An important feature of CGL insurance is that it provides “litigation cost” coverage: if the lawsuit against the insured alleges claims which may possibly fall within coverage, then no matter how completely lacking in merit the lawsuit may be, the insurer will step up and defend the insured at the insurer’s cost. This “possibility of coverage” test for a CGL insurer’s duty to defend was recently reaffirmed by the Supreme Court of Canada in the 2010 Progressive Homes v. Lombard Insurance case.
CGL policies provide important third party liability coverage for businesses. If that liability arises out of the negligence of its employees (as will invariably be the case), the business would rightly expect that the policy would also protect any employee who may be named as a defendant in the resulting lawsuit. And indeed, the CGL policy does indeed generally provide coverage for employees who cause bodily injury or property damage to third parties while acting “in the course and scope of their employment” with their employer.
With respect to employees, however, there is a major gap in coverage about which most employers are completely ignorant: the CGL policy grants employees “additional insured” status so long as they are acting in the scope of their employment but it expressly excludes coverage for bodily injury to co-employees “on the job”. This gap in coverage was highlighted in the recent British Columbia Supreme Court decision of Danicek v. Alexander Holburn Beaudin & Lang, 2011 BCSC 65 where, at the end of the day, an employee who had recovered a $6 million personal injury judgment against a co-employee was unable to collect as against their employer’s CGL policy and was left with an 85% shortfall in recovery.
Ms. Danicek was an articling student employed at the law firm of Alexander Holburn. By all accounts she had that often elusive combination of fierce intelligence and a social personality that promised a bright future as “rainmaker” at the firm. That future came to tragic end when she was involved in a slip and fall accident at a bar following a firm-sponsored associates’ dinner.
For perfectly legitimate business reasons (employee morale and teamwork, collegiality, etc.) the law firm would occasionally pay for an associates-only dinner at a restaurant selected by the associates. As one might expect, food, alcohol and frivolity to various degrees would ensue. Often, a number of the associates would move on to a different establishment following the dinner if the evening was too young to end. This is what happened on April 5, 2001 when, a couple hours later, one associate lost his balance knocking Ms. Danicek to the concrete dance floor where she sustained a severe blow to her head and, as it unfortunately turned out, permanently debilitating injury, headaches and pain.
Ms. Danicek sued her co-worker who had accidentally fallen upon her. She also sued the law firm. The incident and the lawsuit was reported to the law firm’s CGL insurer, Lombard Insurance. Lombard assumed the defence of the law firm (no exclusions applied) but refused to defend the employee-associate defendant invoking the standard exception in the “who is an insured” wording of the policy which read as follows:
“PART II – WHO IS AN INSURED
- Each of the following is also an insured:
- Your employees … but only for acts within the scope of their employment by you. However, none of these employees is an insured for:
- Bodily injury or personal injury to … a co-employee while in the course of his or her employment;”
Lombard argued that the associates’ post-dinner attendance at the bar was not within the scope or course of their employment but it if was, then the above exception squarely applied and the associate-employee did not qualify as an additional insured under the CGL policy.
At the end of the day, the British Columbia Supreme Court agreed with Lombard that the attendance at the bar by the associates was not within the scope or course of their employment with the law firm. The Court held that the connection with the employment was tenuous at best and that the law firm did not gain any meaningful benefit from that part of the evening’s activities. The result was that the CGL policy did not extend indemnity for the associate’s liability to the Plaintiff and the latter was unable to access the CGL’s policy limits of $5 million to satisfy her judgment.
The case highlights a curious anomaly [some would say a major gap in coverage] respecting coverage for employees under their employer’s CGL policy. The exclusion for “injury to co-workers” is hard to rationalize. If coverage exists for the employer law firm or law firm’s partners for liability claims brought by employees injured “on the job”, why would there be no coverage for the employee whose accidental conduct caused the injury?
The rationale for the exclusion is often said to be that “the CGL policy is not supposed to extend to injuries covered by the Workers’ Compensation regime”. But this rationale actually makes no sense. It is true that injuries “on the job” will trigger tort immunity for employers and co-employees by virtue of the statutory bar found in the legislation (in BC, in S. 10 of that Province’s Workers Compensation Act). But if the lawsuit is brought against the employer or co-employee by the injured worker, someone has to defend it and most businesses would rightly expect that the litigation cost insurance of the CGL policy would be triggered. As the Danicek case demonstrates, the insurance does actually cover the claim against the employer but does not cover the claim against the co-employee.
There was another interesting twist to the Danicek case that will be of interest to both homeowners and CGL insurers. The homeowner insurer of the employee-defendant had, as you might expect, stepped up to assume the defence of their insured, and ultimately paid its policy limits of $1 million to settle the claim and protect the insured from any excess judgment. However, that homeowner insurer also issued a contribution lawsuit against the CGL insurer seeking contribution towards the rather substantial costs of defending the litigation. At the end of the day, the Court ruled that, although the CGL policy did not ultimately provide indemnity for the associate’s liability, its duty to defend had nonetheless been triggered by the combination of the pleadings and the “possibility of the coverage” test and that the CGL insurer was therefore liable to pay 50% of the defence costs to the homeowner insurer.