At first glance, the employer’s liability exclusion in a commercial insurance policy appears straightforward — the policy does not allow for coverage of bodily injury claims made against an insured employer by an employee. By including this exclusion in business owners’ policies, policy drafters recognized that general liability coverage is unnecessary for an employer whose employee is injured on the job because the workers’ compensation system compensates the injured worker.
In Pennsylvania, the exclusion’s application is complicated when a liability policy covers multiple insureds and the injured worker sues a nonemployer insured. In such instances, the employee alleges, for example, that the nonemploying insured — perhaps a related company or independent contractor — was negligent in supplying a vehicle or performed repair work that caused the injury.
Until recently, the fault lines were clearly split between state courts, which have largely distinguished the only Pennsylvania Supreme Court decision on the subject, which benefited the insurer, and federal courts, which are bound to follow the decision of a state’s highest court. A recent decision from a federal judge in Philadelphia appears to have tilted this delicate balance in favor of policyholders.
The issue first came to light in 1967, when the Pennsylvania Supreme Court decided Pennsylvania Manufacturers’ Association Insurance Co. v. Aetna Casualty and Surety Insurance Co. In the PMA case, an employee of the Harry Niehaus Company drove a company truck to Delaware Valley Wool Scouring Company, where a Delaware Valley employee negligently operated a forklift while unloading the truck and injured the Niehaus employee.
Though not a named insured under the Niehaus policy with PMA, Delaware Valley qualified as an insured under an omnibus provision since the bodily injury resulted from an automobile. The Pennsylvania Supreme Court held PMA’s employer’s liability exclusion — which barred coverage for bodily injury claims made by an employee of "the insured" — was applicable and precluded coverage for Delaware Valley, positing the term “the insured” was limited to Niehaus, the named insured.
Without discussing its meaning and applicability, the state's high court dismissed Delaware Valley’s argument that a so-called “severability of interests” provision in the policy dictated a contrary result. Such a clause outlines that an insurance policy is to be read as if a separate policy were issued to each qualifying insured.
Since issuing PMA, the Pennsylvania Supreme Court has not addressed the viability of that decision. Federal courts, which are constrained to follow controlling Pennsylvania Supreme Court precedent, have been adhering to PMA, despite the evolution of policy language since 1967. See, Brewer v. United States Fire Insurance Co. (2011); Scottsdale Insurance Co. v. City of Easton(2010); Brown & Root Braun Inc. v. Bogan Inc. (2002); Endurance American Specialty Insurance Co. v. H&W Equities Inc. (2013); Markel Insurance Co. v. Young (2012); North Wales Water Authority v. Aetna Life & Casualty Co. (1996).
At the state court level, however, PMA has been routinely distinguished. In 1990, a superior court panel rejected PMA in Luko v. Lloyd’s London (1990). The policy in Luko, issued to two named insureds — one the employer and another the tortfeasor — contained an exclusion similar to that in PMA, but also included a bargained-for endorsement that modified the exclusion. That endorsement allowed the superior court to distinguish PMA. The court went on to note in dicta that the policy’s severability provision nevertheless allowed for coverage for the injury claim since “the insurance afforded applies separately to each insured against whom claim is made or suit is brought.”
In United States Steel Corp. v. National Fire Insurance of Hartford(2011), the exclusion at issue stated that coverage for bodily injury to an insured’s employee arising out of, and in the course of, employment by the insured was precluded. The policy, issued to named insured, Power Piping, expressly included U.S. Steel as an additional insured, and also contained separation of insureds and severability clauses akin to Luko.
Allegheny County Judge Stanton Wettick distinguished PMA — where there was a single insured (i.e., “a stranger to the named insured”) — from Luko and the case before him, where there were two named insureds. Judge Wettick reasoned that, in the latter instances, it would have been each insured’s expectation to be covered if sued for injuries sustained by another named insured’s employee.
In giving weight to an insured’s reasonable expectations, Judge Wettick observed that modern Pennsylvania insurance law had moved in a direction that allowed for that consideration. Interestingly, the district court in H&W Equities rejected application of the reasonable expectations doctrine since, as in U.S. Steel, the policy in that case was issued to a business, not an individual. The court observed that the reasonable expectations doctrine could not apply to an insurance dispute involving a commercial insured.
Breaking a 23-year silence on the issue, in September 2013, the superior court weighed in on the debate with its opinion in Mutual Benefit Insurance Co. v. Politopoulos (2013). While acknowledging that dicta in Luko — that the severability clause mandated that the policy be read separately as to each insured — lacked any binding effect, the panel essentially used the same rationale to find that the nonemploying insured was entitled to coverage.
The court noted that a separation of insureds provision that was virtually identical to Luko’s severability provision — “[T]his insurance applies … [s]eparately to each insured against whom claim is made or suit is brought” — and was more precise than comparable wording in the PMA policy, which in its view did not necessarily mandate that the policies be read independently as to each insured. Recognizing that it was powerless to overrule a Pennsylvania Supreme Court decision, the superior court distinguished PMA factually, stating that “the language we find dispositive is materially distinct from that in PMA, and it is for that reason alone — not any misgivings about PMA — that we reach this result.”
Not only is the separation of insureds clause in Politopoulos the same as the language involved in Luko and U.S. Steel, it mirrors the provisions discussed in federal court decisions such as Scottsdaleand Markel. In fact, that wording is contained in present-day commercial general liability policies issued to many commercial insureds.
The Politopoulos case opened the door for the federal courts’ recent movement away from PMA. Although it reviewed a severability clause under New Jersey law in Arcelormittal Plate LLC v. Joule Technical Services Inc. (2014), the Third Circuit, citing Politopoulos, suggested in dicta that “PMA, although still good law, may not control in cases where the policy contains a severability clause distinguishable from that in PMA.”
Most recently, with its decision in Ramara Inc. v. Westfield Insurance Co. (2014), a Pennsylvania federal court for the first time has firmly departed from PMA by relying on Politopoulos, a case where the severability provision contained language allowing for each insured to be considered as if it is the only insured.
In the case underlying Ramara, Fortress Steel employee Anthony Axe allegedly sustained injuries while setting beam clips on/for a garage deck. Axe sued Ramara, the garage owner and general contractor Sentry. Ramara sought coverage as an additional insured from Fortress’ liability insurer. The carrier denied that Ramara was an additional insured and further argued that the claim fell within the employer’s liability exclusion.
After concluding that Ramara qualified as an additional insured, Judge Stewart Dalzell distinguished PMA and concluded that the employer’s liability exclusion did not apply to the facts of the case. He noted that the policy at issue, unlike the policy in PMA, contained clear language in the severability clause requiring the policy to be read separately as to each insured against whom a lawsuit is brought.
Judge Dalzell went on to observe that Ramara was an additional insured by virtue of the bargained-for language in the construction contract between Fortress and Sentry, not by way of PMA’s omnibus clause, “which has no role in the design of the insurance contract.”
Finding that there was no Pennsylvania Supreme Court case directly on point, the district court found Politopoulos “a persuasive indicator of Pennsylvania law.” The judge did not address why he declined to follow the Third Circuit cases involving the modern severability clause that nonetheless were governed by PMA.
As long as the Pennsylvania Supreme Court continues to remain silent — the high court is considering whether to allow an appeal inPolitopoulos — policyholders and insurers are left to navigate the minefield created in the wake of PMA. For the moment, however, one thing is clear. Unless the Third Circuit overturns Ramara, insurers that are able to pursue relief in federal court as to the exclusion’s application are now faced with an obstacle in what was once an easier path.
**Note: this article is presented as it originally appears in Law360