An Insurance Pitfall for Unwary Contractors

Hirschler Fleischer Construction Series
The Employee Exclusion:
An Insurance Pitfall for Unwary Contractors
By Kelly J. Bundy
A
recent case highlights the critical significance of an “employee exclusion” in a commercial
general liability policy. In Stephens v. Mid-Continent Casualty Company, 2014 WL 1623737 (11th Cir. April 24,
2014), the court held that an employee
exclusion in a general contractor’s policy
exempted a carrier from liability for the
death of a subcontractor’s employee.
The Stephens Case
Anchorage Homes, a general contractor, entered into an agreement with a
couple to install a modular home on their
property. Anchorage then hired a subcontractor, Team Fritz, to perform some
of the work. After an employee of Team
Fritz fell on the worksite and died, his estate sued Anchorage for wrongful death.
At the time of the accident, Anchorage
held a CGL policy with Mid-Continent
Casualty Company. Anchorage submitted
the claim to Mid-Continent expecting
the insurer to indemnify and defend it
against the deceased employee’s claims.
However, Mid-Continent refused to indemnify and defend Anchorage on the
basis of the policy’s employee exclusion.
Anchorage entered into a mediated
settlement with the estate for over $4
million and assigned its claims against
Mid-Continent to the estate. In turn, the
estate agreed not to collect the judgment
from Anchorage. The estate then sued
Mid-Continent, seeking the judgment
amount and arguing that Mid-Continent had wrongfully refused to defend
and indemnify Anchorage. The district
court ruled for Mid-Continent on summary judgment, and the Eleventh Circuit
agreed. The reasons behind this ruling
offer some important lessons to general
contractors.
Employee Exclusion
in CGL Policy Precluded Coverage
The CGL policy at issue contained an
employee exclusion clause similar to
those often found in other CGL policies.
This exclusion provided that Mid-Continent would not cover injury to Anchorage’s employees arising out of and in the
course of their employment. As Team
Fritz was a subcontractor of Anchorage,
the Eleventh Circuit held that the employee exclusion clause exempted the deceased employee from coverage.
The court reached this decision by first
finding that Team Fritz was a subcontractor to Anchorage. The court based
this finding on several factors, including:
(1) the existence of a written contract between Anchorage and the property owners, entitled Owner/Contractor Agreement; (2) the fact that the contract was
printed on Anchorage letterhead with
the words “General Contractor” at the
top; (3) the fact that the Owner/Contractor Agreement provided that Anchorage
would supervise and direct the work and
remain responsible for its proper completion; (4) the fact that Anchorage accepted
payments from the property owners and
used those payments to pay Team Fritz;
and (5) the fact that Team Fritz was hired
to perform a task expressly included as
part of the contract work in the Owner/
Contractor Agreement.
Based on this general contractor–subcontractor relationship, the court found
the deceased employee was a “statutory
employee” to Anchorage – a concept de-
Kelly J. Bundy is a litigation attorney
with Hirschler Fleischer (Richmond,
Virginia) who focuses her practice on
construction law.
She may be reached at (804) 771-9505
or by email at [email protected].
34 Construction June 2014
rived from worker’s compensation law.
Under Florida worker’s compensation
law, a general contractor develops a statutory employment relationship with the
employees of its subcontractors. Therefore, because Team Fritz, a subcontractor
of Anchorage, employed the deceased, he
held the status of statutory employee.
The court also held that under Florida
law, standard employee exclusions, such
as the one contained in the Mid-Continent policy, applied to both actual employees and statutory employees. This
brought the deceased employee within
the employee exclusion, because the law
treated the deceased employee in the
same manner as an actual employee of
Anchorage, and the deceased employee’s injuries arose out of and during the
scope of his employment. The Eleventh
Circuit reasoned that CGL insurance
provides coverage for injuries that occur
to the public-at-large, whereas worker’s
compensation insurance and employer’s
liability insurance serve as a more appropriate way to insure against employee injuries. Thus, Mid-Continent had no duty
to indemnify Anchorage for claims arising from the employee’s death.
Contractor Best Practice:
Review Your Coverage
This opinion serves as a stark reminder
to contractors to ensure their policies do
not allow gaps in coverage. Contractors
should review their various policies to
ensure that their employees, as well as
their subcontractors’ employees, are covered under the relevant policy. As seen
in the Stephens decision, that determination can hinge on state law. Thus,
contractors should review the applicability of their coverage when contracting in new or different jurisdictions. By
understanding the scope and operation
of their insurance coverage, contractors
can confidently focus on day-to-day
operations. v