California Court of Appeal, California Specialty Insulation, Inc. v. Allied World Surplus Lines Insurance Company, B324805

Commercial General Liability Insurance

 

Action for Declaratory Relief

 

Policy’s Exclusions from Coverage for Bodily Injury Liability

 

Interpretation of an Insurance Policy

 

Ambiguous Term

 

Insured’s Objectively Reasonable Expectations

 

Surplusage

 

California Law

 

 

 

 

Appeal from a judgment of the Superior Court of Los Angeles County, Michelle Williams Court, Judge. Affirmed.

 

 

 

CSI filed an action for declaratory relief after Allied World refused to defend and indemnify CSI against a negligence claim following a construction site accident. The parties dispute whether one of the policy’s exclusions from coverage for bodily injury liability applies under these circumstances.

 

 

The policy excludes from coverage bodily injury to the employees of any “contractor.” The term “contractor” is not defined in the policy. Allied World contends the term is unambiguous and the exclusion precludes coverage for the negligence claim in question. CSI takes the opposite view. It argues the term is ambiguous and the exclusion does not apply to the negligence claim. After the parties filed cross-motions for summary judgment, the trial court ruled in CSI’s favor, granting its motion and denying Allied World’s. The court determined the term “contractor” in the disputed exclusion was ambiguous, and ultimately construed the term in CSI’s favor. We reach the same conclusion as the trial court. The term “contractor” in the disputed exclusion is ambiguous. Based on CSI’s objectively reasonable expectations, the exclusion does not apply to the negligence claim in question. Therefore, we affirm.

 

 

In 2017, a real property owner retained Air Control Systems, Inc. (Air Control) to perform improvement work at a building in Los Angeles. Air Control later retained CSI to install duct insulation as part of the project. In 2019, Jason Standiford, an Air Control employee, filed a personal injury complaint against CSI, asserting one cause of action for general negligence. Standiford alleged he suffered physical injuries in 2017 when he fell 16 to 20 feet after a CSI employee drove a scissor lift into a ladder he was standing on.

 

 

At the time of Standiford’s accident, CSI was insured through a commercial general liability insurance policy from Allied World. Under the policy, Allied World agreed to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ . . . to which this insurance applies.” The policy stated Allied World had a duty to defend CSI “against any ‘suit’ seeking those damages,” but also that Allied World had no duty to defend against a suit to which the policy did not apply. As an addition to the list of exclusions from coverage for bodily injury liability, the policy set forth an endorsement titled “Bodily Injury to Any Employee or Temporary Worker of Contractors Exclusion” (Contractor Exclusion). Relevant here, the Contractor Exclusion stated the policy did not apply to “‘Bodily injury’ . . . to any ‘employee’ or ‘temporary worker’ of any contractor or subcontractor arising out of or in the course of the rendering or performing services of any kind or nature by such contractor or subcontractor.” Neither the endorsement nor the policy as a whole defined the term “contractor.”

 

 

CSI tendered its defense in Standiford’s action to Allied World. Allied World accepted the defense without reserving any rights, and retained counsel filed an answer on CSI’s behalf. Allied World later withdrew its defense, asserting the Contractor Exclusion precluded any defense or coverage obligation. In February 2021, CSI filed a complaint for declaratory relief. CSI sought to establish that under the policy Allied World had duties to defend and indemnify CSI in the Standiford action. The parties filed cross-motions for summary judgment, for which they stipulated to the relevant facts. In their motions, the parties narrowed their dispute to whether the Contractor Exclusion applied for purposes of the Standiford action. The trial court granted CSI’s motion and denied Allied World’s. The court determined the Contractor Exclusion did not apply because the terms “contractor” and “subcontractor” were ambiguous and meant, in line with CSI’s reasonable expectations, “CSI’s contractor or subcontractor, i.e., a contractor or subcontractor retained by CSI.” Because CSI did not retain Air Control, the court continued, Standiford was not an employee of a contractor or subcontractor within the meaning of the exclusion and CSI was entitled to the declaratory relief it sought. The court entered judgment in favor of CSI.

 

 

This appeal requires us to interpret an insurance policy. “In general, interpretation of an insurance policy is a question of law that is decided under settled rules of contract interpretation.” (State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 194; accord, Yahoo Inc. v. National Union Fire Ins. Co. etc. (2022) 14 Cal.5th 58, 67 (Yahoo Inc.) [“‘“While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.”’”].) “‘Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties’ mutual intentions. [Citations.] “If contractual language is clear and explicit, it governs.” [Citations.] If the terms are ambiguous [i.e., susceptible of more than one reasonable interpretation], we interpret them to protect “‘the objectively reasonable expectations of the insured.’” [Citations.] Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer. [Citation.]’ [Citation.] The ‘tie-breaker’ rule of construction against the insurer stems from the recognition that the insurer generally drafted the policy and received premiums to provide the agreed protection.” (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, 321 (Minkler).) “To further ensure that coverage conforms fully to the objectively reasonable expectations of the insured, the corollary rule of interpretation has developed that, in cases of ambiguity, basic coverage provisions are construed broadly in favor of affording protection, but clauses setting forth specific exclusions from coverage are interpreted narrowly against the insurer. The insured has the burden of establishing that a claim, unless specifically excluded, is within basic coverage, while the insurer has the burden of establishing that a specific exclusion applies.” (Id. at p. 322.)

 

 

(…) (See Minkler, supra, 49 Cal.4th at p. 322 [“The existence of a material ambiguity in the terms of an insurance policy may not, of course, be determined in the abstract, or in isolation. The policy must be examined as a whole, and in context, to determine whether an ambiguity exists.”].)

