Betts Patterson Mines

The Second Person in a Two Person Contract Can’t be a Third Person Under the “Insured Contract” Exception

Washington’s Supreme Court is correctly regarded as one of the worst forums for property and casualty insurers.  But late this past year, insurers received a glimmer of hope in a case with novel facts.  Even a victory under unusual facts is cause for celebration given the Court’s abysmal treatment of insurers over the past two decades.

Language commonly found in commercial contracts provided the setting for this case, Int’l Marine Underwriters v. ABCD Marine, LLCMany contracts require the insured to defend and indemnify the other party to the contract (such as a landlord or general contractor).  Because CGL polices exclude an insured’s contractual assumption of someone else’s liability, coverage is returned if the policy defines the relevant contract (with the defense and indemnity obligation) as an “insured contract.”  This preclusion of the assumption of liability exclusion is often referred to as the “insured contract” exception.  For example, most CGL policies define leases as “insured contracts.”  So if the insured’s landlord is sued, and the landlord asks the insured to defend the landlord, coverage typically is returned – or the exclusion is excepted – under the named insured tenant’s policy.  

Standard CGL policies also define “insured contracts” as those in which the named insured assumes another party’s (such as a contractor’s) liability for bodily injury to a third person.  This requirement that the bodily injury must be to a third person proved crucial to the Court’s holding that the “insured contract” exception did not apply.  Indeed, the facts in Int’l Marine Underwriters were unique because the injured party and the insured were one and the same. 

In this case, the named insured was a general partnership which provided welding services to Northland Services.  When Northland and the insured executed their services contract, a general partner of the named insured business signed this contract.  This contract required the insured to indemnify Northland against liability for the insured’s operations.  The same general partner of the named insured who signed the contract containing indemnity language was later seriously injured because of the negligence of Northland’s employee.  The injured general partner of the named insured then sued Northland because its employee caused the partner’s injuries.  Naturally, Northland told the insured that their contract required the insured to indemnify Northland.  The insured then asked its CGL carrier to defend it against Northland’s indemnity claim.  The CGL carrier refused to indemnify its insured.  The insurer contended that bodily injury to a person who signs the purported “insured contract” – as the general partner of the named insured’s business – is not bodily injury to a third person, and the “insured contract” exception is therefore inapplicable. 

The Court, in a 5-4 decision, agreed with the insurer.  The Court held the policy excluded injuries to the general partner of the named insured who was the same person signing the indemnity agreement or “insured contract.”  The Court reasoned that for coverage to be returned under the “insured contract” exception, the named insured – consistent with the definition of “insured contract” – had to assume liability for injury to a third person.  Injury to the named insured’s general partner who signed the contract with the indemnity language was not injury to a third person.  Therefore, the insurer did not return coverage under the “insured contract” exception, and the contractual assumption of liability exclusion applied.  Put differently, contracting to pay for bodily injury to a third person does not mean contracting to pay for bodily injury to the second party to a two party contract whom the policy also listed as an insured.

Most injured workers will not be the same person who signs the “insured contract.”  Nonetheless this decision may be a hopeful sign in Washington.  Courts, especially Washington’s Supreme Court in recent years, frequently default to the cliché of construing against the insurer when they analyze esoteric exclusions under novel facts.  That the Court upheld the exclusion is reason for hope when it has provided few such reasons in the last couple decades.

This decision’s author, Justice James M. Johnson, recently announced his retirement from the Court, and it was a 5-4 decision.  Governor Inslee appointed former King County Superior Court Judge Mary Yu to complete Justice Johnson’s term.

~Mark Mills