Pennsylvania Federal Court Addresses Recurring Asbestos Coverage Issues

Craig O’Neill and Laura Rossi | Complex Insurance Coverage Reporter | January 18, 2019

In a pair of recent asbestos coverage decisions, a Pennsylvania federal court issued rulings addressing expedited funding orders, number of “occurrences,” and the applicability of aggregate limits under the Fourth Circuit’s Wallace & Gale approach.

Zurn Industries, LLC v. Allstate Insurance Company, 2018 U.S. Dist. LEXIS 197481 (W.D. Pa. Nov. 20, 2018)

Policyholder Zurn, a manufacturer and distributor of boilers, was named as a defendant in thousands of underlying asbestos-related bodily injury suits. After its primary insurers claimed exhaustion, Zurn moved on an expedited basis to require two of its excess insurers to each assume fifty percent of its defense and indemnity costs until they reached a permanent cost-sharing agreement. In denying Zurn’s expedited request for interim funding, the court held that the record was insufficient “in the opening stages of litigation, before discovery has occurred” to determine whether the underlying coverage had been properly exhausted but left the door open for Zurn to refile its motion on a more developed record.

Relying on J.H. France and Koppers, Zurn argued that it had properly “selected” the excess insurers’ policies and, therefore, they were obligated to share its defense and indemnity costs subject only to their right “to redistribute the burden among themselves.” Zurn also argued that, under Pennsylvania’s “four corners” rule, it only needed to make a prima facie showing that the underlying asbestos claims fell within the scope of coverage based on proof of exhaustion from a prior insurer. Zurn’s excess insurer countered that the relief sought was premature due to a dispute over the accuracy of the primary insurer’s representations concerning exhaustion that must be resolved following discovery and motion practice.

The district court noted that “extenuating circumstances” complicated the application of the usual “four corners” rule because the case involved (1) thousands of underlying asbestos claims rather than a single claim; and (2) excess insurance coverage, meaning that the policyholder must also establish that the insurer’s policies were triggered by the exhaustion of underlying coverage. The court further observed that exhaustion is “inherently a factual issue, and the record before the Court [was] both limited and underdeveloped.” Ultimately, the court concluded that it was premature to make any determination concerning exhaustion since the insurer who provided representations of exhaustion had yet to answer the complaint or file cross-claims against it. As the court explained:

To the extent that Zurn cites [cases] for the proposition that it has satisfied its prima facie evidentiary burden by supplying loss runs, . . . does not necessarily mean that the Court can or should determine whether that burden has been met in the opening stages of litigation, before discovery has occurred…. Notably, none of the cases cited by [Zurn] involved the type of interim relief being sought here in the opening stage of litigation, and this Court has been unable to find any Pennsylvania case in which such relief has been requested or granted at the outset (emphasis added).

The court therefore denied Zurn’s motion without prejudice. Because the court deemed Zurn’s defense of thousands of asbestos lawsuits a “serious matter that deserve[d] prompt attention,” it directed the parties to confer and submit a proposal for expedited discovery on the issue of exhaustion.

Ohio Valley Insulating Company, Inc. v. Maryland Casualty Company, 2018 U.S. Dist. LEXIS 216393 (W.D. Pa. Dec. 27, 2018)

Policyholder Ohio Valley Insulating Company (OVI), an installer of steam pipes and boiler insulation, brought a coverage action against its insurer in a dispute over numerous asbestos bodily injury claims. The district court held on summary judgment that (1) each site where the insured conducted operations was a separate “occurrence”; and (2) the aggregate limits of the “completed operations” hazard applied.

First, the district court considered whether the claims brought against OVI were one or multiple occurrences. The policies at issue provided that “all bodily injury . . . arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.” The court was persuaded by Kvaerner v. OneBeacon, 74 Pa. D. & C.4th 32 (Pa. Ct. Com. Pl. Phila. Cty. 2005), which held that each construction site where the insured used asbestos constituted a separate “occurrence” because “the claimants that were exposed to asbestos at the same location and at the same time were exposed to substantially the same general condition.” The court distinguished between products and operations claims and concluded that the activities that “triggered the underlying claims did not arise from a single, negligent practice that could be considered one cause such as distributing a uniformly defective product from a single manufacturer or selling a product containing asbestos from one location.”

