On May 26, 2015, the Pennsylvania Supreme Court handed down its much anticipated decision in Mutual Benefit Ins. Co. v. Christos Politsopoulos. The decision is good news for policyholders, particularly those who use contractors and rely on additional insured provisions in their contractor's insurance policies as a way of transferring risk.
Here is the common fact scenario that the Supreme Court addressed. Let's say that you are the owner of property and you lease that property to a restaurant. The lease requires that the restaurant add you, the property owner, as an additional insured to the restaurant's commercial liability policy. Let's further assume that an employee of the restaurant slips and falls and suffers injury while working in the restaurant. The employee cannot sue the restaurant due to the restaurant's workers compensation immunity. The employee therefore decides to sue you to recover for her injuries beyond the workers comp benefits. You report the employee's suit to the restaurant's commercial liability carrier, and request a defense and indemnity under that policy because you are listed as an additional insured. This is where the problem arose. Based on a Pennsylvania Supreme Court decision in 1967 (PMA v. Aetna Casualty & Surety Ins. Co.) insurance companies have uniformly taken the position that the Employers' Liability exclusion that exists in virtually all commercial liability policies excludes coverage for you, as the additional insured property owner. Insurance companies argued successfully in PMA that the employers' liability exclusion applied to both the named insured and additional insureds. This conclusion was challenged recently and eventually came before the Pennsylvania Supreme Court in 2014.
In the Mutual Benefit decision handed down this month, the Supreme Court ruled that the language in the standard employers' liability exclusion is ambiguous (that it is not clear whether it is intended to apply to either the named insured or the additional insured, or both), and, using a standard rule of policy interpretation, held that the policy language must be construed against the insurance company and in favor of the policyholder. Accordingly, insurance companies can no longer use the Employers' Liability exclusion contained in virtually all commercial liability policies to deny coverage to an additional insured that is sued by the named insured's employee. This decision is not limited to the real estate scenario outlined above. It is applicable to construction, vendor, and any other type of contractual arrangement in which one party agrees to add another as an additional insured to an existing commercial liability policy.
Because of the far-reaching effects of this decision, we anticipate that insurance companies will respond by trying to eliminate the "ambiguity" in the Employers' Liability exclusion as found by the Pennsylvania Supreme Court. This will not happen overnight. Current and previous forms of commercial liability policies will continue to provide coverage well into the future. It is our prediction that, within about two years, insurance companies will seek to eliminate the ambiguity in the language and will then reassert their denials of coverage under those future generations of the policies.
For the time being, commercial policyholders who are additional insureds under other commercial liability policies can rest easy. The Supreme Court has removed a substantial impediment to coverage. Even before the Mutual Benefit decision, our Insurance Group has been advising clients to update their contracts to eliminate this issue. For instance, a property owner who leases space to a restaurant has been able to overcome the PMA decision by adding pertinent language to the Lease Agreement. We continue to recommend that the language be added to lease agreements, construction agreements, vendor agreements and so forth. The reason is that if the insurance companies modify the standard language to eliminate the "ambiguity" in the Employers' Exclusion, policyholders can continue to argue that the language contained in their agreements makes clear that the insurance company has to provide coverage to them as additional insureds, despite the Employers' Liability exclusion. Please contact a member of our Insurance Group to discuss including the pertinent language in your contractual arrangements.