Garret Murai | California Construction Law Blog
What’s in a word? When it comes to insurance policies, a word, can potentially mean millions of dollars.
In California Specialty Insulation, Inc. v. Allied World Surplus Lines Insurance Company, 102 Cal.App.5th 1 (2024), an insured and its insurer battled it out over the word “contractor,” and whether an exclusion from coverage of bodily injury to any employee or temporary worker “of any contractor or subcontractor,” excluded a personal injury claim brought by an employee of a general contractor against a subcontractor.
The California Specialty Contractor Case
In 2017, Air Control Systems, Inc. (“Air Control”) was contracted to perform improvements at a building in Los Angeles, California. Air Control in turn subcontracted with California Specialty Insulation, Inc. (“CSI”) to install duct insulation on the project.
During construction, an employee of Air Control was injured when he fell 16 to 20 feet from a ladder that was struck by a scissor lift driven by an employee of CSI. Approximately two years later the Air Control employee filed a personal injury lawsuit against CSI.
Upon receipt of the lawsuit, CSI tendered the claim to its commercial general liability carrier Allied World Surplus Lines Insurance Company (“Allied World”). Allied Word accepted defense without a reservation of rights , but later denied coverage, on the ground that the claim was not covered under the policy.
In 2021, CSI filed a declaratory relief lawsuit against Allied World claiming that, under the policy, Allied had a duty to defend and indemnify CSI from and against the lawsuit filed the Air Control employee.
At issue was an endorsement to the policy titled “Bodily Injury to Any Employee or Temporary Worker of Contractors Exclusion.” The endorsement provided that there was no coverage for “‘Bodily Injury’ . . . to any ’employee’ or ‘temporary worker’ of any contractor or subcontractor arising out of or in the course of the rendering or performing services of any kind or nature by such contractor or subcontractor.” The term “contractor” was not defined in the endorsement or the policy.
According to Allied World, the endorsement removed coverage for bodily injury suffered by an employee of “any contractor” including the employee of a contractor such as Air Control. CSI, on the other hand, claimed that the endorsement only removed coverage for bodily injury suffered by one of its own employees or an employee of one of its subcontractors, and since Air Control was a higher-tiered contractor, the exclusion did not apply.
Both parties filed motions for summary judgment and the trial court sided with CSI finding the terms “contractor” and “subcontractor” to be ambiguous and that Allied World’s interpretation was not in line with CSI’s reasonable expectations. Allied World appealed.
The Court of Appeal Decision
On appeal, the Court of Appeal explained that they review rulings on summary judgment de novo without deference to the trial court ruling.
With respect to interpretations of insurance policies, the Court of Appeal explained that they are guided by certain well established rules. These include the rule that “if contractual language is clear and explicit, it governs”, but if the terms are ambiguous, they are interpreted to protect “the objectively reasonable expectations of the insured.” “Only if these rules do not resolve a claimed ambiguity,” explained the Court of Appeal, “do we resort to the rule that ambiguities are to be resolved against the insurer.”
The Court of Appeal further noted:
To further ensure that coverage conforms fully to the objectively reasonable expectations of the insured, the corollary rule of interpretation has developed that, in cases of ambiguity, basic coverage provisions are construed broadly in favor of affording protection, but clauses setting forth specific exclusions from coverage are interpreted narrowly against the insurer. The insured has the burden of establishing that a claim, unless specifically excluded, is within basic coverage ,while the insure has the burden of establishing that a specific exclusion applies.
Here, explained the Court of Appeal, Allied World relying on the dictionary definition of “contractor” contends that the term “contractor” as used in the endorsement unambiguously means anyone who has “contracted to work on a construction project”, while CSI argues that the term “contractor” can also just as reasonably be read as “anyone hired by the insured pursuant to contract.”
Underscoring the often technical nature of contract interpretation issues, Allied World noted that the endorsement includes the modifier “any” before the word “contractor” and that its placement before the term “contractor” establishes that the exclusion “is not a limited subset of contractors, such as those hired by CSI” but rather “every contractor” or “all contractors” irrespective of whether they were hired by CSI or not.
Not so fast held the Court of Appeal. While “Allied World is correct that the phrase ‘any contractor’ is interchangeable with ‘every contractor’ and ‘all contractors’ . . . none of these phrases helps resolve the ambiguity in so far as the term ‘contractor’ remains undefined and subject to multiple reasonable interpretations.”
Having found the term “contractor” to be ambiguous the Court of Appeal next looked at what interpretation would protect the insured (CSI’s) objectively reasonable interpretation and, here, it agreed that construing the term “contractor” more narrowly as suggested by CSI protected the objectively reasonable interests of CSI:
As noted, CSI contends the term “contractor” means anyone CSI hired other than its employees. CSI contends this narrower reading of the term best aligns with its objectively reasonable expectations as the insured. Namely, CSI explains that in purchasing the policy it expected to be “protected from liability for accidental bodily injury arising out of the conduct of its insulation business, unless the injury was sustained either by a CSI employee or by an employee of a CSI contractor.” For the uncovered injuries, CSI notes, it maintained workers’ compensation insurance and had the ability to require the same form of insurance be maintained by anyone it hired to perform work on its behalf. In contrast, CSI continues, it “could not exercise the same control over all contractors in the world and thus had no objectively reasonable expectation that injuries to contractors unrelated to CSI would be excluded from coverage.” CSI contends these expectations are consistent with, and supported by, the purpose of commercial general liability insurance.
In sum, held the Court of Appeal, based on the reasonable expectations of the insured, “contractor,” as it is used in the endorsement, means “anyone hired by the insured pursuant to contract,” or more simply, “CSI’s contractor.” Under this definition, the Air Control employee was not a contractor’s employee because “CSI did not hire his employer, Air Control.” Therefore, the exclusion does not apply to preclude Allied World’s defense and coverage obligations for purposes of the negligence claim.
Conclusion
So there you have it. A good summary of the rules applying to interpretation of insurance policies, as well as a front row seat (sort of), of how technical the arguments can get when parties are arguing different interpretations of policy terms.
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