Why it matters: Policyholders scored a victory in Pennsylvania when the state’s highest court ruled that the employer’s liability exclusion in an umbrella commercial liability insurance policy had limited scope due to basic grammar rules concerning the use of definite and indefinite articles in the policy provision.

A restaurant bought an umbrella liability policy that included an employer’s liability exclusion, which applied to injury to “an employee of the insured arising out of and in the course of [the employee’s] employment by the insured.” The policy also included language providing that the policy applies “separately to each insured against whom claim is made or suit is brought.”

The restaurant operates on leased property, and the lease agreement required the restaurant to include the property owners as additional insureds on the liability policy. A restaurant employee was injured in 2007 and sued the property owners, who requested a defense from the restaurant’s insurance carrier. The insurer denied the request for defense and indemnification based on an exclusion for “employer’s liability,” arguing that the injured employee was in the “employment of the insured,” because the property owners were an “insured” under the policy. The Pennsylvania Supreme Court rejected the insurer’s reading, finding that it was ambiguous whether “the insured” in that context included more than the injured person’s employer or, more expansively, applied to “any insured.” Because the property owners did not employ the injured party, the exclusion did not apply.

As such, Pennsylvania policyholders can rest assured that insurers will be bound strictly to the language of their exclusions and not be permitted to expand their reach through broad interpretations of unclear language.

Detailed discussion: Christos Politsopoulos and Dionysios Mihalopoulos leased their property to Leola Restaurant. The lease required that the property owners be named as additional insureds on the restaurant’s liability policy. While the owners were not specifically designated on the declarations page, the policy was designed to extend coverage to unidentified persons doing business with Leola with whom the restaurant agreed in writing to provide insurance.

In December 2007, a Leola employee fell from an outside set of stairs and was injured. She sued the property owners, alleging they were negligent in maintaining the stairs in an unsafe and dangerous condition.

The property owners sought defense and indemnification from Mutual Benefit Insurance Company pursuant to Leola’s umbrella commercial liability insurance policy. The insurer denied the request, relying upon an employer’s liability exclusion that prohibited coverage pertaining to liability for injury to “[a]n ‘employee’ of the insured arising out of and in the course of … [e]mployment by the insured[.]” Mutual Benefit argued that the policy’s broad definition of “insured” encompassed the property owners and that the exclusion therefore applied.

In response, the property owners countered that the exclusion was unclear and ambiguous because it used the term “the insured” as opposed to “any insured” to refer to the particular insured against whom a claim is asserted. They also pointed to a Separation of Insureds provision that stated the policy applied “[s]eparately to each insured against whom claim is made or suit is brought.”

The property owners filed suit and the trial court judge granted the insurer’s motion for summary judgment. The trial court believed it was bound by Pennsylvania Manufacturers’ Association Insurance Co. v. AETNA Casualty & Surety Insurance Co., 426 Pa. 453, 233 A.2d 548 (PMA). An appellate panel reversed.

The Supreme Court, however, found PMA distinguishable and joined the majority of jurisdictions to take a narrower view of the employer’s liability exclusion pertaining to employees of “the insured.”

“[A] majority of jurisdictions recognize potential differences in meaning which may be taken from the selective use of definite and indefinite articles in association with the word ‘insured’ as employed in insurance policy exclusions,” the Pennsylvania Supreme Court explained. “Such potential differences, where recognized by the courts, have been taken to reflect ambiguities, thus requiring construction of salient policy language on the terms most favorable to the insured.”

The court cited decisions from jurisdictions including Iowa, Louisiana, North Carolina, Maine, Michigan, and Ohio.

PMA departed from this line of reasoning, the court said.

“Upon consideration of the broader range of authorities and the reasoning which they provide—which were not overtly considered in PMA—we decline 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,’” the court wrote. “Rather, we are persuaded that, at 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 reasonably taken as signifying the particular insured against whom a claim is asserted.”

The separation of insureds clause only served to reinforce this understanding, the court added, although other indications and contextual cues appearing in an insurance policy may serve to render the meaning of “the insured” more apparent.

Concerns expressed by the insurer that this would result in “double payment” for employees with coverage from an employer’s insurer as well as workers’ compensation did not sway the court. This public policy argument “downplays both the diversity in the interests present and the potential impact of an employer’s subrogation rights relative to workers’ compensation payments,” the court said.

“In summary, we conclude that the employer’s liability exclusion in the umbrella policy is ambiguous,” the court wrote. “Application of governing principles of insurance policy construction yields the understanding that the ambiguous exclusionary language pertains only to claims asserted by employees of ‘the insured’ against whom the claim is directed. ... Since the Property Owners are not [the injured plaintiff’s] employers, the employer’s liability exclusion is inapplicable.”

To read the opinion in Mutual Benefit Insurance Co. v. Politsopoulos, click here.