Construction companies generally do not expect to be targets of tort liability for the injuries of their employees.  They are protected by workers compensation laws against such claims.  It follows then that general liability insurance policies do not expect to insure the tort injuries of the insured’s employees, because the insured should have no tort liability for its employees’ injuries.  However, a quirk of the various contracts that are entered into between construction companies does allow for an employer to find itself paying for the tort injuries of its employees, in which case the employer’s liability insurer may foot the bill.  This strange quirk where an employee’s damages are ultimately paid by his employer and the employer’s insurer are known as “action over claims.”  This article explains what an “action over” claim is, and what steps insurers are taking to avoid insuring such claims.   

What is an “action over” claim?

An “action over” (also called a “third party over action”) is a type of action in which an injured employee, after collecting workers compensation benefits from the employer, files a tort claim against a third party whose negligence allegedly caused the employee's injury.  For example, assume an injured employee worked for a company installing windows on new construction.  The employee sues the general contractor at the construction site, arguing that the general contractor failed to provide a safe work site. In that case, the general contractor that was sued likely has a contract with the window company requiring the window company to defend and indemnify the general contractor against such claims. In this case, the window company may find itself indirectly paying for the injuries of its own employee, which the employee has sued the general contractor to recover.   Through this scenario, it is possible for an employer to ultimately be found paying the tort liability for injuries to its own employee.  This is an “action over” claim.

Although the standard general liability policy seeks to exclude coverage for claims by an employee against an employer, there is a loophole that could allow coverage for “action over” claims.  The standard general liability form contains an employer’s liability exclusion (exclusion e) in Coverage A.  This exclusion has a sentence at the end which reads “[t]his exclusion does not apply to liability assumed by the insured under an ‘insured contract’.”  Therefore, if the window company’s liability to the general contractor is deemed to arise from an “insured contract,” then it may be that the insurer ends up insuring the injuries suffered by an employee of the insured—who sued a third party, who then sought indemnity from the insured/employer.  In other words, it is this last sentence of the employer’s liability exclusion e that actually could be interpreted to create coverage for an “action over” claim against the insured. 

How are insurers precluding coverage for “action over” claims?

To preclude coverage for “action over” claims, some insurers have introduced an endorsement that, most significantly, removes the final sentence of the employer’s liability exclusion e.  This endorsement may therefore prevent coverage for “action over” claims.  The endorsement provides as follows:

It is agreed that the following change is made to Coverage A. 2. Exclusions:

Exclusion e. Employer’s Liability is deleted in its entirety and replaced with the following:

e. Employer's Liability

"Bodily injury" to:

(1)     An "employee" of the named insured arising out of and in the course of:

(a)     Employment by the named insured; or

(b)     Performing duties related to the conduct of the named insured's business; or

(2)     The spouse, child, parent, brother or sister of that "employee" as a consequence of Paragraph (1) above.

This exclusion applies:

(1)     Whether the named insured may be liable as an employer or in any other capacity; and

(2)     To any obligation to share damages with or repay someone else who must pay damages because of the injury.

Those courts that have addressed the action over endorsement have generally enforced the endorsement as written. These cases include Century Sur. Co. v. QSC Painting, Inc., 2:08-CV-860, 2010 WL 891245 (W.D. Pa. Mar. 8, 2010), and Starwood Hotels & Resorts Worldwide, Inc. v. Century Sur. Co., CIV.A.H-06-1210, 2007 WL 1644041 (S.D. Tex. June 5, 2007).  In QSC, the insured was a painting company that contracted with a utility to paint an electrical substation.   An employee of the insured was electrocuted while painting the substation and, after receiving workers compensation benefits, sued the utility. The utility tendered the defense and indemnity of the employee’s suit to the insured pursuant to the painting contract. The insured, in turn, sought coverage from its CGL insurer, Century, which denied coverage citing the action over endorsement. On appeal, the court found that the action over endorsement precluded coverage for the claim for indemnification by the utility against the insured. The court observed that the endorsement removed from the policy’s employer’s liability exclusion e the exception for liability assumed in an “insured contract,” which the court noted was exactly the type of agreement in place between the insured and the utility. Finally, the Court also rejected the insured’s argument that the endorsement thwarted the insured’s reasonable expectations of coverage for such claims.

