Thursday, August 27, 2015

First Circuit holds that exclusion for injury to contractors applies only to injury to insured's contractors

Benchmark contracted to renovate a house.  The homeowners had hired an architect named Thomas Huth.  Huth hired Sara Egan to apply decorative painting to one of the walls.  Egan's employee Meghan Bailey worked on that task.  She fell from a ladder positioned on top of scaffolding.

Bailey sued Benchmark, alleging that it negligently erected and maintained the ladder and scaffolding.  Benchmark sought a defense from its insurer, USLIC.

USLIC denied that it had a duty to defend, relying on an exclusion excluding coverage for bodily injury to any employee of any contractor arising out rendering services of any kind for which any insured may become liable in any capacity.

     Sidenote:  The full exclusion is actually much more complicated.  A few months ago I wrote a post about why insurance policies are impossible to understand.  This exclusion is a perfect example of a clause that starts off making sense and then rambles and wanders until you have no idea how the end of it goes with the beginning.  The court (or the attorneys) did an admirable job of distilling it down to relevant clauses. 

"Contractor" was not defined in the policy.

In U.S. Liab. Ins. Co. v. Benchmark Constr., __ F.3d __, 2015 WL 4747164, the United States Court of  Appeals for the First Circuit held that there were two ambiguities in the exclusion.

First, the court held that the phrase "bodily injury to any employee of any contractor arising out of rendering services of any kind for which any insured may become liable" was ambiguous because it is not clear whether the phrase "for which any insured may become liable" modifies "services" or "bodily injury." 

(Anyone who has diagrammed sentences would know that the phrase modifies "services."  As that art has fallen off most schools' curriculums I don't fault the court for holding that the clause is ambiguous.)

Benchmark argued that the phrase modified "services," so that the policy excludes the claims of a contractor's employee only if the contractor's employee is injured while performing services for which the insured has some responsibility.  Under that interpretation, the exclusion is limited to bodily injury to employees of contractors Benchmark hires or has some contractual responsibility to.  Benchmark therefore contended that the exclusion applies only if Benchmark retained the right to exert any control over Bailey's decorative painting services and could be accountable for liabilities arising from or related to her work. 

USLIC argued that the phrase modifies "bodily injury," so that it applies to bodily injury to any contractor, subcontractor or employee of a contractor or subcontractor injured on the job if Benchmark may become liable for that injury.  Although Benchmark had no contractual relationship with Bailey, according to USLIC the exclusion applies because she was employed by a contractor. 

The court held that because reasonably intelligent people could differ as to what the phrase modifies the exclusion is ambiguous.  Because ambiguities are interpreted in favor of the insured, it must be interpreted as Benchmark asserted.  Because Benchmark could not become liable for Bailey's decorative painting, the exclusion does not apply.

The court also held that the meaning of the word "contractor" in the exclusion is ambiguous. 

Benchmark argued that contractor means Benchmark contractors.  USLIC argued that contractor means "anyone with a contract."  Since Egan had a contract to apply decorative paint, she was a contractor under this definition.

The court held that reasonably intelligent people could differ about the meaning of the word "contractor" and therefore the word must be interpreted in favor on Benchmark.  For that additional reason, the exclusion did not apply.

Congratulations to my law school classmate and colleague Mike Sams, incidentally one of the best attorneys I have ever had on the other side of a case, who represented Benchmark. 

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