INSURER MUST DEFEND PROPERTY OWNER AS “ADDITIONAL INSURED” UNDER ITS SUBCONTRACTOR’S GENERAL LIABILITY POLICY

In a recent decision, the Third Circuit held that the owner of a parking garage where construction work was taking place was an “additional insured” under a general liability policy that listed a subcontractor as the named insured and was therefore entitled to a defense under the policy in a lawsuit brought by an employee of that subcontractor who was injured while performing construction work at the garage. In Ramara v. Westfield Insurance Co., No. 15-1003, 2016 U.S. App. Lexis 2656 (3rd Cir. Feb. 17, 2016), Ramara, Inc., the garage owner, hired Sentry Builders Corp. as a general contractor to perform work at the garage, who in turn, subcontracted certain concrete and related work to Fortress Steel Services, Inc. The contract between Fortress and Sentry required Fortress to purchase a general liability policy, which it did from Westfield and that policy named both Sentry and Ramara as “additional insureds.”

During construction, one of Fortress’s employees, Anthony Axe, was injured in an accident and he filed tort claims against only Ramara and Sentry, since Fortress was immune from suit under the Pennsylvania’s Workers’ Compensation Act. Based on its being named as an “additional insured” under the Fortress policy, Ramara tendered the claim to Westfield seeking a defense and indemnification, but Westfield declined coverage because it claimed that the policy did not insure Ramara for Axe’s claims. Ramara then filed a declaratory judgment and breach of contract action against Westfield, the U.S. District Court for the Eastern District of Pennsylvania granted partial summary judgment to Ramara and Westfield appealed.

Under the policy, an additional insured was only entitled to coverage if the injury was “caused, in whole or in part,” by Fortress’s acts or omissions or the acts or omissions of someone acting on Fortress’s behalf. Westfield claimed that because Axe’s underlying complaint did not expressly allege that Fortress proximately caused his injuries, thus allegedly violating Pennsylvania’s strictly construed four-corners rule, it had no duty to defend Ramara. Because the relevant case law defined “proximate causation” as a cause which was “a substantial factor in bringing about the plaintiff’s harm,” the appellate court’s review focused on whether or not, when liberally construed in Fortress’s favor, Axe’s complaint “potentially alleged” that Fortress’s acts or omissions were a substantial factor in his being injured. The court held that Axe’s allegations based Ramara’s liability, at least in part, on Ramara’s failure to supervise the work of its contractors or subcontractors, who allegedly improperly used equipment and disregarded a site safety plan. The court further held that even though Fortress had been hired by Sentry, it was nonetheless a Ramara subcontractor, and that Axe’s sole reason for being on the job site at which he sustained the injuries was his employment by Fortress. As such, the court determined that Axe had made factual allegations that potentially would support a conclusion that his injuries were “caused, in whole or in part,” by Fortress’s acts or omissions and therefore, Ramara came within the “additional insured” endorsement with respect to Axe’s suit and was entitled to a defense.

The court also addressed Westfield’s argument that the underlying complaint did not expressly allege that Fortress proximately caused Axe’s injuries by noting that because of the worker’s compensation issue, specifically Fortress’s immunity to a suit by its employee, it was understandable that Axe’s attorney drafted the complaint in the underlying action taking the existence of the worker’s compensation act into account and did not make specific allegations against Fortress. Therefore, the Third Circuit held that where the Workers’ Compensation Act is relevant to a coverage determination, it must be factored into the determination of whether the allegations in the underlying case might trigger coverage under the policy.

AMBIGUITY IN AN ERISA PLAN’S GRANT OF DISCRETION ONCE AGAIN HARMS THE CLAIMS ADMINISTRATOR

As courts continue to closely scrutinize discretionary language in ERISA plans, and states seek to ban such language all together, it is more important than ever for plans to ensure that there is no ambiguity in the discretionary grant in the plan documents.  This was evidenced once again in a recent decision in the First Circuit when the court held that Blue Cross Blue Shield of Massachusetts (“BCBS”) had not appropriately reserved discretion in an ERISA-governed plan, and therefore, the case should have been reviewed under the de novo standard.

In Stephanie C. v. Blue Cross Blue Shield of Massachusetts HMO Blue, No. 15-1531, 2016 U.S. App. LEXIS 2693 (1st Cir. Feb. 17, 2016), the plaintiff sued regarding mental illness treatment for her teenaged son that had been denied by BCBS and the U.S. District Court of Massachusetts granted summary judgment to BCBS when it determined, using the arbitrary and capricious standard of review, that the denial was reasonable. The Plan’s subscriber certificate stated that coverage under the Plan remained subject to BCBS’s determination that treatments were “medically necessary.” In addition, the Plan’s “premium account agreement,” (“PAA”) which formed part of the agreement between the plan administrator and BCBS, but which had not been previously disclosed to the plaintiff, named the father’s employer as the plan fiduciary and BCBS as the claims fiduciary and stated BCBS “is the fiduciary to whom [the employer] has granted full discretionary authority” and that “all determinations of [BCBS] . . . will be conclusive and binding on all persons unless it can be shown that [a particular] determination is arbitrary and capricious.”

The son had been enrolled in several programs that his parents hoped would help alleviate his extreme anti-social behavior, one of which was a private school treatment center in Utah called Gateway Academy. The father’s employer submitted three sets of evaluation tests from Gateway to BCBS for payment and they were paid as a “one-time exception” since Gateway was a non-covered provider but Gateway also submitted a number of charges on its own related to residential services rendered to the son, which were denied because, among other things, BCBS determined that the treatments were not medically necessary. This denial was eventually formally contested through BCBS’s internal review process during which documentation from various of the son’s therapists, educators and evaluators was submitted. Based at least in part on a review of the record by a psychiatrist reviewer, BCBS upheld the initial denial, which was challenged in the Massachusetts District Court, which granted summary judgment to BCBS.

On appeal, plaintiff argued that the certificate’s “medically necessary” language did not constitute a clear grant of discretionary authority and since the PAA was never disclosed it could not be used to grant discretion to BCBS. The appeals court agreed with plaintiff because it determined that the certificate’s statement that that coverage under the Plan remained subject to BCBS’s determination that treatments were medically necessary was not a clear grant of discretionary authority, i.e., was ambiguous, and was, at best, a “subtle inference.” It also determined that the ambiguity could not be cured by the PAA because that document had not been disclosed to the plaintiff at the time coverage attached. As such, the court remanded the case to the trial court with instructions that it reconsider the denial under the de novo standard of review, a situation that most likely would have been avoided by simply stating in the plan documents provided to plan participants that BCBS had discretion to interpret the plan’s terms when making claims decisions.