In its recent decision in Atlantic Casualty Ins. Co. v. Paszko Masonry, Inc., 2013 U.S. App. LEXIS 11561 (7th Cir. June 7, 2013), the United States Court of Appeals for the Seventh Circuit had occasion to consider whether a company that had bid on, but not yet been awarded a construction project, could nevertheless be deemed a “contractor” for the purpose of an employee bodily injury exclusion.

The facts in Paszko related to the construction of an apartment building in Illinois on which Prince Contractors, Inc. was the general contractor.  While construction was in process, Prince bid out work relating to caulking of gaps and joints.  Raincoat Solutions bid on the project, and its bid was accepted, subject to approval of the caulking material and subject to Prince approving the competency of the caulking employee to be furnished by Raincoat.  In an effort to secure the bid, Raincoat sent its intended employee, Rybaltowski, to the construction site to demonstrate how he would perform the caulking.  Notably, Raincoat did not expect to be compensated for the work it performed in connection with the demonstration.  After the demonstration was completed, but before Mr. Rybaltowski could leave the site, he was injured when a beam fell on him.  Only a half hour after this incident, Raincoat and Prince signed a subcontract.  Mr. Rybaltowski later filed suit against Prince and the subcontractor that had been working on the beam, Paszko.

Paszko was insured under a general liability policy issued by Atlantic Casualty.  The policy contained an exclusion for “Injury to Employees, Contractors and Employees of Contractors,” which barred coverage for bodily injury “to any 'contractor' arising out of or in the course of the rendering or performing services of any kind or nature whatsoever by such 'contractor' for which any insured may become liable in any capacity.”  The policy stated that:

… ‘contractor’ shall include but is not limited to any independent contractor or subcontractor of any insured, any general contractor, any developer, any property owner, any independent contractor or subcontractor of any general contractor, any independent contractor or subcontractor of any developer, any independent contractor or subcontractor of any property owner, and any and all persons working for and or providing services and or materials of any kind for these persons or entities mentioned herein.  (Emphasis supplied.)

Thus, coverage for Paszko, and Prince as an additional insured under Paszko’s policy, turned on the question of whether Raincoat could be considered a “contractor” at the time of Mr. Rybaltowski’s injury.

The Seventh Circuit, in a decision authored by Judge Richard Posner, began its analysis by observing that the policy definition of contractor was “poorly drafted,” since it only set forth examples of contractors rather than clearly defining the term.  This definition raised a question as to when Raincoat qualified as a contractor simply by the nature of its business.  As Judge Posner explained:

The wording of the exclusion leaves uncertain whether Raincoat was a contractor simply because companies that engage in construction are called "contractors," or whether it did not become a "contractor" until it signed a contract with Prince or until it provided materials or services other than the demonstration of caulking, or whether the demonstration itself was a service provided by a contractor.

Judge Posner acknowledged that in one sense, Raincoat was “providing services” to Prince in connection with the demonstration, even if it had not yet signed the subcontract.  In this connection, Raincoat through Mr. Rybaltowski’s efforts, did caulk a few windows as part of the demonstration, and presumably this was of benefit to Prince.  The court nevertheless concluded that the exclusion could be interpreted differently, and in fact, more narrowly.  Specifically, Judge Posner reasoned that:

Also plausible, however, is the alternative interpretation that services are not provided until the contractor (with or without a signed contract, because a provider of services is a "contractor" within the meaning of the exclusion regardless of whether he has a contract) begins to do compensated work on the project.

Thus, finding several plausible definitions of “contractor,” the court concluded the term was ambiguous and therefore must be interpreted in the insured’s favor.  While the court agreed that it would be “a little odd” to treat a construction worker such as Mr. Rybaltowski as a “passerby” just because he was demonstrating a construction service rather than performing that service for compensation, this outcome was necessitated by the ambiguity in Atlantic’s definition of “contractor.”