In following Kvaerner, the court emphasized that (1) the policies restricted coverage to OVI’s specified operations—i.e., “Steam Pipe or Boiler Insulation”—at various sites; (2) the policies provided coverage for “completed operations” hazards but were silent on “products” hazards coverage; (3) the asbestos suits derived from multiple contract, operations, and job sites; and (4) the insurers’ determination of OVI’s liability in the asbestos suits was based on a “contract book” match, i.e., whether a particular claimant’s work history coincides with the list of OVI’s contemporaneously recorded operations. According to the court, these facts “demonstrate[d] that claimants in the Asbestos Suits who were exposed to asbestos during the same time and at the same site where OVI was conducting one of its operations were subjected to continuous or repeated exposure to substantially the same general condition.”

Second, the court rejected OVI’s contention that the asbestos suits fell solely within the policies’ “operations” coverage. Instead, the court followed the rule announced by the Fourth Circuit Court in In re Wallace & Gale Co., 385 F.3d 820, 830 (4th Cir. 2004) (establishing that “where the injury that triggers coverage occurs subsequent to exposure to an operation, that claim is subject to the aggregate limits of the ‘completed operations’ hazard” which “encompass any bodily injury claim in which the claimant was injured by asbestos exposure attributable to an operation that the insured completed prior to the start of the policy period.”). The court found that the approach in Wallace & Gale “comports with Pennsylvania ‘trigger’ theory of coverage in asbestos cases”—specifically noting that, under J.H. France, a claimant’s exposure to asbestos, as well as all phases of an ensuing disease, independently “trigger” coverage. Thus, the court concluded that multiple policies were triggered and “the aggregate limits associated with the ‘completed operations’ hazard [were] applicable.”

Subcontracting In The Construction Industry And Who Is Responsible For The Injured Employee?

Ryan M. Hathcock | Drew Eckl & Farnham, LLP | December 5, 2018

The current trend in the construction industry involves the acquisition of specialized laborers and contractors to perform the various tasks required to complete each aspect of a given project. General contractors obtain the services of subcontractors as a common business practice to help construction projects become completed more efficiently. Often, these subcontractors are more capable of performing the specialized work, and in many ways, the construction industry is a subcontractor-driven industry.

The addition of subcontractors to a construction project brings additional workers hired by each subcontractor. In the event a subcontractor’s employee is injured in the performance of the work at the construction site, a question arises of who may be held responsible for payment of workers’ compensation benefits for those injuries.

Statutory Employment

A “statutory employer” is an entity that may be held liable for workers’ compensation benefits for injuries to a subcontractor’s employees. O.C.G.A. § 34-9-8(a) specifically lists the entities that may be considered statutory employers under the Workers’ Compensation Act and may liable for workers’ compensation benefits to an injured employee. That list includes principle contractors, intermediate contractors, and subcontractors. After identification of the appropriate immediate and statutory employers that may be held liable, the next question is determining which party is responsible for payment of any workers’ compensation benefits.

Under O.C.G.A. § 34-9-8(c), the immediate employer remains primarily liable for compensation, and the statutory employer is secondarily liable. In order to obtain workers’ compensation benefits from the statutory employer, a claim for benefits must first be brought against the immediate employer. If the immediate employer is uninsured or insolvent, the injured employee may then seek benefits from the statutory employer. In those situations where the statutory employer is held liable, the Georgia Workers’ Compensation Act allows the liable statutory employer to recoup their losses “from any person who, independently of this Code section, would have been liable to pay compensation to the injured employee or from any intermediate contractor.” O.C.G.A. § 34-9-8(b). Although there is an avenue for recovery for the statutory employer to recoup its losses, it may be impossible to recoup any losses from an insolvent immediate employer.

Employer/Employee Relationship Requirement

The Workers’ Compensation Act requires most employers with three or more employees to carry valid workers’ compensation insurance. Too often, one or more subcontractor fails to obtain and carry workers’ compensation insurance. Even if a subcontractor does not have three or more employees and does not obtain workers’ compensation insurance, the general contractor can be held liable for workers’ compensation benefits as a statutory employer. In those circumstances, the general contractor assumes liability for workers’ compensation coverage for the subcontractor’s employees injured on a general contractor’s project.

