Separation of Insured Clause Strikes Again to Deny Coverage

A very recent blog discussed the effect of a separation of insured clause, on the scope of general liability coverage for an additional insured, when a personal injury claim is pursued by an injured worker. A federal court judge has just reached the same conclusion in another case.

Here, a residential project was being built by a developer and its related construction company. The construction company engaged a framing subcontractor. An employee of the framing sub was injured on the job, and he eventually sued the developer and contractor, who had a general liability policy with Nautilus Insurance Company.

Notice was sent to Nautilus, and it denied coverage. The developer/contractor filed a lawsuit for declaratory judgment, seeking a court order requiring Nautilus to defend and provide coverage.

A federal court judge has ruled in favor of Nautilus and against the developer/contractor, holding that the separation of insured clause acted to exclude coverage for the injured worker claim. In its decision, the court quoted a portion of the endorsement and separation of insured clause:

The Policy includes Endorsement L205 (the "L205 Endorsement"). D. 25 at 84. The L205 Endorsement states in capital letters that it "CHANGES THE POLICY" and further reiterates that the endorsement "modifies the insurance policy" by replacing the employer's liability exclusion in the general terms with the following terms of the exclusion:

e. Injury to Employees, Contractors, Volunteers and Other Workers

"Bodily Injury" to:

(1) "Employees", "leased workers", "temporary workers", "volunteer workers", statutory "employees" casual workers, seasonal workers, contractors, subcontractors, or independent contractor of any insured; or

(2) Any insured's contractors', subcontractors' or independent contractors' "employees", "leased workers", "temporary workers", "volunteer workers", statutory "employees", casual workers, seasonal workers, contractors, subcontractors or independent contractors arising out of and in the course of:

(a) Employment by any insured; or

(b) Directly or indirectly performing duties related to the conduct of any insured business; . . . .

Note here that the phrase “Employment by any insured” in section (e)(2)(a) is not being construed by the court in the sense of an employer/employee relationship. Rather, the court is construing that phrase in the context of engagement by the insured even if indirectly. This is a critical element of the court’s analysis, which results in the endorsement sweeping away an entire category of coverage, and parties who would assume they had coverage, that would ordinarily be expected.

The federal court case is Nagog Real Estate Consulting Corp. v. Nautilus Ins. Co., 2020 U.S. Dist. LEXIS 126737 (D. Mass., June 20, 2020).