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Kentucky Supreme Court: Commercial auto policy’s employee injury exclusion didn’t bar coverage for permissive user of insured’s truck

An exclusion in a company’s auto liability policy barring coverage for employee injuries did not bar coverage for a permissive user of one of the firm’s trucks in an underlying wrongful-death suit against the driver arising after one of the insured’s employees was killed when he fell from the truck, the Kentucky Supreme Court advised. In so ruling, the high court affirmed a state appellate panel’s conclusion that the insurance policy’s severability clause applied coverage separately to each insured, thereby rendering the employee exclusion ineffective as to the permissive user, who was an insured under the terms of the policy but was not the decedent’s employer as required by the terms of exclusion (Tower Insurance Co. of New York v. Horn, October 29, 2015, per curiam).

Background. Brent Horn, a friend of the managers of highway mower/landscaper B&B Contracting, LLC, volunteered to drive a B&B truck without compensation in order to help out on a day when the firm was short-staffed. Tragically, B&B employee Bradley Stafford fell from Horn’s truck and was fatally injured. The administratrix of Stafford’s estate filed a wrongful-death suit against Horn, asserting that the liability insurance policy covering B&B’s trucks issued by Tower Insurance Co. of New York covered the claim against him.

Tower filed an intervening complaint, seeking a declaration of rights regarding its obligation to defend and indemnify Horn. The trial court granted summary judgment favoring the insurance company and denying coverage to Horn. The trial court found that although Horn was not a B&B employee, he was a permissive user of the firm’s truck and, as such, was an insured under the policy. However, the policy’s “Employee Indemnification and Employer’s Liability” exclusion—which barred coverage for bodily injury to an employee of the insured—precluded coverage for Stafford’s death because he was an employee of B&B, the court determined, declining to find that the policy’s severability clause negated the exclusion.

Horn appealed, and a divided appellate panel reversed the trial court’s decision, finding that Horn was an insured under the policy and that the employee exclusion undoubtedly created an exception to Tower’s duty to cover B&B’s liability to Stafford’s estate. Nevertheless, the panel held that the insurance policy’s severability clause applied coverage separately to each insured, thereby rendering the employee exclusion ineffective as to Horn, who was not Stafford’s employer. Horn enjoyed a “unique status” under the policy and was not barred from coverage for purposes of defense and indemnification, the panel concluded. Tower sought and received review of the appeals court’s ruling from the state’s highest court.

Policy language. The policy provided that the insurance company would “pay all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ [including death] or ‘property damage’ to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of the covered ‘auto.’” Furthermore, the insurance company reserved “the right and duty to defend an ‘insured’ against a ‘suit’ asking for such damages.”

Under the policy’s “Who Is an Insured” provision, an insured was defined as including the named insured (i.e., B&B) as well as “anyone else while using with your permission a covered ‘auto’ you own, hire or borrow.” Further, the policy contained a severability clause stating that an “insured” was defined as “any person or organization qualifying as an insured in the Who Is an Insured provision of the applicable coverage. Except with respect to the Limit of insurance, the coverage afforded applies separately to each insured who is seeking coverage or against whom a claim or ‘suit’ is brought.”

Finally, the policy’s “Employee Indemnification and Employer’s Liability” exclusion exempted an insured from coverage for bodily injuries to “[a]n ‘employee’ of the ‘insured’ arising out of and in the course of (1) [e]mployment by the ‘insured;’ or (2) [p]erforming the duties related to the conduct of the ‘insured’s’ business.”

The parties’ contentions. The insurance company argued on appeal that the policy excluded coverage for any claim relating to the employee’s death, citing a prior case from the high court for the assertion that it would be unreasonable to afford greater coverage to an unnamed insured than to the named insured that had paid premiums when the unnamed insured had not. Kentucky law holds that the purpose of severability clauses is not to negate policy exclusions, the insurer contended. The volunteer driver countered that the policy’s exclusion had to be examined independently in order to give meaning to the severability clause. In addition, the driver distinguished the insurer’s case precedent offered and provided counter-examples from other states.

Who was an “insured.” As a threshold matter, the volunteer driver was an “insured” under the insurance policy at issue because the truck that he was driving at the time of the accident was listed as a covered auto under the named insured’s policy and the volunteer driver was operating that truck with the named insured’s permission when the employee’s death occurred. As an insured under the policy, the volunteer driver was entitled to coverage; therefore, the insurance company owed the volunteer driver a duty of indemnification and defense under the policy’s affirmative provisions.

Employee exclusion’s applicability. As it was undisputed that the decedent was an employee of the named insured and that the volunteer driver was neither an employee of the named insured nor the decedent’s employer, the issue was whether the insurance policy’s employee exclusion applied to bar coverage of the volunteer driver, a permissive user. In that regard, having determined that the permissive user was an “insured” under the terms of the policy, the severability clause—which stated that the coverage applied separately to each insured seeking coverage or against whom a claim or suit was brought—applied to the circumstances at issue. Moreover, because the language of the policy treated insureds individually, the coverage analysis had to be treated that way as well.

Accordingly, by substituting the permissive user’s name in place of the term “the Insured,” it was clear that the policy’s employee exclusion did not apply to him. The exclusion stated that coverage did not apply to “[b]odily injury to … [a]n employee of [the insured] arising out of and in the course of [e]mployment by [the insured]; or performing the duties related to the conduct of [the insured]’s business.” The decedent was not an employee of the permissive user; the decedent’s injury did not arise out of and in the course of his employment by the permissive user; and the decedent’s injury and death did not arise out of his performance of duties related to the conduct of the permissive user’s business.  As a consequence, the court of appeals’ decision was affirmed and the matter was remanded to the trial court for additional proceedings.

The case is No. 2014-SC-000015-DG.

Attorneys: Joseph Stan Lee (Bowles Rice, LLP) for Tower Insurance Co. of New York. Gregory Lee Monge (VanAntwerp Attorneys, LLP), John C. Bowlin (Bowlin Law Firm, P.S.C.) and Anthony Charles Donahue (Donahue Law Group, P.S.C.) for Brent Horn; MicKayla Sesco and Bridgefield Casualty Insurance Co., Inc.

Companies: Tower Insurance Co. of New York; Bridgefield Casualty Insurance Co., Inc.