Employer’s Liability Insurer Not Obligated to Cover Claims Alleging Intentional Conduct

In Seneca Ins. Co. v. Cybernet Entertainment, LLC, et al., No. 16-cv-06554, the United States District Court for the Northern District of California ruled that the State Insurance Compensation Fund (“State Fund”) has no duty to defend Cybernet Entertainment, LLC (“Cybernet”), a producer of adult films, in a series of personal injury lawsuits filed by three actors alleging that they contracted human immunodeficiency virus (HIV) while on set. Cybernet maintained a Workers’ Compensation and Employer’s Liability Insurance Policy (the “Policy”) issued by the State Fund, and the instant dispute arose after Cybernet sought coverage to defend the underlying lawsuits.

After contracting HIV, the actors sought workers’ compensation benefits pursuant to the Act and under the Policy. The State Fund initially paid partial benefits to two of the three actors, but denied liability for the third actor’s claims. The actors thereafter filed civil actions against Cybernet in California State Court. Cybernet unsuccessfully responded to the lawsuits by demurring on grounds that California workers’ compensation provided an exclusive remedy and barred all tort claims. The State Fund agreed to defend Cybernet in these lawsuits subject to a reservation of rights, but later denied coverage after the California Superior Court overruled the demurrers, citing exclusions in the employer’s liability section of the Policy for claims (1) covered by workers’ compensation and (2) arising from Cybernet’s intentional actions.

By way of background, the Act provides a comprehensive system of remedies for workers who suffer injuries in the course and scope of their employment. The Act provides, in part, that workers’ compensation is the “sole and exclusive remedy of the employee…against the employer.” Cal. Lab. Code § 3602(a). California Courts apply a two-pronged test to determine whether the Act preempts tort claims – (1) the injury must arise out of an in the course of the employment; and (2) the act giving rise to the injury must constitute a risk reasonably encompassed within the compensation bargain between employee and employer. See Shoemaker v. Myers, 801 P.2d 1054 (1990). The Court found that claims based upon the allegedly negligent conduct of Cybernet (negligent supervision, negligent hiring, etc.) were preempted under the Act and no duty to defend existed under the Policy, which excludes “any obligation imposed by a workers’ compensation…benefits law.”

The Court was equivocal with respect to the preemptive impact of the Act on claims arising from the allegedly intentional conduct of Cybernet (intentional misrepresentation, fraud, battery, etc.), but found that the language of the Policy obviated any need for a decision under the Act. The Court framed the issue as follows: “to the extent that plaintiffs’ claims arise from Cybernet’s intentional conduct and therefore are not necessarily preempted…the issue becomes whether the State Fund has a duty to defend Cybernet with regard to these claims under the terms of the Policy.” Generally, the Policy provides “liability insurance” for “bodily injury by accident or…disease” and defines “accident” as “an event that is neither expected nor intended from the standpoint of the insured.” The State Fund argued that Cybernet was not entitled to coverage for any claims arising from intentional actions because the Policy excludes coverage for any “injury intentionally caused or aggravated” by Cybernet. The Court agreed, granting the State Fund’s partial motion for summary judgment, reasoning that no coverage exists and finding that the State Fund has no duty to defend Cybernet from claims arising from its allegedly intentional acts.

Illinois Supreme Court Slams Door on Long-Tail Toxic Tort Claims Against Employers

We previously wrote about the potential new risks facing employers’ liability insurers in light of recent case law from Pennsylvania and Illinois permitting employees to maintain long-tail occupational disease claims against former employers in the tort system, outside of the traditionally exclusive workers compensation regimes. For now, employers and their insurers can breathe a sigh of relief, at least in Illinois.

On November 4, 2015, the Illinois Supreme Court reversed an Illinois intermediate appellate court which had permitted an employee’s estate to sue his former employer in the tort system. Folta v. Ferro Eng’g, 2015 IL 118070 (Ill. Nov. 4, 2015). That employee, James Folta, worked for Ferro Engineering from 1966 to 1970 as a shipping clerk and product tester, and allegedly developed mesothelioma in part as a result of his exposure to asbestos-containing products at Ferro. The intermediate appellate court held that the identical exclusivity provisions in the Illinois Workers’ Occupational Disease Act and the Workers’ Compensation Act (collectively, the “Act”) did not bar Folta’s tort claim against Ferro because he first discovered his asbestos-related injury outside of the Act’s statute of repose. Folta v. Ferro Engineering, 14 N.E.3d 717 (Ill. App. Ct. 1st Dist. 2014).

