A long line of insurance coverage case law exists in Massachusetts where general contractors have unsuccessfully tried to avoid liability for injuries to employees of their subcontractors through indemnity agreements and additional insured endorsements.
Add to that line of cases, a recent Massachusetts Appeals Court decision, Phoenix Bay State Construction Company. v. First Financial Insurance Company. This case shows that even the most careful risk control methods can fail if someone does not catch the fine print of a nonstandard endorsement to a policy.
In the Phoenix case, the general contractor lost its additional insured coverage over the difference between two words in such an endorsement: “The” and “Any.”
Phoenix’s construction agreements to avoid subcontractor-caused liability
Phoenix Bay State Construction Company (“Phoenix”) entered into an agreement as a general contractor with a subcontractor, Lanco Scaffolding (“Lanco”), on a 2014 construction project in Chestnut Hill.
Under Massachusetts law, general contractors, like Phoenix, have an overall nondelegable duty to ensure compliance with the requirements of the State’s worksite safety regulations. A general contractor cannot avoid this duty by making subcontractors solely responsible for workplace safety.
In this case, the subcontract between Phoenix and Lanco had provisions designed to protect Phoenix from vicarious liability arising out of liability claims from Lanco’s on-site scaffolding activities, including any work-related personal injuries suffered by an employee of Lanco.
Under the subcontract, Lanco was responsible for its “scope of work, including the ‘design, installation, rental, and dismantling of scaffolding’ and to ‘supervise and direct the work, using [Lanco’s] best skills and attention.” Lanco was also “solely responsible for all means, methods, techniques, procedures, and coordination of all portions of the [subcontract] work…’”
The subcontract in one of its other paragraphs titled “Safety Precautions and Procedures” stated that Lanco was required to “take reasonable safety precautions with respect to performance of this Contract, [and] shall comply with safety measures initiated by the Contractor and with applicable laws, statutes, ordinances, codes, rules and regulations and lawful orders of public authorities for the safety of persons and property.”
The subcontract further required Lanco to indemnify, defend and hold harmless Phoenix “from and against any and all damages, claims, liability, loss, cost or expense (including reasonable attorney’s fees and costs) from, for, relating to or arising out of:
a. any injury to or death of or damage to or destruction of any person or property arising from or caused by any act or omission of [Lanco] or any of [Lanco’s] employees …”
As a final liability defense, the subcontract required Lanco to provide adequate liability insurance that included, “the Contractor… as additional insured on a primary and non-contributory basis for claims caused in whole or in part by the Subcontractor’s negligent act or omissions during the Subcontractor’s operations.”
In compliance with the subcontract’s insurance provision, Lanco provided a liability policy from an excess and surplus carrier, First Financial Insurance Company (“First Financial”), a subsidiary of the IFG Companies.
Phoenix accepted First Financial’s policy as evidence of Lanco’s compliance with the subcontract’s insurance provisions. Phoenix may not have recognized that this policy had a nonstandard cross-liability exclusion endorsement. While the usual form of this exclusion in a commercial general liability form does not apply to “bodily injury” to an employee of “the insured,” First Financial’s policy barred coverage for injuries to the employees of “any insured”.
A Lanco employee sues Phoenix for lack of worksite safety
On September 19, 2017, an employee of Lanco, Francisco Perlera (“Mr. Perlera”) filed suit against Phoenix, alleging that he was injured in a construction accident on or about September 22, 2014, while assisting with the dismantling of a scaffold being used by Lanco on Phoenix’s job site.
Since he could not sue Lanco because of the workers’ compensation act, his suit alleged that Phoenix owed him a duty to provide a “reasonably safe work environment.” The suit further alleged that Phoenix had “negligently, recklessly and/or breached its duty:
- By failing to supply [him] with any kind of fall protection and/or harness or other safety device;
- By allowing and/or directing him not to work without fall protection and/or a harness or other safety device; and,
- By allowing and/or directing him to perform dangerous work without appropriate safety devices or precautions.”
Under Massachusetts worksite safety regulations that Phoenix had a duty to enforce, the failure to require workers on scaffolding to use safety harnesses was evidence of negligence sufficient to establish legal liability for any resulting bodily injury depending on the circumstances.
Phoenix Sues First Financial for coverage as an additional insured
On August 31, 2017, Phoenix tendered Mr. Perlera’s complaint to First Financial for defense and indemnity based on Phoenix’s status as an “additional insured” on First Financial’s policy issued to Lanco.
On October 2, 2017, First Financial denied Phoenix’s claim asserting the policy need not respond because there were no allegations in the Perlera complaint against the policy’s Named Insured, Lanco.
Under First Financial’s coverage analysis, Phoenix only had the right to a defense of a liability suit as an additional insured if the suit’s allegations stated an “act or omission” by Lanco and not just Phoenix.
On November 1, 2017, Phoenix sued First Financial seeking defense and indemnity for Mr. Perlera’s lawsuit. Phoenix added Lanco as a necessary party to the suit since it was the Named Insured on the commercial liability policy in question.
Phoenix and First Financial cross-moved in the Superior Court for summary judgment, each seeking a judicial declaration that would uphold its position. Phoenix requested a declaration that there was coverage for Phoenix as an additional insured under the First Financial policy. First Financial, for its part, asserted that the Superior Court judge should rule Phoenix had no right to any coverage for the Perlera suit.
First Financial argued to the Superior Court that the Perlera complaint did not allege facts involving Lanco that would support Phoenix’s claim that it was an additional insured under the First Financial policy.
