The Supreme Court Declines to Enforce an Employer Liability Exclusion

The recent case of Mutual Ben. Ins. Co., v. Politsopoulos concerned the scope of an employer’s liability exclusion in an umbrella commercial liability insurance policy.

Leola Restaurant maintained an umbrella commercial liability insurance policy with Mutual Benefit, which contained an employer’s liability exclusion.  This exclusion indicated that the policy did not provide coverage for liability for injury to “[a]n ‘employee’ of the insured arising out of and in the course of . . . [e]mployment by the insured[.]” In addition, the policy contained a clause captioned “Separation of Insureds,” which provided, subject to exceptions not relevant here, that “this insurance applies . . . [s]eparately to each insured against whom claim is made or suit is brought.”

Leola Restaurant conducted its business on a property leased from Politsopoulos and Mihalopoulos (the “Property Owners”). The lease required the Property Owners to be “named as . . . additional insured parties” on the liability policy.  While the Owners were not specifically designated on the declarations page of the umbrella policy, the instrument was designed to extend coverage to unidentified persons doing business with Leola Restaurant for whom the latter had agreed in writing to provide insurance.

In December 2007, Denovitz, an employee of Leola Restaurant, fell from an outside set of stairs and suffered injuries.  She commenced a negligence action against the Property Owners asserting that they were negligent in maintaining the stairs in an unsafe and dangerous condition.  The Property Owners sought defense and indemnification from Mutual Benefit, per the umbrella policy.  Mutual acknowledged that the Property Owners were insureds under the umbrella policy but nevertheless disclaimed coverage, invoking the employer’s liability exclusion. Based on the policy’s broad definition of “insured” to encompass named insureds to include Leola Restaurant, it was Mutual Benefit’s central position that Denovitz was an employee of “the insured,” for purposes of the exclusion (albeit she was not an employee of the Property Owners, the insureds against whom a claim had been asserted). The Property Owners took the position that the exclusion was unclear, and coverage should be deemed to be negated only upon injury to an employee of the specific insured seeking coverage.  In particular, the Property Owners pointed to the separation-of-insureds clause providing that coverage extends separately to each insured against whom claims are asserted.

A declaratory action was filed by Mutual Benefit. Summary judgment was awarded in its favor, the trial court applying PMA v. AETNA, 426 Pa. 453, 233 A.2d 548 (1967).  The trial court indicated that it applied this precedent begrudgingly and that it thought PMA was no longer good law.

On appeal, the Superior Court reversed.  In the opinion, initially, PMA was distinguished on the basis that the insureds seeking coverage in that case were not named insureds, whereas, , in the present case “the [Property] Owners undisputedly were named insureds under the Umbrella Policy.” Id. at 535.  The Superior Court then referred to the separation-of-insureds clause addressing named insureds and providing (subject to limited exceptions not applicable here): “[T]his insurance applies . . . [a]s if each named insured were the only named insured[.]”

Thereafter, the Supreme Court indicated that the Superior Court completely misanalysed the issues and looked at the policy language, contracts and controlling law anew. The Supreme Court noted that generally a separation-of-insureds clause indicates that insurance applies separately to each insured against whom claim is made. As a general rule, neither a separation-of-insureds clause nor its analogue, a severability-of-interests provision, is to be interpreted in a manner which would subvert otherwise clear and unambiguous policy exclusions.   This widely-accepted understanding is consistent with one facet of the Supreme Court’s decision in PMA. PMA, 426 Pa. at 459, 233 A.2d at 552 (commenting on the insignificance of modest variations among severability-of-interests clauses as compared with the importance of clarity in policy exclusions).

In the end, however, the Pennsylvania Supreme Court 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,” and held that where a commercial general liability policy makes varied use of the definite (“the”) and indefinite (“an” or “any”) 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 Supreme Court found that the separation-of-insureds clause, in this context, serves only to reinforce such an understanding, and concluded that the employer’s liability exclusion in the umbrella policy is ambiguous.  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, which understanding gains further support by reference to the policy’s separation-of insureds provision. The Pennsylvania Supreme Court held that since the Property Owners are not Denovitz’s employers, the employer’s liability exclusion is not applicable.

Mutual Ben. Ins. Co., v. Politsopoulos, 60 MAP 2014 (May 26, 2015) (Saylor, C.J.)

David R. Friedman

Office: King of Prussia, Philadelphia
Phone: (610) 977-4106
Practice Areas: Commercial Litigation, Coverage, Fraud/SIU, General Liability, Premises Liability, Products Liability, Third Party, UM/UIM