CGL Policy Gaps and Workers’ Compensation: Understanding the Impact to Additional Insureds

Unless you are a workers’ compensation claims expert, you might not know that a subcontractor’s injured employee generally cannot sue them, but can sue upstream parties. This leaves general contractors, property managers, and owners exposed. An additional insured endorsement on the subcontractor’s commercial general liability (CGL) policy helps minimize exposure.

But does it eliminate that exposure completely? Not quite.

Three major legal landmines exist when it comes to workers’ compensation claims and additional insureds. Recognizing these hazards can save time and trouble in fighting a lawsuit from someone else’s employee.

Let’s frame our legal landmines with a common scenario:

Real Good Builders, a general contractor, hires Pete’s Painters for work on a construction project. They sign the contract which requires Pete’s to add Real Good as an additional insured.

While painting the building’s exterior, a Pete’s employee falls and breaks several bones. The employee files for workers’ compensation from Pete’s Painters and sues Real Good Builders for not maintaining a safe work environment.  

As an additional insured, Real Good Builders tenders the suit to Pete’s insurance company for defense. The insurer denies coverage.

Why was coverage denied? Time for a closer look.

Coverage Denial Landmine #1: Four-Corners Jurisdictions

Additional insured endorsements include causation-trigger language stating that liability only applies when “caused, in whole or in part, by” the acts or omissions of the named insured. This equates to showing that the named insured is at least 1% at fault for the loss.

[For a deeper dive into causation-trigger language, pause here and read our article “How Does Causation-Trigger Language Affect Coverage for Additional Insureds?”]

We could make a case that Pete’s bears some responsibility for the injury. However, since the employee cannot sue Pete’s (because of the workers’ compensation exclusive remedy provision), they do not mention their employer in the lawsuit. In a four-corners jurisdiction, the court likely would side with the insurance company in denying coverage to defend Real Good against the claim.

Four-corners states allow only what is included within the “four corners” of the suit compared to the “four corners” of the insurance policy. No other evidence is allowed. Since the employee does not mention Pete’s Painters in the allegation, the court would ignore their involvement. As a result, Real Good as the additional insured does not receive coverage under Pete’s policy.

Approximately 17 states represent four-corners jurisdictions. While the insurance company may deny the duty of defense in these states, evidence of Pete’s role could become relevant to the courts when determining fault for indemnification.

Coverage Denial Landmine #2: Third-Party Indemnification and Contribution Claims

When an employee allegation fails to fulfill the causation-trigger language requirement, an additional insured can try to sue the named insured directly to initiate coverage. By alleging fault, Real Good Builders seeks to trigger the duty to defend requirement in the Pete’s Painters insurance policy.

Many courts across the country deny this action, reasoning that an additional insured now becomes a plaintiff rather than a defendant. Therefore, the insurance company does not have a duty to defend. Courts prohibiting the practice also view it as potential insurance manipulation. They believe the maneuver opens the door for additional insureds to file baseless third-party claims alleging named insured negligence simply to trigger the insurer’s duty to defend.

Coverage Denial Landmine #3: Employers’ Liability Exclusion

Standard commercial general liability policies include Employers’ Liability Exclusion E regarding bodily injury. The exclusion concerns “An employee of the insured arising out of and in the course of employment by the insured; or while performing duties related to the conduct of the insured’s business.”

The clause relates to employer liability and any requirement to share or repay money to another party paying damages because of the injury. This would be bad news for additional insureds except that Exclusion E does not apply to liability assumed under an “insured contract.”  

So far, so good. Except insurers are starting to attach another exclusion—CG 21 39. Often found in policies written for contractors, this “Contractual Liability Limitation” narrows the definition of an insured contract. The amendment removes “That part of any other contract or agreement pertaining to your business … under which you assume tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization” from the policy.

Simply put, the exclusion eliminates coverage of lawsuit liability for Real Good Builders assumed by Pete’s Painters through the additional insured endorsement.

Next Steps for Worker Lawsuit Legal Risk Management

Don’t wait for a lawsuit to discover that an insurance policy’s duty to defend cannot be triggered.

• Research if your project resides in a four-corners state. Understand that the language in the lawsuit compared to the insurance policy weighs heavily on an insurer’s duty to defend in these jurisdictions.
• Have your legal team review case law for the courts where your company has projects. Find out if they allow an additional insured to sue a named insured directly to initiate coverage against worker lawsuits. Knowing where the practice is disallowed could save time and money in fighting a losing battle.
• Stipulate in the contract that exclusion CG 21 39 is prohibited. Then review all existing third-party policies to identify if the exclusion already exists among working subcontractors.

Let Lumie handle the paperwork

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