The polarity of that is O.C.G.A § 34-9-8 will only apply if the injured individual is an employee of his actual employer. While it has been determined that O.C.G.A. § 34-9-8(c) allows an employee to recover workers’ compensation benefits from the statutory employer if he is unable to recover those benefits from his direct employer, the injured individual cannot recover those benefits if he is not an actual employee. Thus, an injured individual will be unable to recover benefits from the statutory employer if he was working for his direct employer as an independent contractor.

Statutory Employer Tort Immunity

The Georgia Workers’ Compensation Act allows for medical treatment and lost wages to an injured employee without the need to prove fault of the employer (who may not be at fault at all). As a result, the injured employee gives up the right to sue his immediate employer and all other statutory employers for the injuries sustained on the job.

The obligation to pay workers’ compensation benefits provides immunity from tort claims arising from the same accident to all entities upward in the contractual chain between the principal contractor and the immediate employer. With that said, immunity does not extend to employees of the principal contractor. Immunity protection to a statutory employer is prompted by the statutory employer’s potential liability for workers’ compensation benefits even if the statutory employer (i.e. principal contractor) does not ultimately have to pay any benefits in connection with the workers’ compensation claim.

Third-Party Property Owner Liability

A property owner is not ordinarily a “statutory employer” under the Workers’ Compensation Act. However, an owner or an entity in control of the premises where an employee is injured may be subject to workers’ compensation liability as a statutory employer, “in the isolated situation where the party also serves as a contractor for yet another entity and hires another contractor to perform the work on the premises.” Creeden v. Fuentes, 296 Ga.App. 98(1), 673 S.E.2d 611 (2009) (citation and punctuation omitted). In other words, an owner or entity in control of property may be subject to statutory employer liability if that entity also functions as a contractor for another entity and hires a subcontractor to perform work on the premises. The corollary of this is that where the owner is potentially liable as a statutory employer, the owner is also entitled to tort immunity due to the exclusive remedy doctrine.

Practical Considerations for General Contractors

The Georgia Workers’ Compensation Act provisions regarding contractor-subcontractor relationships are designed to create a safety net for any injured worker to assure benefits will be paid by someone. General contractors are responsible for providing workers’ compensation coverage to their own employees, but they may also have additional exposure in instances where their subcontractors have not obtained coverage for the subcontractor’s employees. For a general contractor (i.e. statutory employer) to avoid being held financially responsible for another entity’s employees, it is essential that the general contractor protect itself by requiring every lower tier contractor to carry workers’ compensation coverage. In addition to statutory requirements, workers’ compensation coverage can also be contractually required. This verification process often fails through the life of a construction project as numerous subcontractors come and go. However, the cost to upstream contractors in the event of a workplace injury can be substantial.

The Nation Council on Compensation Insurance (NCCI) maintains an active list that allows for verification of workers’ compensation coverage for any company. General contractors are often not aware of the service provided by NCCI that could greatly limit their exposure in workers’ compensation matters. Aside from regularly checking the NCCI database, general contractors could ensure compliance by contractual language requiring for verification of coverage by providing valid certificates of insurance at each subcontractor pay request. Certificates of insurance should not be consider absolute verification of valid insurance, given that inaccurate or fraudulent certificates of insurance may be prepared. Checking directly with the insurance carrier to confirm proper insurance is held is always the best practice.

Work injuries in the construction industry are more common than in any other industry. Requiring all subcontractors down the contractual chain to obtain valid workers’ compensation insurance will prevent situations in which the general contract will be forced to accept responsibility for claims and reduce the number of instances in which they will tap their own insurance for coverage. In theory, a contractual requirement for subcontractors to present workers’ compensation coverage seems simple. In complex construction projects with numerous subcontractors and an ever approaching deadline, the need for skilled and efficient labor sometimes overrides a thorough examination of a subcontractor’s insurance coverage. Unfortunately, that mistake can become extremely costly as general contractors will assume liability for workers’ compensation benefits for injuries to an employee it did not directly hire.

