Severability Clause Saves Coverage For Additional Insureds

It has been a fairly quiet first half of 2016 for insurance law decisions in Florida.  Several important cases are pending with Florida appellate courts, and as the weather heats up hopefully some of those decisions will be released.  In the meantime, I want to discuss a common general liability insurance clause addressed in a recent appellate decision that does not receive as much attention as it should.  It is usually referenced in a general liability policy as a “Separation of Insureds” clause, although it is commonly referred to as the “severability clause”.  This clause states that coverage applies separately as to each party insured by the policy.

Most insurance policies cover multiple parties.  For example, Directors & Officers insurance typically insures a company (the named insured), its subsidiaries, and its directors, officers, and employees (individual insureds).  General liability policies also typically insure multiple corporate entities as well as employees, and also often insure additional insured parties that are unaffiliated with the named insured (such as lessors, property owners, contractors, and vendors).

When a loss occurs, insurers often have to sort out which parties are potentially insured, and which policy provisions and exclusions are applicable to each.  This task can be particularly complicated when multiple insureds are named in a lawsuit.  The purpose of the severability clause is to separate insureds for purposes of applying coverage terms.  This can become an issue when a claim is asserted against multiple insureds, some of whom allegedly committed an intentional or fraudulent act, and some of whom that are “innocent” insureds.  The severability issue also frequently arises with respect to claims that involve an employment relationship, where an employer is sued alongside third parties.

There are two types of severability clauses found in insurance policies.  The first, “application severability”, is typically found in a Directors & Officers policy.  This type of severability clause states that an insured will not lose its coverage under the policy, even if there are misrepresentations made in the application, if the insured was not aware of the misrepresentations.  The purpose of “application severability” is to preserve coverage for “innocent” insureds that had nothing to do with the application, even if coverage may be lost for insureds with knowledge of the misrepresentation.

The second type of severability clause is an “exclusion severability” clause.  This type of clause is typically found in general liability policies and also some Directors & Officers policies.  The exclusion severability clause states that coverages and exclusions apply separately as to each insured.  In Directors & Officers policies, certain exclusions may apply to exclude coverage for the company but not individual insureds.  General liability policies typically have broad severability clauses that state coverage under the policy applies separately to each insured, and so the applicability of an exclusion to one insured has no impact on whether the exclusion also applies to a different insured.

In addition to claims involving “innocent” insureds, severability frequently becomes an issue with claims that involve employment relationships.  Most general liability policies exclude coverage for employment-related claims, such as discrimination, sexual harassment, and wage and hour claims.  General liability policies also typically contain employer’s liability exclusions that exclude coverage for claims asserted against an insured by one of its employees, under the rationale that such claims are covered by worker’s compensation and employer’s liability insurance.

Insurance coverage disputes arise in several contexts.  For example, some employment-related claims also assert bodily injury or personal injury claims separate and apart from the employment claims.  Examples are claims for defamation, retaliation, false imprisonment, and negligent infliction of emotional distress.  Such claims may be made against the claimant’s employer or against third-parties such as contractors, supervisors, and co-employees.

Another context, which is common in the construction industry in particular, involves injured worker claims against third parties.  When a subcontractor employee is injured on the job, he is prevented by the worker’s compensation bar from suing his employer directly.  However, the claimant can sue the general contractor and owner of the project.  The claimant also may sue individually a fellow employee whose negligence was contributed to the injury.  These lawsuits, often referred to as “third-party-over actions”, often trigger indemnity agreements that determine which party or parties are ultimately responsible for a loss.

When a claim is asserted by an employee, general liability insurers frequently invoke employment-related exclusions to deny coverage.  Compounding the problem is that many companies do not purchase employment practices liability insurance, and, even for those companies that do purchase such insurance, many employee claims are not covered by employment practice insurance, such as claims for bodily injury and personal injury referenced above.

Recent Florida caselaw has clarified the impact of severability clauses in the context of employee claims.  In Taylor v. Admiral Ins. Co., Case No. 3D14-720 (Fla. 3d DCA Feb. 10, 2016), the Third District Court of Appeals addressed a claim asserted by a party who was injured at Vizcaya Museum & Gardens in Miami.  The claimant was attending a function sponsored by her company when she was injured.  She sued her employer as well as Vizcaya and Miami-Dade County, which owns and operates Vizcaya.  Vizcaya and Miami-Dade County were additional insureds on the employer’s policy and sought coverage under that policy.  The insurer denied coverage for all insureds under the employer’s liability exclusion, which excluded coverage for any claims arising out of bodily injury to “any insured”.  The trial court entered summary judgment in favor of the insurer on the employer’s liability exclusion.

The 3rd DCA reversed the trial court’s decision.  The appellate court held that, while coverage was excluded for the claimant’s employer, such was not the case for Vizcaya and Miami-Dade County, as neither of these defendants employed the claimant.  The court held that the “Separation of Insureds” provision meant that coverage applied to each insured as if it was the only insured under the policy.  Therefore, the employer’s liability exclusion was not applicable to non-employer insureds.

The 3rd DCA cited extensively to the recent decision of the Eleventh Circuit Court of Appeals in Evanston Ins. Co. v. Design Build Interamerican, Inc., 569 Fed. Appx. 739 (11th Cir. 2014).  In Design Build Interamerican, a subcontractor employee was injured while working on a construction site.  The injured worker sued co-employees who he alleged were negligent.  The insurer denied coverage to these co-employees on the basis of the employer’s liability exclusion.  The 11th Circuit ultimately held that the co-employees were covered due to the severability clause, since none of the co-employees were the injured worker’s employer.  Although coverage was excluded for the injured worker’s employer, coverage existed for defendants who did not have an employment relationship with the claimant.

Counsel should be mindful of severability clauses when assessing the availability of coverage for claims involving multiple defendants, particularly those claims asserted by an employee of the named insured.  It is not necessarily the case that an exclusion applies across the board to all insureds under the same policy, and coverage should be analyzed for each insured separately as if it were the only insured.