In reversing the appellate court, the Illinois Supreme Court held that Folta’s tort claim against Ferro was barred by the exclusive remedy provisions of the Act even though Folta had no rights under the Act because his injuries manifested after the 25-year statutory time limits to file claims. Under Illinois law, “an employee can escape the exclusivity provisions of the Act if the employee establishes that the injury (1) was not accidental; (2) did not arise from his employment; (3) was not received during the course of employment; or (4) was not compensable under the Act.”  Id. at *14. In Folta, the plaintiff argued – and the intermediate appellate court accepted – that his claim was “not compensable” because his disease manifested outside of the Act’s statutory time limits to file a claim. In other words, plaintiff argued that “he never had an opportunity to recover any benefits under the Act. That is, through no fault of his own, the claim was time-barred before his disease manifested.” Id. at *16. On the other hand, the employer argued that an injury was “compensable” if the type of injury fell within the scope of the Act, regardless of whether an employee could recover thereunder.

The Folta court agreed with the employer, explaining that the legislatively-enacted time limit acts as a “statute of repose, and creates an absolute bar on the right to bring a claim.” Id. at *33. Further, the Folta court explained that such a statute of repose was not manifestly unfair because the time limitation did “not prevent an employee from seeking a remedy against other third parties for an injury or disease.” In dissent, however, Justice Freeman heralded Pennsylvania’s “persuasive” Tooey decision, which permitted employees to sue their former employers in tort for long-tail occupational disease injuries.

It remains to be seen whether other jurisdictions will follow the Pennsylvania or Illinois approach but, for now, employers and their employers’ liability insurers should continue to be prepared to address these potential newfound liabilities.

Pennsylvania Supreme Court Holds That Employer’s Liability Exclusion Does Not Exclude Coverage for Employee Claim Against Non-Employer Additional Insured

The Pennsylvania Supreme Court recently held that an employer’s liability exclusion in an umbrella policy did not apply to a claim brought by the named insured’s employee against an additional insured. Mutual Benefit v. Politsopoulous, — A.3d — (Pa. 2015). In Politsopoulous, the insurer issued a commercial umbrella liability policy to a restaurant that conferred additional insured status on the restaurant’s landlord by virtue of the policy’s blanket additional insured endorsement and the corresponding insurance requirements of the lease agreement. A restaurant employee sued the landlord for injuries sustained when she fell down a flight of stairs. The insurer denied the landlord’s request for coverage based on the employer’s liability exclusion and filed a declaratory judgment action in the Lancaster County Court of Common Pleas.  That exclusion barred coverage for an injury to “[a]n ‘employee’ of the insured arising out of and in the course of . . . [e]mployment by the insured].” Mutual Benefit contended that the phrase “the insured” meant that coverage was excluded for injuries to employees of the named insured, while the additional insured contended that the exclusion should be applied separately to each insured seeking coverage. In other words, because the plaintiff was not the landlord’s employee, the exclusion should not apply.

The trial court granted summary judgment in favor of Mutual Benefit explaining that it was bound by Pa. Mfrs’ Assoc. Ins. Co. v. Aetna Cas. & Sur. Ins. Co., 233 A.2d 548, 549 (Pa. 1967). In that case, the court held that the phrase “’[t]he insured’ has not been interpreted to mean ‘an insured’ or ‘any insured.’ It has merely been interpreted as the language dictates, to include the named insured.” 33 A.2d at 550. Because it was bound by PMA, the trial court held that the phrase “the insured” in the restaurant policy’s employer’s liability exclusion encompassed the named insured as a matter of law. Accordingly, the trial court held that the exclusion applied because the employee suing the additional insured was an employee of the named insured. The trial court, however, criticized the logic of the PMA decision and invited appellate review.

The Superior Court reversed the trial court on the basis of the policy’s severability clause, explaining that the severability clause required the court to take the following approach to policy interpretation:

When determining coverage as to any one insured, the policy must be applied as though there were only one insured, i.e., the one as to which coverage is to be determined . . . [this] policy language directs us to evaluate coverage as though Employer does not exist.

Mut. Benefit Ins. Co. v. Politopoulos, 75 A.3d 528, 536 (Pa. Super. Ct. 2013). Accordingly, the Superior Court reasoned that, when treating the landlords as the only insureds under the policy, the employer’s liability exclusion did not apply since the landlords did not employ the underlying plaintiff. Id. at 537.

The Supreme Court affirmed the Superior Court’s decision, but disagreed with its reasoning. Though it did not overrule PMA, the Politsopoulous Court “decline[d] to extend PMA’s expansive construction of the term ‘the insured’ to an instance in which a commercial general liability policy variously makes use of the terms ‘the insured’ and ‘any insured.’” Accordingly, the Court held that the phrase “the insured” was ambiguous: “[A]t least where a commercial general liability policy makes varied use of the definite and indefinite articles, this, as a general rule, creates an ambiguity relative to the former, such that ‘the insured’ may be reasonable taken as signifying the particular insured against whom a claim is asserted.” Since, under Pennsylvania law, ambiguous exclusionary language is construed against the insurer, the Politopoulos court held that the exclusion did not apply because “the ambiguous exclusionary language pertains only to claims asserted by employees of ‘the insured’ against whom the claim is directed.”

