Insurance laws may vary slightly between jurisdictions but major principles are nearly uniform. These include requirements that an insurer should draft clear and unambiguous exclusions and should identify and fully inform the insured of the basis for a coverage issue promptly. Failure to adhere to these fundamentals generally turns out poorly for the carrier as the New York Federal Court recently explained.

Reidy Contracting Group, LLC v. Mt. Hawley Insurance Company

683 F.Supp.3d 290 (W.D. NY 2023)

2024 WL 1345704 (W.D. NY 2024)

Background

In January 2013, David Zhigue, Manuel Japa and Segundo Japa (“Workers”) were on a construction site in New York as part of their employment with Vanquish Contracting Corp. (“Vanquish”). Vanquish and Workers were demolition subcontractors hired by general contractor Reidy Contracting Group, LLC (“Reidy”). Workers were all injured when scaffolding collapsed at the site.

Later in 2013, Workers filed a lawsuit against various entities including Reidy. Reidy subsequently filed a claim against Vanquish and its insurers for contractual indemnity.

Insurance Coverage

The subcontractor agreement between Reidy and Vanquish required Vanquish to obtain CGL coverage and name Reidy as an additional insured under those policies. Vanquish purchased a primary CGL policy from Endurance and an excess policy from Mt. Hawley Insurance Company. The coverage disputes at issue involved Mt. Hawley’s excess policy as Endurance had paid out the limits of its primary policy. However, this coverage dispute turned to some extent on the interpretation of the Endurance primary policy.

The Endurance primary policy provided that Vanquish was the named insured and by endorsement provided that additional insureds would include any entity that Vanquish had agreed by written contract to add as an additional insured. This would include Reidy. However, this endorsement provided that the additional insureds would only be provided coverage for their supervision of Vanquish’s work. Essentially, coverage was excluded if Reidy actively engaged in a negligent act that caused injury. This limitation was referred to as the Endurance Limitation.

The Mt. Hawley excess policy was essentially a follow-form policy and defined insured as any person or entity insured under the Endurance Policy. The Mt. Hawley excess policy contained an Employers Liability Exclusion. This exclusion stated there would be no coverage for bodily injury to:

1. An employee of any insured arising out of and in the course of:
   1. Employment by the insured…

The Mt. Hawley policy also contained a Separation of Insureds provision that required coverage for each insured to be evaluated separately.

Denial of Coverage by Mt. Hawley

After claims were submitted, Endurance agreed to provide coverage and paid out its policy limits. However, Mt. Hawley declined a defense and indemnity to Reidy in writing and cited only the Employers Liability Exclusion. The Endurance Limitation was not mentioned in Mt. Hawley’s coverage denial to Reidy.

Years later, Reidy and its other insurers requested that Mt. Hawley reconsider its denial and provide coverage to Reidy for Workers’ claims. Mt. Hawley refused to retract its denial. Reidy and its insurers then filed a declaratory judgment action in Federal Court to determine Mt. Hawley’s coverage obligations.

DJ Action

Mt. Hawley initially argued in the DJ Action that the Employers Liability Exclusion precluded coverage for Workers’ claims. Mt. Hawley acknowledged that Workers were not employees of Reidy but pointed out that the Employers Liability Exclusion precluded coverage for bodily injury to the employee of any insured. As Vanquish was the named insured and the employer of Workers’, the carrier claimed the exclusion must be interpreted to also exclude coverage for the Workers’ claims against Reidy. Later, Mt. Hawley would also argue that the Endurance Limitation might preclude coverage for Reidy as it had not yet been decided whether Reidy was liable for Workers’ claims for failing to adequately supervise the job site or from some other affirmative action Reidy took to cause the Workers’ injuries.

The Federal Court did not agree with Mt. Hawley’s arguments and rejected each through two separate summary judgment orders.

First, the Court took up and rejected Mt. Hawley’s argument that the Employers Liability Exclusion was applicable. In doing so, the Court acknowledged that the Employers Liability Exclusion at first used the phrase “any insured” to preclude coverage for injuries to employees. Had the exclusion stopped there, coverage for Workers’ claims against Reidy may very well have been excluded as Workers’ were employees of Vanquish, the named insured. However, the exclusion went on in the very next sentence to state that coverage would not apply for employees injured in the course and scope of their employment with “the insured”. By using the phrase “the insured”, the policy could be viewed as only excluding coverage for the actual employer of Workers. With the separation of insureds provision requiring separate coverage analyses for Reidy and Vanquish, coverage would be available for Reidy as it was not Workers actual employer. At a minimum, the court found the use of the phrases “any insured” and “the insured” in the same exclusion to be ambiguous and ambiguities were required to be resolved in favor of the insured.

Roughly a year later, the Court took up Mt. Hawley’s argument regarding the Endurance Limitation. The Court was skeptical this limitation would preclude coverage as there seemed to be a lack of evidence that Reidy had any liability other than that for its supervisory role over the construction site. More importantly, the Court determined that it really didn’t matter if the facts supported the Endurance Limitation. Mt. Hawley had not promptly raised the Limitation in its initial denial of coverage and waited years until the declaratory judgment action was filed to raise this argument. The insurance regulations in New York required the carrier to promptly and in writing inform the insured (including an additional insured) of the specific basis for any denial. Mt. Hawley failed to do so and was now precluded from relying on the Endurance Limitation.

Persistence in challenging a coverage denial paid off for Reidy. The District Court’s decisions highlight the need to thoroughly examine an exclusion for any ambiguity. The decision further illustrates that an insurers’ failure to timely raise a coverage exclusion/limitation can be fatal even in the absence of the insured demonstrating prejudice.