Hold on to your hat – this case is a winding road through hilly insurance territory.
According to JD Supra, insurance companies in Pennsylvania clung to a 1967 ruling that affirmed commercial liability policies exclude coverage for additional insureds when the policyholder's employee sues them over work injuries. Insurance companies claimed employer's liability exclusions, which virtually all commercial liability policies have, applied to both the named insured and additional insured. In other words, additional insureds didn't have to worry about getting sued by a policyholder's employee – the lawsuit just wouldn't hold water, and so coverage wouldn't apply.
That was the status quo until a recent case involving the insurance company Mutual Benefit made the Pennsylvania Supreme Court rethink its decision from 1967. The report states that now insurance companies can't use the standard employer's liability exclusion to deny coverage to an additional insured that is sued by the named insured's employee.
That's both bad news and good news. Here's why:
- Named insured's employees can sue additional insureds over work injuries because they aren't the employer and don't provide Workers' Comp benefits.
- Additional insureds may be able to draw on the named insured's General Liability Insurance policy to address the lawsuit.
That's a lot of insurance talk to take in, so let's break this down into a digestible example.
The Skinny: Additional Insureds Have More Liability Exposure, but also More Liability Protection
Before we get down to brass tacks, let's establish that as a small-business owner, you may be a named insured – that is, the owner of your very own insurance policy. In some situations, you may also be an additional insured, meaning you are listed on another business's insurance policy. For example, if you do freelance work, you might ask for additional insured status to protect you from lawsuits you might face for doing work for someone else. It's a smart safeguard for when you can't really control the final outcome or course of a project.
Now let's tackle this new wrinkle in your insurance world.
Let's say that you are a construction contractor, and as such, you are an additional insured on your architecture client's General Liability policy. You're working on a residential project and your client sends an architect to supervise the work. One day, you accidentally drop a hammer on that architect's head at the very moment he briefly removed his hardhat. The timing was truly tragic.
The architect makes a claim on your client's Workers' Compensation Insurance policy to cover the medical bills for his work injury. The employee can't sue his employer over the injury if he accepts the employer's Workers' Comp benefits (medical costs, replacement wages, etc.). In most states, this is called the "exclusive remedy rule."
But the head trauma has had a lasting negative impact on the employee, so he seeks alternate avenues to get additional compensation for the injury. He decides to sue you. However, so long as the new Pennsylvania ruling stands, you can draw on your client's General Liability policy (which can address lawsuits over third-party bodily injuries) to cover the claim because you're listed as an additional insured.
So, What Now?
The takeaway is that if you're an additional insured, a named insured's employee can potentially sue you. That said, insurance companies can't rely on the employer's liability exclusion to deny your coverage when you make a claim on the named insured's policy for the lawsuit. All in all, it's really the insurance companies that are most affected by the PA ruling.
However, for small-business owners who have additional insureds, this could mean their policies may bear the brunt of more claims. On the other hand, insurers will probably take steps in the future to ensure policies won't allow for this type of coverage.
This is pretty complicated stuff, so if you still have questions, please feel free to talk to one of our insurance agents.