Although the outcome of this particular case is not surprising, the Supreme Court provided an articulate analysis of how the use of definite and indefinite articles in association with the word “insured” throughout a policy can give rise to an ambiguity when considered in the context of particular policy exclusions. The debate over “the insured” versus “any insured” is sure to continue, but we can expect the Politopoulos case to be a part of that discussion in Pennsylvania going forward.

Asbestos Suits Against Employers Present New Risk for Employer’s Liability Insurers

Two asbestos hotbed jurisdictions, Pennsylvania and Illinois, have recently opened the door to long-tail occupational disease claims against employers in the tort system.  These decisions held that the exclusivity provisions of the applicable state workers’ compensation acts do not prohibit employees diagnosed with occupational diseases long after their retirement from suing their former employers in the tort system alongside the traditional panoply of asbestos defendants.  Employers and their employer’s liability insurers should be aware of this new risk and the issues it may present going forward.

In Pennsylvania – as in almost any other state – the Workers’ Compensation Act is and has been the exclusive means for an employee to recover from his or her employer for workplace-related injuries.  Certain enumerated “occupational diseases,” such as asbestosis, are included within the act’s ambit provided that they occur “within three hundred weeks after the last date of employment . . .” 77 P.S. § 411(2).  This 300-week provision had been interpreted as a statute of limitations and/or repose, closing the door on claimants’ recovery from employers when a latent disease manifests after 300 weeks.  Therefore, employees could not sue their employers in the tort system because of the workers’ compensation exclusivity provision, nor could they pursue workers’ compensation benefits because of the statute of repose.

say Images: Robert Biedermann/Shutterstock.com

Images: Robert Biedermann/Shutterstock.com

The Supreme Court of Pennsylvania abrogated this long-standing interpretation in Tooey v. AK Steel Corp., 81 A.3d 85 (Pa. 2013).  The court held that because the occupational disease claims manifesting outside the 300-week period are not covered by the act, the act’s exclusivity provision does not apply, and employees are free to sue their former employers in tort.  Similarly, in Illinois, the Workers’ Compensation Act and Workers’ Occupational Diseases Act contain exclusivity provisions that bar employees’ direct tort actions against employers for workplace injuries.  Under those statutes, an employee must file claims within three and 25 years, respectively.

In Folta v. Ferro Engineering, (Ill. App. Ct. 1st Dist. June 27, 2014), an Illinois intermediate appellate court held that the Foltas could maintain a tort claim against James Folta’s former employer because he first discovered his asbestos-related injury outside of the acts’ statutes of repose.  Unlike Pennsylvania, where a legislative amendment to the workers’ compensation statute appears to be the only “fix,” there remains a possibility that Folta is reversed on appeal or that the Illinois Supreme Court overrules Folta in another case.  The defendant in Folta filed a petition for leave to appeal, which remains pending.

While the traditional asbestos products and premises defendants seek coverage from their historical general liability insurers, commercial general liability policies are unlikely to provide coverage to employer defendants because of the policies’ employer’s liability exclusions.  Instead, employers may look to their workers’ compensation/employer’s liability policies.  Employer’s liability coverage exists “to ‘fill the gaps’ between workers’ compensation coverage and an employers’ general liability policy… to protect the insure[d] from tort liability for injuries to employees who do not come under the exclusive remedy provisions of workers’ compensation.”  See Erie Ins. Prop. & Cas. Co. v. Stage Show Pizza, JTS, Inc., 210 W. Va. 63, 68, 553 S.E.2d 257, 262 (2001).  Tooey and Folta have created a new “gap,” and that gap may widen into a chasm, as Philadelphia’s The Legal Intelligencer reported on June 3 that courts are “universally” accepting plaintiffs’ attempts to join employers in pending mesothelioma cases, and that virtually every new filing names employers as defendants.

Images: Robert Biedermann/Shutterstock.com

Images: Robert Biedermann/Shutterstock.com

Employer’s liability coverage is fundamentally different and much more limited than general liability coverage.  Because this coverage was offered to fill the narrow “gap” between general liability and workers’ compensation coverage, it was offered inexpensively.  As a result, employer’s liability coverage often includes high deductibles (or loss reimbursement provisions) and low aggregate limits.  Some employer’s liability coverage forms include time limitations, limiting coverage to claims filed against the employer within three or five years of the policy’s expiration date.  Further, most employer’s liability coverage contains specific trigger language, limiting coverage to those policies in effect only on the last date of the worker’s exposure to hazardous conditions at the workplace.  Therefore, the “continuous trigger” applicable to general liability policies is unlikely to apply to employer’s liability insurers.  Employers risk only being able to access a single policy year that is subject to a high deductible and low aggregate limit (with no excess coverage available).

It remains to be seen whether the decisions in Pennsylvania and Illinois represent an emerging risk that may spread to other jurisdictions, or if the legislatures of both states will react swiftly to amend their respective states’ laws.  For now, however, employers and their employer’s liability insurers should be prepared to address these potential newfound liabilities.