Similarly, in Starwood, an employee of the insured window contractor was killed while replacing windows at a hotel. The estate of the employee sued the hotel, which tendered the action for defense and indemnity to the window contractor’s insurer, Century (again) as an additional insured.  Century initially denied based upon the action over endorsement, but later accepted the defense under a reservation of rights.  The hotel sued Century for unpaid defense costs and argued that the action over endorsement does not bar coverage.  The hotel first argued that the reference in the endorsement to “named insured” means the insured against whom a suit has been filed, (not the insured named in the declarations) which in that case was the hotel.  Therefore, as the hotel argued, the endorsement only bars coverage for injuries to a hotel employee, which the deceased was not.  The court rejected this argument observing that the “separation of insureds” provision clearly indicates that the hotel was an insured but not the named insured.  It is important to note here that, if the endorsement had referred to “the insured” (rather than the named insured), the employee exclusion would not apply because, as the court noted, the exclusion would then have to be read as referring only to that particular insured against whom a claim is being made. 

According to the courts in Starwood and QSC, the action over endorsement is a total exclusion for any claims arising out of injuries to employees of the named insured while on the job, including third party claims based in contribution or contractual or equitable indemnification. 

What if the claimant is an employee of an additional insured?

It may be significant to note another change in the “action over” endorsement referenced above.  While the standard employer’s liability exclusion excludes coverage for claims brought by employees of “the insured,” the action over endorsement only precludes coverage for claims brought by employees of “the named insured.”  Therefore, if an additional insured is seeking coverage for its contractual indemnity to a third party arising from a claim of the additional insured’s employee, then the additional insured’s claim may not be barred by the action over endorsement, which only applies to claims by the named insured.

When does the “insured contract” exception to exclusion e really apply?

In the first instance, an “action over” claim against an insured construction company should only fall within the exception to exclusion e if the insured’s indemnity obligations arise from “an insured contract.” It is worth noting that, in some states, indemnity agreements wherein one party agrees to indemnify the other for the indemnified party’s own negligence are unenforceable.  In such jurisdictions, “action over” claims based on contractual indemnification are excluded even if the policy is not amended to include an action over endorsement.  This is because, as discussed above, the employer’s liability exclusion contains an exception for liability assumed under an “insured contract,” which provides a window to coverage for action over claims based on contractual indemnification.  An “insured contract” is defined in the policy as an agreement under which the named insured assumes “the tort liability of another party to pay for ‘bodily injury’ … to a third person…”  Where indemnity arrangements are forbidden, the contract on which the action over claim is based can not qualify as an “insured contract” because it is not permissible to assume the tort liability of another as required under the definition of “insured contract.” Consequently, the exception to the employer’s liability exclusion for liability assumed in an “insured contract” is not applicable and the action over claim is barred.  See generally Virginia Sur. Co., Inc. v. N. Ins. Co. of New York, 224 Ill. 2d 550, 570, 866 N.E.2d 149, 161 (Ill. 2007).  Jurisdictions that void some or all indemnity agreements in the construction context include Illinois (740 ILCS 35 et seq.), Colorado (C.R.S. § 13-21-111.5(b)), Wyoming (§ 30-1-131 (in work involving oil, gas or water wells), Missouri (Mo. Rev. Stat § 434.100(1)), and Ohio (Ohio Rev. Code Ann. § 2305.31).     

Conclusion

The action over endorsement can effectively bar coverage for action over claims against the named insured.  However, the absence of such an endorsement does not mean that action over claims are always covered, particularly in the construction context, because the law in a number of states voids agreements in which a party agrees to indemnify another for the indemnitee’s own negligence.  Also, coverage for action over claims against an additional insured involving injury claims of the additional insured’s employees may be precluded from coverage under the employer’s liability exclusion e, but brought back into coverage by the action over endorsement.  Consequently, claims professionals faced with coverage determinations as to action over claims must keep in mind that the individualized facts must be taken into consideration along with the relevant policy provisions. 

For further information on “action over” issues or other insurance issues relating to construction claims, please contact Adam H. Fleischer, afleischer@batescarey.com, or John A. Husmann, jhusmann@batescarey.com