Judge Pushes the Button for Coverage for Elevator Subcontractor
Literal interpretation of unambiguous policy language rejected because it would defeat the purpose of the liability coverage.
In a recent decision construing a commercial general liability policy, Judge Sam Sparks of the Western District of Texas used contextual clues in the policy as well as an “illusory coverage argument” to narrow an exclusion whose literal words applied more broadly.
In Northfield Ins. Co. v. Herrera, A-16-CA-00553-SS, 2017 WL 5147618, at *3 (W.D. Tex. Nov. 6, 2017), an employee of Austin Energy was injured in an elevator failure at Sandhill Energy Center in Austin. The elevator was serviced and maintained by a contractor for Austin Energy, Herrera. The injured employee sued Herrera and his company and Herrera sought coverage from Northfield under a CGL policy. Northfield defended Herrera and filed this declaratory action seeking a finding it had no duty to defend or indemnify under a subcontractor exclusion that provided the insurance does not apply to bodily injury to:
(3) Any person who is employed by, is leased to or contracted with any organization that:
(a) Contracted with you or with any insured for services; or
(b) Contracted with others on your behalf for services;
arising out of and in the course of employment by that organization or performing duties related to the conduct of that organization’s business. . .
Judge Sparks held the exclusion did not preclude coverage for Herrera because it applied only to his “downstream” contractors, not to companies with whom Herrera contracted to do work as a subcontractor himself. Northfield argued the exclusion unambiguously applied to the suit because it applied to an employee of an “organization that . . . [c]ontracted with [Herrera] for services . . .”, which literally describes the relationship between Herrera and Austin Energy. Herrera, however, argued the only reasonable interpretation of the exclusion is “it applies downstream to exclude coverage to Herrera, and his employees and subcontractors”, not to upstream entities who hire Herrera to provide services to the upstream entity. 2017 WL 5147618, at *3. In the alternative, Herrera argued the exclusion was ambiguous and must be interpreted in his favor for coverage.
Judge Sparks held the exclusion is unambiguous and that Herrera’s was the only reasonable interpretation of it. Thus, the Court ruled “it is clear the provision was intended to run downstream to employees and workers of Herrera’s subcontractors” because other sections of the exclusion applied to injury to Herrera’s employees and Herrera’s subcontractors and thus the “logical progression” was to apply the exclusion “to Herrera’s subcontractors and their subcontractors”. Id. Obviously, the language, literally construed, is not limited to that interpretation and clearly encompassed employees of entities who hired Herrera. Perhaps recognizing this, Judge Sparks held the insurer’s “expansive reading of the Exclusion is unreasonable because it would render coverage under the Policy largely illusory.” Id. (citing ATOFINA Petrochemicals, Inc. v. Cont’l Cas. Co., 185 S.W.3d 440, 444 (Tex. 2005) (rejecting insurer’s interpretation because it “would render coverage under the endorsement largely illusory”)). The Court noted that because Herrera’s business is to be hired by contract to maintain elevators for other companies, Northfield’s interpretation is unreasonable “because it would eviscerate the Policy’s coverage and undermine the very purpose service-providing businesses like Herrera carry general liability insurance.” Id. This case is thus a good illustration of a situation in which a carrier’s reasonable interpretation of policy language in accordance with its literal meaning is nevertheless rejected because it will undermine the purpose of the coverage.