On August 12, 2015, the First Circuit Court of Appeals reviewed a decision that had been the subject of the Agency Checklists article, “MA Insurance Law Alert: Avoid This Policy For Your Insured Contractors”.
In that case, decided in July 2014, the United States District Court found in favor of the insurer, United States Liability Company (“US Liability”) against its insured Benchmark Construction Services, Inc. (“Benchmark”) denying Benchmark any defense or indemnity for a suit by an injured employee of a contractor that had no relationship to Benchmark. On August 12, 2015, the First Circuit Court of Appeals reversed the summary judgment decision in favor of the US Liability and ordered the entry of judgment in favor of Benchmark.
Contractor’s general liability policy with over-broad exclusion for employees of any “contractor”
US Liability issued a commercial general liability policy to its insured, Benchmark Construction Services (“Benchmark”). The Benchmark policy contained a basic CGL form that US liability amended by 25 separate endorsements. The endorsement identified as the L-500 endorsement completely replaced the “Employer’s Liability” exclusion from the original policy and extended the exclusion to include employees of any “contractor” even if the insured, Benchmark, had no legal relation with that contractor whose employee was injured. The Court of Appeals abstracted the full L-500 endorsement of relevant terms and found that the exclusion basically prohibited coverage for:
“Bodily injury” to any . . . “employee” . . . of any contractor . . . arising out of . . . rendering services of any kind . . . for which any insured may become liable in any capacity[.]
US Liability says L-500 endorsement excludes coverage for suit by employee of contractor working for architect
Benchmark is a construction company that renovate homes. In 2009, two Newton homeowners hired Benchmark to renovate their home. The homeowners had hired an architect, Thomas Huth, to design the renovation plans. Huth, in turn, hired Sara Egan d/b/a Painted Design to apply decorative painting to one of the interior walls.
Benchmark finished its renovation contract On March 5, 2010, however, Benchmark reentered the property, at the owners’ request, to install 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 in Middlesex Superior Court, alleging 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 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 notified US Liability requesting defense and indemnity under Benchmark’s commercial general liability policy. But, US Liability advised Benchmark that it would not defend or indemnify Benchmark for Ms. Bailey’s lawsuit because the L-500 endorsement barred coverage.
United States District Court finds for US liability but questions why anyone would contract this way
US Liability did not dispute that Benchmark had no contractual relationship with either Huth, Egan, or Bailey; neither did US Liability dispute that Bailey’s work had not been performed under a contract with any of Benchmark’s contractors or subcontractors. However, US Liability denied liability because Ms. Bailey employer, Painted Design, was a “contractor” within the meaning of the L-500 endorsement.
US liability did not defend under reservation of rights but instead filed a declaratory judgment in Federal Court seeking a ruling that US Liability had properly denied Benchmark any defense or indemnity because of the terms of the L-500 endorsement.
Both US Liability and Benchmark moved for summary judgment. US Liability arguing that L-500 endorsement’s terms were clear and unambiguous. Benchmark argued that the endorsement did not apply and that its terms were ambiguous and thus should be construed in favor of the insured, Benchmark.
The District Court judge deciding the summary judgment motions ruled that although the insurance policy did define the term “contractor,” as used in the L-500 endorsement, the term’s common and usual meaning meant unambiguously “anyone with a contract.” Since Ms. Bailey’s boss had contracted to do the decorative painting, Ms. Bailey was a contractor’s employee and her claims were subject to the exclusion. Thus, US Liability did not have any obligations under its insurance contract to Benchmark for Ms. Bailey’s lawsuit.
Although the District Court judge felt legally constrained to comment on US Liability’s L-500 endorsement as state:
[T]he 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.
Court of Appeals labels US Liability’s L-500 endorsement “a haphazard approach to insurance”
Benchmark appealed the ruling in favor of US Liability to the First Circuit Court of Appeals. The First Circuit Court of Appeals panel, including former United States Supreme Court Justice, David Souter, reviewed the district court decision anew and reached an entirely different conclusion.
The panel ruled that the L-500 endorsement was ambiguous and that the policy did not satisfy the criteria that a reasonable insured would under the circumstances expect the coverage of the policy to include.
In describing the District Court judge’s reservations as to why anyone would write a policy as US Liability claimed the L-500 endorsement did, the Appeals Court stated: “Although the District Court felt constrained to adopt the broader definition of ‘contractor,’ it nevertheless conceded the folly of such a haphazard approach to insurance”.
Here, the panel found that although the expansive definition of the term “contractor” as urged by US Liability and as accepted the District Court was certainly correct, one could under the circumstances also reasonably interpret the term contractor as used in the L-500 endorsement to only include contractors that had a contractual relationship to Benchmark.
The appellate panel, in making its decision also referenced the oft-cited but infrequently used doctrine of “reasonable expectations.” This doctrine can, in appropriate cases, allow a court in interpreting a policy under Massachusetts law “to consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.”
In reversing the judgment for US Liability and ordering the entry of judgment for Benchmark, the appellate panel specifically determined that based upon purpose of the policy and the narrower definition of the term “contractor”, Benchmark had reasonable expectations for coverage that this panel honored stating;
Given that the purpose of the policy is to indemnify Benchmark against third-party liability and that the Endorsement may reasonably be read as an employer’s liability exclusion, it would be incongruous to exclude Bailey’s claims on the basis of the Endorsement. Bailey neither worked directly for Benchmark, nor was Benchmark anywhere in her chain of employment…Hence, her claims are of the sort that Benchmark could reasonably expect to be covered under the policy.
Benchmark can recover defense costs, settlement costs, and legal fees for the Federal Court suit.
The First Circuit Court of Appeals final order required United States Liability to both defend and indemnify Benchmark Construction in the suit brought by Ms. Meaghan.
A review of the Superior Court docket in the suit of Meaghan v. Benchmark Construction, however, shows that this case settled by a stipulation of dismissal on June 10, 2015. Notwithstanding the settlement, under Massachusetts Law, US Liability would have the responsibility to pay all of Benchmark Construction’s legal fees in the underlying suit plus any reasonable settlement payments, if any, made to Ms. Meaghan.
Additionally, it is important to note that, under Massachusetts Law, since the declaratory judgment suit involved the obligation of US Liability to defend Benchmark, US Liability will have the additional responsibility of paying the legal fees of Benchmark for the declaratory judgment action within the Federal Court system.
Copy of the First Circuit Court of Appeals decision
A copy of the First Circuit Court of Appeals decision can be viewed by clicking here: United States Liability Company v. Benchmark Construction Company, Inc.