California Supreme Court Rules Broadly in Favor of Insureds

David E. Weiss and Kerry Roberson | ReedSmith | June 11, 2018

On Monday, June 4, 2018, the California Supreme Court ruled that an insurance company must provide liability coverage to its corporate insured against claims of negligent hiring, retention, and supervision of its employee, who allegedly sexually assaulted a 13-year-old child. The case is Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc., Case No. S236765 (June 4, 2018). This decision is “of exceptional importance to injured parties, employers, and insurance companies doing business in California,” wrote the U.S. Court of Appeals for the Ninth Circuit, in an order certifying the issue to the California Supreme Court.

In 2002, Ledesma & Meyer Construction Co. (L&M) entered into a contract with the San Bernadino School District for a construction project at a local middle school. L&M hired Darold Hecht to work on the project. In 2010, a 13-year-old student at the school (Jane Doe), filed suit asserting numerous claims against L&M, alleging that she was sexually abused by Hecht. One of Doe’s claims against L&M alleged negligent hiring, retention, and supervision of Hecht. L&M’s insurer, Liberty Surplus Insurance Corporation, agreed to defend L&M under a reservation of rights.

Liberty sought declaratory judgment in federal court that Liberty was not obligated to defend or indemnify L&M against Doe’s lawsuit, arguing that L&M’s negligence did not constitute an “occurrence” under the commercial general liability policy. The policy provided L&M coverage for liabilities arising from “bodily injury” caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The District Court held that Liberty was not obligated to defend or indemnify L&M in the underlying action because L&M’s negligent hiring, retention, and supervision of Hecht was “too attenuated from the injury-causing conduct” of Hecht to fit the policy definition of “occurrence.”

L&M appealed to the United States Court of Appeals for the Ninth Circuit, which then issued an order certifying the issue to the Supreme Court of California. The Ninth Circuit sought guidance because “California law [wa]s unsettled in this area,” and because of the “significant precedential and public policy importance” of the outcome. The Supreme Court of California agreed to answer the following question: “When a third party sues an employer for the negligent hiring, retention, and supervision of an employee who intentionally injured that third party, does the suit allege an ‘occurrence’ under the employer’s commercial general liability policy?”

The Court explained that the term “accident” in liability insurance policies in California is a settled matter. “[A]n accident is ‘an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown cause” and refers to the conduct of the insured. Additionally, the term “includes negligence,” which indicates that a policy that provides coverage to the insured for injuries caused by an “accident” includes coverage for injuries resulting from the insured’s negligent actions.

The Court also analyzed the District Court’s decision and determined that the court engaged in faulty reasoning both in terms of causation and its reading of the relevant case law. The District Court determined that L&M’s alleged negligent actions were “too attenuated” from Hecht’s actions to be considered the “cause” of Doe’s injuries. However, this line of reasoning runs contrary to California cases that have recognized that negligent hiring, retention, or supervision can be a substantial factor in causing the harm to a third party due to the actions of an employee.

Additionally, the District Court misplaced reliance on a number of cases to support its proposition that L&M’s allegedly negligent actions do not qualify as “accidents” simply because they did not anticipate the injury to occur. However, the cases that the District Court cited were distinguishable from the case at hand in various critical ways and thus did not support the District Court’s proposition.

Minkler v. Safeco Ins. Co. of America is the controlling authority on this issue (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315.) In Minkler, a Little League coach was sued by a player for sexual molestation. The player also sued the coach’s mother for negligent supervision and failure to prevent the molestations in her home. The coach and the mother committed independent torts, but the coach’s intentional actions did not preclude the mother from coverage. Although insurance does not usually cover intentional injuries, the Court stated, “[t]here is no overriding policy reason why a person injured by sexual abuse should be denied compensation for the harm from insurance coverage purchased by the negligent facilitator.”

If the Court had decided in Liberty’s favor, employers would not be covered for claims of negligent hiring, retention, or supervision in situations where employees engage in intentional actions, a result that would be fundamentally inconsistent with existing California case law. For that reason, the court ruled in favor of L&M, stating that, “absent an applicable exclusion, employers may legitimately expect coverage for [claims of negligent hiring, retention, or supervision whenever the employee’s conduct is deliberate] under comprehensive general liability insurance policies, just as they do for other claims of negligence.” This holding protects the reasonable expectations of policyholders and makes clear that the coverage analysis should be focused on the conduct alleged against the particular insured seeking coverage. Thus, if there are claims against multiple actors, the specific claims against each individual actor need to be analyzed separately.

