The Word “Contractor” Used In A CGL Policy’s “Contractor Exclusion” Endorsement Held Ambiguous

In California Spec. Insulation, Inc. v. Allied World Surplus Lines Ins. Co., __ Cal.Rptr.3d __, 2024 WL 2238634 (May 17, 2024), the Second District Court of Appeal of California applied the state’s well-established rules of policy interpretation to find the undefined term “contractor” in a “Contractor Exclusion” was ambiguous, and held the exclusion did not bar coverage for the defense or indemnification of an underlying lawsuit.

The case arose out of the unremarkable scenario in which a real property owner hired a contractor (“Air Control”) to perform improvement work at a building, and Air Control subcontracted with the insured (“CSI”) to install duct insulation. An employee (“Claimant”) of Air Control sued CSI, alleging he sustained injuries from a fall after CSI’s employee drove a lift into a ladder on which Claimant was standing.

Initially, CSI’s CGL insurer accepted its tender of defense. Subsequently, however, the insurer withdrew its defense based upon a “Bodily Injury to Any Employee or Temporary Worker of Contractors Exclusion” endorsement to the policy. It barred coverage for, “‘bodily injury’ … to any ‘employee’ … of any contractor … arising out of or in the course of the rendering or performing services of any kind or nature by such contractor…” No part of the policy defined “contractor.”

CSI argued the exclusion was ambiguous and should be interpreted to apply only to injury sustained by an employee of CSI’s contractor. The insurer countered that the exclusion applied more broadly to injury sustained by an employee of any contractor, including an employee of a contractor that hired CSI.

The parties filed cross-motions for summary judgment regarding whether the exclusion applied to the underlying action. The trial court granted CSI’s motion and denied the insurer’s cross-motion, finding the term “contractor” was ambiguous and meant CSI’s contractor. Because Claimant was not CSI’s employee, the trial court held the Contractor Exclusion was inapplicable.

The Court of Appeal stated that under California’s rules of policy interpretation, “[i]f contractual language is clear and explicit, it governs.” However, if the terms are susceptible of more than one reasonable interpretation, they are ambiguous and courts will “interpret them to protect ‘the objectively reasonable expectations of the insured.’” If these rules do not resolve an ambiguity, courts will employ the “tie-breaker” rule of policy interpretation against the insurer, which typically drafts the policy language.

Thus, the Court of Appeal first turned to the parties’ proffered interpretations of “contractor.” Relying on dictionary definitions, the insurer argued “contractor” unambiguously means anyone who has “contracted to work on a construction project.” The Court found that interpretation reasonable, but also found that CSI’s proffered interpretation meaning “CSI’s contractor” was also reasonable. Accordingly, the Court of Appeal agreed with the trial court that the term “contractor” in the Contractor Exclusion was ambiguous. In order to resolve the ambiguity, the Court next considered which interpretation would protect CSI’s objectively reasonable expectations. It concluded that CSI’s interpretation would do so for at least two reasons.

First, the Court stated that a CGL policy establishes a reasonable expectation the insured will have coverage for ordinary acts of negligence resulting in bodily injury. It further stated, “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.”

Second, the Court found that CSI’s interpretation aligns the Contractor Exclusion with the policy’s separate Employer’s Liability Exclusion, which bars coverage for work-related injuries of the insured’s employees. According to the Court, “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)…” 

The Court of Appeal held the exclusion did not preclude a defense and coverage obligation for the underlying action.

In summary, this case teaches that a seemingly clear term may be found ambiguous depending on the context in which it is used and the competing interpretations advanced by the parties, as well as how a court will apply California’s rules of policy interpretation in such a circumstance.