Most business owners understand that in exchange for paying premiums for workers compensation insurance, they get immunity from suit from their own injured employees. This is usually referred to as the workers compensation "exclusive remedy": if an employee accepts workers compensation insurance benefits, the employee may not sue the employer (subject to certain exceptions for egregious cases). So why, as the title of this post suggests, do many employers feel like they end up paying twice for their employees' injuries? It boils down to three words: additional insured promises.
Many workplaces these days have workers from multiple companies all working together at the same time. For example, a warehouse may have workers from three or more companies at any one time: there may be workers hired by the warehouse tenant, independent contractors whom the tenant hired to perform quality control, workers hired by the warehouse owner to repair some aspect of the warehouse, and more. It adds up to a lot of companies sending their employees off to work on premises that are not "home" for those employees.
In most situations, the owner (or tenant) of the property where these various employees do their work will require all those other companies to name the owner/tenant as an "additional insured" on their liability policies, and will require all contractors that use subcontractors to have those subcontractors, too, name everyone else as an additional insured. In short, there will be many overlapping (and often reciprocal) contractual promises to provide additional insured coverage to the owner, the tenant, and others.
Let's say that a warehouse owner, Owner A, contracts with Vendor B to do some repairs on a warehouse, and Vendor B hires Contractor C to do some specialized part of that work. Owner A requires that Vendor B and Contractor C name Owner A as an additional insured; Vendor B also requires that Contractor C name Vendor B and Owner A as additional insureds.
And let's say that Contractor C's worker, Juan, gets hurt on the job and receives workers' compensation benefits. He sues Vendor B and Owner A over his injuries. Why doesn't Juan also sue Contractor C? Juan does not sue Contractor C, his own employer, because of the workers compensation exclusive remedy.
Of course, in order to sue Vendor B and Owner A, Juan has to allege that they did something wrong—something to cause his injury. But Juan's complaint in court will usually be fairly vague about exactly what Vendor B and Owner A did wrong—probably because he does not yet know exactly who was responsible for what on the jobsite. And that is where additional insured status comes in.
(N.B.: For more on what additional insured status means, click here. For more on how Oregon's courts are making it easier for a subcontractor's injured workers to sue general contractors and property owners, click here for an excellent DJC article featuring my partner Gary Christensen.)
As additional insureds on Contractor C's policy, both Owner A and Vendor B are owed a defense by Contractor C's insurer—let's call it Insurer E. Insurer E might say, "Hold on a minute! They [Owner A and Vendor B] are entitled to a defense only if Contractor C is somehow involved in this—and Contractor C is not in this lawsuit!" Insurer E will make this argument because Oregon has a statute, applicable to construction contracts, saying that one company cannot by contract make another company pay for the first company's own negligence—this is called Oregon's anti-indemnity statute: ORS 30.140. (Washington has a similar statute.) So Owner A and Vendor B are entitled to indemnity (and additional insured status) from Contractor C only to the extent that Contractor C was negligent, and Owner A and Vendor B are held liable for that negligence. And so Insurer E might argue: "Look, Juan doesn't allege that Contractor C was negligent, because he's not suing Contractor C! So no defense for either of you!"
This was the situation in Homeland Insurance Co. v. AAM, Inc. et al., a May 2016 decision from an Oregon federal judge. Homeland insured AAM—Contractor C in our story above. Juan Orta-Carrizales was AAM's employee, and he was badly hurt on the job. Homeland did not want to provide additional insured coverage for the owner and the general contractor—and specifically did not want to have to provide a defense to them (Owner A and Vendor B) so it sued for a declaration from the court that it did not have to defend.
First, the court rejected Homeland's argument that because the employee had not sued his employer, there could be no additional insured coverage, since the employee did not name the employer because of the workers' compensation statute, not because he didn't think the employer was actually liable.
Second, the court rejected the argument that because the employee did not specifically say in the complaint that his employer did something wrong, there could be no coverage. Instead, the court—relying on a long line of Oregon cases on this subject—carefully examined the complaint to see whether there was an implied allegation that the employer (Contractor C) was negligent.
The court found that employee Juan had implied that his employer was negligent. Juan alleged that his injury had come about in part because he was given specific instructions about how to do his job at the site, including instructions to carry building materials in a way that left him unable to properly use his safety equipment. But Juan did not allege who had given him the instructions. Therefore, it was possible that Juan's employer had given him the instructions, meaning that the employer was negligent and partially to blame for the injuries. As a result, Homeland had a duty to defend Owner A and Vendor B against the lawsuit—at least until it was proved that the employer had done none of the things that led to the injury.
Because Homeland has to pay to defend two entities in a lawsuit, it will likely raise the premiums for its insured (Contractor C) at the next policy renewal—or at least factor those defense cost losses into the renewal decision. The result of this lines of cases is that companies end up paying twice, indirectly, for those injuries: once when they pay their workers compensation insurance premiums, and once when they pay more for insurance because of additional insured promises to others. This is an important consideration for companies that have employees that they place in the field and that have contracts with broad additional insured requirements. One way to avoid these risks, of course, is to resist making other parties additional insureds. But, subcontractors rarely have that kind of bargaining power. Therefore, if this type of cost may be unavoidable, it must be factored into risk planning, to avoid unwelcome surprises.