The California Supreme Court’s decision will have implications beyond the employment situation dealt with in the case; for instance, the Court ordered briefing deferred in Travelers Property Casualty Co. of America v. Actavis, Inc., Case No. S245867, pending this decision. In that case, the Court will consider whether Travelers owed its pharmaceutical company insured a duty to defend or indemnify in an action involving underlying claims involving liabilities arising from the sale and marketing of opioids. We will report on that decision as soon as it comes down.

When Should an Accident be an Accident?

Charles P. Edwards | Barnes & Thornburg LLP | November 27, 2017

Standard commercial general liability (CGL) insurance policies provide coverage for damages the policyholder is legally obligated to pay because of property damage or bodily injury caused by an “occurrence.” CGL policies typically define “occurrence” as an “accident.” Courts define an accident as “an unexpected happening without an intention or design.” Auto-Owners Ins. Co. v. Harvey, 842 N.E.2d 1279, 1283 (Ind. 2006).

Simple, right? Unfortunately, a trilogy of cases from the Indiana Supreme Court have caused confusion on this issue, particularly where the policyholder may have errors and omissions (E&O) coverage.

In Harvey, a 16-year-old girl, Brandy, fell into a river and drowned after being intentionally pushed during an altercation with a boy, Toby. Toby admitted that he intended to push Brandy, but denied that he intended to harm her. Brandy’s parents filed a wrongful death action alleging Toby’s conduct was negligent and reckless and a declaratory judgment action against Toby’s homeowner’s insurer, Auto-Owners. Auto-Owners denied it had any duty to defend or indemnify Toby, arguing that Toby’s conduct was not an “occurrence” and that it fell under the exclusion for “intended and expected harm.”

The Indiana Supreme Court concluded that, “[u]nder the facts of this case … the meaning and application of this [occurrence] provision is unclear.” Id. at 1284. If judged by Toby’s conduct, there clearly was no accident; but if judged by the result – Brandy’s fall and drowning – then there was an accident, because Toby did not intend for that to happen. The court specifically rejected the rule applied by other courts that “a volitional act – which is always intended – does not constitute an accident, even where the results may be unexpected or unforeseen.” Id. at 1285. The court called such a rule “unclear, potentially confusing, and likely to result in subjective and unpredictable judicial applications.” Id. at 1285–86.

In discussing what constitutes an “occurrence,” the court mentioned, but did not expressly follow, a number of cases applying the definition “to circumstances remote from instances of specific personal physical conduct, but rather arising from claims based on commercial or professional conduct.” Those cases included R.N. Thompson & Assoc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160, 164–65 (Ind. Ct. App. 1997), in which the Court of Appeals held that economic losses from construction defects are not an occurrence.

In 2009, the Indiana Supreme Court addressed the occurrence issue in Tri-Etch, Inc. v. Cincinnati Ins Co., 909 N.E.2d 997, 999 (Ind. 2009). That case involved a liquor store clerk (Young) who was abducted shortly before midnight, tied to a tree in a local park, and beaten. He was found the next day alive, but later died of his injuries. Young’s estate sued the alarm company (Tri-Etch) alleging it negligently failed to notify the store’s manager within 30 minutes of closing that the night alarm had not been set, and that if Tri–Etch had acted promptly, Young would have been found earlier and would have survived. The jury in that case found against Tri-Etch and awarded $2.5 million to Young’s estate.

In the coverage case, the Indiana Supreme Court considered whether Tri-Etch’s failure to notify the store manager after the alarm had not been set constituted an occurrence. In holding it was not, the court distinguished Harvey by noting that, “in Harvey, we noted the distinction between an ‘occurrence’ as the term is used in CGL policies, and claims based on ‘commercial or professional conduct.’” Id. at 1284. One of those cases, as mentioned, was R.N. Thompson.