Also, First Financial argued that the policy’s cross-liability exclusion endorsement and the definition of “Who is an Insured” when construed together effectively barred coverage for Phoenix of any bodily injury suit by a Lanco’s employee.
The cross-liability exclusion provided that:
This insurance does not apply to any actual or alleged “bodily injury,” “property damage,” or “personal advertising injury” to: …4. Any insured” (Emphasis added).
Section II of the policy, “Who is an Insured,” provided that Lanco’s employees, including Mr. Perlera, were insureds for:
“acts within the scope of their employment by [Lanco] or while performing duties related to the conduct of [Lanco’s] business.”
Thus, since Phoenix and Mr. Perlera, as a Lanco employee, were both insureds under the policy per the definition, a bodily injury claim between them had no coverage per the cross-liability exclusion.
Phoenix, in response, argued that the policy’s “Separation of Insureds” clause that provided:
Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:
a. As if each Named Insured were the only Named Insured; and
b. Separately as to each insured against whom claim is made or “suit” is brought.”
To Phoenix, this clause trumped the cross-liability exclusion because it required interpreting coverage as though each insured had a separate and distinct insurance policy. Under that interpretation of the Separation of Insureds clause, the reference to “any insured” in the cross-liability exclusion becomes ambiguous and not applicable to finding that Phoenix and Mr. Perlera are insureds under the same policy.
The Superior Court ruling and report to the Appeals Court
On December 3, 2018, the Superior Court granted summary judgment in favor of Phoenix, declaring that Phoenix was an additional insured and entitled to a defense to the Perlera suit by First Financial.
The Superior Court refused to apply the cross-liability exclusion in First Financial’s policy because it found the exclusion that precluded coverage for claims of bodily injury by the employee of “any insured” was ambiguous. The Superior Court also found that the cross-liability exclusion was also void as being ambiguous in light of the policy’s “Separation of Insureds clause.”
Ordinarily, this case would have stayed in the Superior Court, pending a final judgment on First Financial’s duty to indemnify. The decision on the duty to defend was not a final decision that ordinarily would allow proceedings in the Superior Court.
In a somewhat unusual move, both Phoenix and First Financial requested a report of the decision to the Appeals Court.
While allowed under the Massachusetts Rules of Civil Procedure, the report of cases is unusual. The last case Agency Checklists found where the Appeals Court allowed the report procedure to proceed occurred in 2007. Under the report procedure, a trial court judge may send a case to the Appeals Court, if they are “of [the] opinion that an interlocutory finding or order made by it so affects the merits of the controversy that the matter ought to be determined by the Appeals Court before any further proceedings in the trial court.”
After the Superior Court judge allowed the joint request, the Appeals Court accepted the report stating that “Given that the decision to report is “highly discretionary,” we will not second guess the judge’s decision to report in the circumstances of this case.”
The Appeals Court rules the cross-liability exclusion applies
In the Appeals Court, Phoenix claimed, as it had in the Superior Court, that the cross-liability exclusion and the severability of interest clause were, as applied, to Phoenix ambiguous. Unfortunately for Phoenix, the Court found no ambiguity.
The Court addressed what it considered as the only argument that it needed to decide. That argument was how did the cross-liability exclusion and the Separation of Insureds clause apply.
The Court ruled that the purpose of the cross-liability exclusion was to bar coverage for the precise type of claim that Lanco’s employee had brought against Phoenix. The Court found a cross-liability exclusion bars coverage for claims brought by one insured against another and, in this case, both Phoenix and Mr. Perlera were “insureds.”
The Court focused on the distinction between the two phrases in the policy, “any insured” and “the insured.” The Court found this distinction especially crucial in the context of the case brought by Phoenix since the policy sometimes used one phrase and sometimes used the other.
The Court noted that if an exclusion referred to “any insured,” while other exclusions referred to “the insured,” then legally, the difference between these two phrases requires that the Court give the phrases different meanings. Based on that distinction, the Court concluded that the term “any insured” in the cross-liability exclusion “unambiguously include[d] Lanco [and its employees] in addition to Phoenix.” Thus, the cross-liability exclusion barred coverage for Phoenix, notwithstanding the policy’s severability of interest clause.
The final order of the Appeals Court
In conclusion, the Appeals Court entered an order that:
The report is discharged; the amended summary judgment order entered January 23, 2019, is reversed, … and the case is remanded to the Superior Court for a new order declaring that [First Financial] has no duty to defend or indemnity Phoenix for claims asserted in or arising from the action entitled Francisco Perlera v. Phoenix Bay State Company.”
Twenty days to apply for further appellate review to the Supreme Judicial Court
The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.
Since the Appeals Court entered their decision on May 18, 2020, under the Massachusetts Rules of Appellate Procedure, Phoenix will have, at least twenty days, until Monday, June 8, 2020, to apply for further appellate review.
Based upon the decision of the Appeals Court to take away the Superior Court in favor of Phoenix, there is seems little doubt Phoenix will make an application for further appellate review to the Supreme Judicial Court.
Co-Founder/Publisher Agency Checklists
Owen is an experienced insurance litigator as well as a certified mediator and arbitrator who specializes in insurance industry disputes. His interest and affinity for insurance began at a young age working the counter at his father’s assigned risk agency in Roxbury.
Over the course of his career, Owen has argued a number of cases in the Massachusetts Supreme Judicial Court and has helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth. Contact Owen via one of the links below: