that the L500 endorsement was valid and enforceable.
In defending against the suit, Benchmark argued that the L500 endorsement did not make sense. Benchmark argued that the L500 endorsement should only apply to persons who had a contractual relationship to Benchmark. There was no dispute that Ms. Bailey did not have any contractual relationship with Benchmark or anyone with whom Benchmark contracted with for the remodeling contract that Benchmark had with the property owners.
The judge hearing the summary judgment on US Liability’s suit, however, ruled that the L500 endorsement extended broadly to anyone involved on a job whether or not they had any relationship at all of a contractual nature with Benchmark.
In ruling in favor of US Liability, the judge did question the rationale for the L500 endorsement stating:
…the Court can discern no reason why the parties would choose ex ante to have coverage depend on whether an injured party was performing subject to a contract at the time he or she was injured regardless of whether that contract was with the insured or some other entity and regardless of whether the contract was related to the subject matter of the Policy.
Benchmark has appealed the United States District Court decision to the United States First Circuit Court of Appeals. Agency Checklists will update this post when, and if, that Court renders a decision on Benchmark’s appeal.
Agent takeaways from the Benchmark decision and the scope of US Liability’s L500 endorsement
Any agents or brokers who have contractor, subcontractor or real estate developer clients would be well advised to verify if any of their contractor, subcontractor or developer clients have direct or indirect coverage through US Liability or its affiliated companies. If they do, they should consider that under this company’s endorsements, including, but not limited to, its L500 endorsement:
- Contractors or subcontractors may have no coverage for any claims arising out of third-party work-site claims.
- Certificates or insurance certificates issued by US Liability will not disclose the L500 endorsement and the fact that the US Liability policy will likely not respond to any third-party work-site claims
- The US Liability policy in the Benchmark case also had an endorsement excluding contractual liability, so any risk management based upon an insured indemnity agreement between general contractors, subcontractors or sub-subcontractors may be uninsured.
A copy of the decision of the United States District Court can be found here. United States Liability Insurance Company, v. Benchmark Construction Services, Inc.