The Tri-Etch court went on to note that, “[c]laims based on negligent performance of commercial or professional services are ordinarily insured under ‘errors and omissions’ or malpractice policies. For this reason, CGL policies typically exclude claims arising out of professional or other business services.” Id. Indeed, the court ultimately held that in addition to not being an “occurrence,” the claim was excluded by the professional services exclusion.

What the Tri-Etch court did not discuss, because it was not presented, is that most E&O and malpractice policies exclude coverage for bodily injury or property damage, because those damages are covered by CGL policies. As in Tri-Etch, a professional services exclusion may be added to a CGL policy, but that is usually a specific endorsement, which applies only to specific excluded services. Moreover, the mere offering of this exclusion in the insurance marketplace suggests insurers do intend to provide coverage for bodily injury and property damage caused by a professional error or omission in the absence of the exclusion.

One year later, the Indiana Supreme Court again visited the “occurrence” issue in Sheehan Const. Co. v. Cont’l Cas. Co., 935 N.E.2d 160 (Ind.), opinion adhered to as modified on reh’g, 938 N.E.2d 685 (Ind. 2010). In Sheehan, the court overturned R.N. Thompson and held that faulty workmanship was an “accident” and “occurrence” under a CGL policy “so long as the resulting damage is an event that occurs without expectation or foresight.” Id. at 169. The court explained:

As applied to the case before us, if the faulty workmanship was the product of unintentional conduct then we start with the assumption, from Sheehan’s viewpoint, that the work on the Class members’ homes would be completed properly. The resulting damage would therefore be unforeseeable and constitute an “accident” and therefore an “occurrence” within the meaning of the Insurers’ CGL policies.

Id. at 170. This holding was consistent with the court’s earlier holding in Harvey, in that it focused on whether the act was intended to cause the result.

Sheehan should have put an end to any confusion caused by Tri-Etch and returned us to the clear rule of Harvey and clear focus on whether the act – even if intentional – was intended to cause the result. Unfortunately, it appears from a recent decision that Tri-Etch’s reliance on Harvey’s reference to pre-Sheehan cases and speculation about E&O policies may still have some traction.

In Allstate Ins. Co. v. McColly Realtors, Inc., No. 2:16-CV-00142, 2017 WL 4938154 (N.D. Ind. Oct. 31, 2017), a family died as a result of carbon dioxide emitted from a generator in the garage of a home they were renting. The estate filed suit against the realtor (McColly) for failure to warn of latent or concealed dangers and failure to register the home as a rental in McColly’s dealings with the owner of the home. McColly sought coverage under its CGL policy. The court concluded that Allstate did not have a duty to defend or indemnify McColly, following Tri-Etch’s discussion of E&O insurance. The court concluded that, “[t]his claim alleges a professional error or omission, rather than an accident or occurrence.” Id. at *8. The court’s conclusion likely means little to McColly if its E&O policy contains exclusions for bodily injury or property damage.

The interplay between CGL coverage and E&O coverage is illustrated by Wayne Twp. Bd. of Sch. Comm’rs v. Indiana Ins. Co., 650 N.E.2d 1205, 1207 (Ind. Ct. App. 1995). That case involved a school that was sued for its negligence in connection with its principal’s alleged molestation of a student. The school sought coverage under both its CGL policy and its E&O policy. The court held that the allegations against the school did allege an occurrence, noting that “Indiana Insurance has not designated any evidence demonstrating that the school’s alleged conduct was not an accident: there is no evidence that the school intended or expected Barger’s misconduct or that the molestation was the result of the school’s intent or design.” Id. at 1209. The court held that the claims against the school were, however, excluded under the E&O policy, which excluded “any damages, whether direct, indirect or consequential, arising from, or caused by, bodily injury, personal injury, sickness, disease or death.” Id. 1211–12.

Wayne Township reflects the correct “occurrence” analysis when evaluating CGL coverage for a company sued for negligently inflicted bodily injury or property damage. Courts should not speculate about what is or is not covered by any E&O policy. Nor should they determine the “occurrence” issue based on whether the claim is based on commercial or professional conduct, or alleges a professional error or omission. Many companies do not have E&O coverage (because they do not engage in professional services), and many E&O policies contain exclusions for bodily injury or property damage (precisely because those items of damage are covered by CGL policies). The sole focus, instead, should be on whether the complaint alleges an accident, which should be governed by Harvey/Sheehan rule – whether the conduct unintentionally results in bodily injury or property damage.

