The Fourth Circuit has ruled that the terms of an underlying agreement between the named insured and a third party can impose coverage beyond that necessarily provided for in the policy. This case further confirms the long standing principle that exclusions will be strictly construed against the insurer.
BE&K was the general contractor on a hospital construction project for the Charlotte Mecklenburg Hospital Authority in Pineville, NC. BE&K subcontracted with SteelFab for the steel infrastructure, and SteelFab subcontracted in turn with CSS to erect the steel structure. Dustin Miller, an employee of CSS fell 30 feet after his safety cable broke and was paralyzed from the chest down.
CSS was the named insured under a policy with Amerisure. Amerisure’s policy included SteelFab and BE&K as additional insureds (“AI”). Amerisure’s CGL policy had limits of $1,000,000 per occurrence and there was an umbrella policy with $5,000,000 per occurrence limits. The SteelFab subcontract provided that the CSS’s insurance on SteelFab and BE&K as AI’s must be primary and non-contributory. SteelFab had its own CGL insurance through Continental which named BE&K as an AI. BE&K also was insured under the Owner’s “rolling owner control insurance program” (“ROCIP”) with Travelers. The terms of the ROCIP required participation by all tiers of on-site contractors, but BE&K failed to enroll CSS in the ROCIP. Amerisure’s policy on CSS had a CIP (“controlled insurance program”) exclusion that provided:
This insurance does not apply to “bodily injury” . . . arising out of . . . [CSS’s] ongoing operations . . . if such operations were at any time included within a “controlled insurance program” for a construction project in which you are or were involved.(emphasis added).
Miller filed an underlying lawsuit against BE&K and SteelFab for negligence, including failure to provide a safe work place, failure to ensure that subs followed safety protocols, failure to inspect safety features, failure to supervise, etc. (Miller made a workers comp claim against his own employer, CSS, so any negligence claims against CSS were barred.)
Continental defended SteelFab and BE&K and demanded that Amerisure participate in the defense. Amerisure refused, taking the position that the CIP exclusion in its policy applied because the Owner had a ROCIP in place for the project at the time of the accident which included coverage for CSS’s operations (i.e. steel erection). Continental defended and the case was settled at mediation for $1.7 million. Continental incurred $660,700 in defense fees and costs.
Amerisure lost at the trial court level (W.D.N.C) where Judge Mullen ruled that the exclusion did not apply and Amerisure had a duty to defend. He further ruled that although the “other insurance” clauses of the Amerisure and Continental policies provided that Continental’s CGL limits were primary to Amerisure’s Umbrella limits, the SteelFab/CSS subcontract changed that result and made all of Amerisure’s policies primary to Continental’s coverage. Judge Mullen also split the defense cost obligation between Amerisure. The Fourth Circuit not only affirmed that Amerisure should have defended, it also ruled that Amerisure was responsible for all of the defense costs and the full amount of the settlement of the underlying case. The Fourth Circuit held that the CIP exclusion in Amerisure’s policy applied only if two conditions were met: “(1) Miller’s injuries ‘arose out of’ CSS’s operations, and (2) CSS’s operations were ‘included’ in the ROCIP”. The Court ruled that since the claims alleged against BE&K and SteelFab were for their own failures in supervision of CSS’s safety procedures and operations, the first requirement that the injuries “arose out of CSS’s operations” was not met, and the Court did not even consider the second prong, i.e. whether CSS’s operations were included in the ROCIP. (Amerisure’s position was that even though CSS was not “signed up” for the ROCIP, it could have been – so the exclusion applied. But the Court never got to that issue.) At that point, the Court held that Amerisure had breached its duty to defend.
The Court then went on to affirm the trial court’s ruling in holding Amerisure responsible for the entire $1.7 million settlement paid by Continental. Amerisure argued that its umbrella policy stated, “the most we will pay on behalf of the additional insured is the amount of insurance required by the contract, less any amounts payable by the underlying insurance.” Amerisure argued that since Continental’s policy was also “underlying insurance” it should cover any amounts over the first $1,000,000. Relying on the language in the subcontract between SteelFab and CSS, the court noted that CSS was required to obtain $1,000,000 in CGL and another $1,000,000 in umbrella coverage and that BE&K and SteelFab were to be AI’s under CSS’s policy. Consequently, according to the Fourth Circuit Court, the trigger of Amerisure’s umbrella coverage was unaffected by the “other insurance” provisions in the Continental policy and in the Amerisure policy. In essence, the Court ruled that a contract between an insured and a third party governed the extent of insurance provided by the insurer despite language in the policy that may have provided otherwise. Also essential to the Court’s opinion was the “primary and noncontributory” language in the subcontract between CSS and SteelFab that applied to any insurance procured by CSS under its obligation to provide AI coverage to SteelFab and BE&K.
This case is important because of the Court’s willingness to allow the terms of an extraneous contract to control coverage despite that contract’s seeming contradiction with the terms and conditions of coverage in the policy. In short, but for the CSS/SteelFab subcontract dictating that Amerisure’s policies be “primary and noncontributory” the coverage obligations based upon the policy language would have been different. So look at the policy – but now you must also consider outside agreements between the policyholder and third parties if those agreements address insurance provisions. It is possible that those outside agreements may impact the coverage available to an insured or to an additional insured even if the policy states otherwise.
 Of course, any claims against CSS were prohibited because of the workers comp bar, so the only way Miller could recover was if BE&K and SteelFab were also responsible for their own negligence.