 

 

In sum, the term “contractor,” as used in the Contractor Exclusion, is susceptible of more than one reasonable interpretation. These interpretations include the parties’ respective readings of “anyone performing construction work pursuant to contract” and “anyone hired by CSI pursuant to contract.” Because reasonable people may differ as to the meaning of the term “contractor,” the term is ambiguous.

 

 

To resolve the ambiguity in the term “contractor,” we must interpret the term in a manner that protects the insured’s objectively reasonable expectations. (Minkler, supra, 49 Cal.4th at p. 321.) To do that, we examine the term in context and interpret the exclusion narrowly against the insurer. (Id. at p. 322.)

 

 

As noted, CSI contends the term “contractor” means anyone CSI hired other than its employees. CSI contends this narrower reading of the term best aligns with its objectively reasonable expectations as the insured. Namely, CSI explains that in purchasing the policy it expected to be “protected from liability for accidental bodily injury arising out of the conduct of its insulation business, unless the injury was sustained either by a CSI employee or by an employee of a CSI contractor.” For the uncovered injuries, CSI notes, it maintained workers’ compensation insurance and had the ability to require the same form of insurance be maintained by anyone it hired to perform work on its behalf. In contrast, CSI continues, it “could not exercise the same control over all contractors in the world and thus had no objectively reasonable expectation that injuries to contractors unrelated to CSI would be excluded from coverage.” CSI contends these expectations are consistent with, and supported by, the purpose of commercial general liability insurance.

 

 

This logic once more echoes the analysis in Benchmark. Faced with the same ambiguity, the First Circuit addressed the insured’s reasonable expectations in light of the purpose of commercial general liability insurance. (Benchmark, supra, 797 F.3d at pp. 122, 124.) The court explained this form of insurance is meant “‘to protect the insured against losses to third parties arising out of the operation of the insured’s business,’” emphasizing that “the relationship of the injured party to the insured is at the core of this type of ‘broad coverage.’” (Id. at p. 122, quoting 9A Couch on Insurance (3d ed. 2014) §§ 129:1, 129:2.) If “contractor” broadly meant “anyone with a contract,” the court explained, it would make “‘a dice roll of every bodily injury claim, based on whether the injured party happened to be working under any contract no matter how attenuated to the insured’s work.’” (Benchmark, at p. 124.) The court stated it was “unable to discern any reason why the parties would have contracted for coverage to depend on the coincidence of an injured party’s contractual obligations in the world at large.” (Ibid.; see also United States Liability Ins. Co. v. WW Trading Co., Inc. (E.D.N.Y., Sept. 28, 2018, No. 16-CV-3498 (CBA) (JO)) 2018 WL 6344641, at p. *14 [citing Benchmark while interpreting a similar exclusion, and stating, “Why would an insurance policy exclude coverage for individuals injured by [the insured] based solely on whether they are an employee or contractor of a random, third party (say Wal-Mart or Goldman Sachs)? The Court can see no reason.”].) The same analysis applies here. As the California Supreme Court has stated, a commercial general liability policy is meant to “‘“provide the insured with the broadest spectrum of protection against liability for unintentional and unexpected personal injury or property damage arising out of the conduct of the insured’s business.”’” (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 654; see id. at p. 649 [the insuring language of a commercial general liability policy “‘connotes general protection for alleged bodily injury caused by the insured’” and “establishes a reasonable expectation that the insured will have coverage for ordinary acts of negligence resulting in bodily injury”].) Consistent with that purpose, it would be objectively reasonable for an insured to interpret an exclusion that removed coverage for contractors’ employees’ bodily injuries as being limited to those contractors that the insured hired and not contractors in the world at large. As the court in Benchmark concluded, “a reasonable insured would expect the contractual relationship between the insured and the injured party to govern the applicability of an employer’s liability exclusion to a given injury.” (Benchmark, supra, 797 F.3d at p. 124.)

 

 

Defining the term “contractor” more narrowly also comports with the policy as a whole. With this reading, the Contractor Exclusion aligns with the separate “Employer’s Liability Exclusion,” which states the policy does not cover work-related bodily injuries of employees of the insured. Thus, read together, the exclusions separately apply to preclude coverage for injuries of employees of the insured (Employer’s Liability Exclusion) and injuries of employees of the insured’s contractors (Contractor Exclusion)—that is, as CSI points out, injuries the insured can alternatively cover through its workers’ compensation insurance or the workers’ compensation insurance of anyone it hires to perform work on its behalf.

 

 

Moreover, as CSI also points out, reading “contractor” to mean “anyone with a contract,” as Allied World proposes, would render the Employer’s Liability Exclusion surplusage because CSI would qualify as a contractor for which the Contractor Exclusion would apply. (See Yahoo Inc., supra, 14 Cal.5th at p. 69 [“Courts will favor an interpretation that gives meaning to each word in a contract over an interpretation that makes part of the writing redundant”]; see also ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co. (1993) 17 Cal.App.4th 1773, 1785 [“In California, however, contracts—even insurance contracts—are construed to avoid rendering terms surplusage”].)

 

 

In sum, based on the reasonable expectations of the insured, “contractor,” as it is used in the Contractor Exclusion, means “anyone hired by the insured pursuant to contract,” or more simply, “CSI’s contractor.” Under this definition, Standiford was not a contractor’s employee because CSI did not hire his employer, Air Control. Therefore, the Contractor Exclusion does not apply to preclude Allied World’s defense and coverage obligations for purposes of Standiford’s negligence claim.

 

 

 

 

(California Court of Appeal, May 17, 2024, California Specialty Insulation, Inc. v. Allied World Surplus Lines Insurance Company, B324805, Certified for Publication)