Construction Law Practice Tip: General Contractor Liability for Subcontractor Injury

Pierre Grosdidier | Haynes and Boone LLP | October 26, 2017

AIA Document A201TM, General Conditions of the Contract for Construction (the “General Conditions”), is a form agreement often incorporated into a main contract between an owner and a general contractor.1 The General Conditions place project control squarely in the hands of the general contractor. The issue is important because who controls the project might end up owing a duty of care to injured independent contractor employees.2 For example, in Saenz v. David & David Constr. Co., Inc., Saenz, an independent contractor employee, appealed the trial court’s take-nothing judgment in favor of David & David after a crane load struck him on the head, precipitating his fall from a roof.3 Saenz argued, inter alia, that the contract between the owner and David & David, and the subcontract between the latter and Saenz’s employer gave David & David control as a matter of law. The contract between the owner and the general contractor contained clauses almost identical to those in General Conditions §§ 3.3.1, 5.3, and 10.2.1.4 The contract provided that

[t]he contractor shall be solely, subject to the terms of Article 4, responsible for and have control over construction means, methods, techniques, sequences and procedures and for coordinating all portions of the work under the contract unless contract documents give other specific instructions concerning these matters[;]5

and that

[t]he contractor shall take all necessary precautions for safety and shall provide all necessary protection to prevent damage, injury or loss to all persons on the work and other persons who may be affected thereby.6

But the contract also required the general contractor to pass its obligations on to its subcontractors via the following clause:

The contractor shall require each subcontractor, to the extent of the work to be performed by the subcontractor, to be bound to the contractor by terms of the contract documents and to assume towards the contractor all obligations and responsibilities which the contractor by the contract documents assumes towards the owner and architect.7

The court held that this last “contract clause modified the previous control clauses.” The subcontract gave effect to this last clause with the following clause:

Subcontractor . . . assumes the responsibilities of an employer for performance of the Work and acts as an employer of one or more employees by paying wages, directing activities, and performing other similar functions. Subject to the right (but not the obligation) of [David & David] to direct Subcontractor or its employees to cease or change unsafe work practices. Subcontractor is an independent contractor, free to determine the manner in which the Work is performed. (emphasis added).8

The court held that the contracts assigned “the contractor’s responsibility for controlling the construction means, methods, techniques, sequences and procedures” to the subcontractor. The court could not agree, in light of the two contracts, that “David & David’s control of the subcontractor’s work is uncontroverted and thus established as a matter of law.”9 The court overruled Saenz’s issue on appeal and affirmed the trial court’s take-nothing judgment in favor of David & David. This next case shows what happens when the subcontract does not include a provision that passes project control to the subcontractor for the latter’s scope of work.

In Maggi v. RAS Dev., Inc., the plaintiff, a subcontractor’s employee, fell from a height on a construction site and died of his injuries.10 A jury awarded Maggi’s estate $3.3 million against RAS Development, the general contractor. On appeal, RAS Development argued, inter alia, that it should not be held liable for Maggi’s death because it did not control or supervise his work. The subcontract between RAS Development and Maggi’s employer “expressly incorporated” AIA Document A201TM, including form language from §§ 3.3.1, 3.3.2, 10.1, 10.2.1, 10.2.3, and 10.2.6, which gave the contractor control of the worksite and responsibility for its safety. For example, the General Condition’s § 3.3.1 stated that

[t]he Contractor shall supervise and direct the Work, using the Contractor’s best skill and attention. The Contractor shall be solely responsible for and have control over, construction means, methods, techniques, sequences and procedures and for coordinating all portions of the Work under the Contract, unless the Contract documents give other specific instructions concerning these matters.11

The court of appeals held that these clauses made it “clear that the parties intended RAS Development to be responsible for supervising, directing, and controlling the construction project,” and it affirmed the trial court’s judgment.12 We can infer that the subcontract did not contain a provision passing control to the subcontractor and making the latter an independent contractor, free to perform its work, as in Saenz.13 RAS Development might have avoided a holding of control-by-contract had such a provision been in place.14