First Circuit: Ambiguous “Contractor Employees” Exclusion Strictly Construed In Favor of the Insured
In August 2015, the First Circuit Court of Appeals, applying Massachusetts law, rejected as ambiguous a “Contractors Employees” exclusion, and, construing the policy strictly in favor of the insured, ruled that the insurer had a duty to defend.
In United States Liability Insurance Company v. Benchmark Construction Services, Inc., 797 F.3d 116 (2015), Benchmark Construction Services, Inc. (“Benchmark”) and its commercial general liability insurer, United States Liability Insurance Company (“USLIC”), disagreed over whether USLIC had a duty to defend and indemnify Benchmark in a personal injury suit. Benchmark appealed the District Court’s ruling that USLIC had no duty to defend or indemnify. The issue before the First Circuit was whether the exclusion eliminated coverage for the personal injury claim.
The case concerned a painter who suffered injuries during the renovation of a home. The homeowners had hired Benchmark to renovate their home. The renovation plans were designed by architect Thomas Huth (“Huth”), who hired the painting business owned by Sara Egan (“Egan”) to paint one of the interior walls. Egan sent employee Megan Bailey (“Bailey”) to fulfill the job. It was undisputed that Benchmark had no contractual relationship with any party other than the homeowners.
During the painting process, Bailey fell from a ladder stationed on top of scaffolding. She filed suit in Superior Court, alleging negligence by Benchmark. Benchmark demanded that USLIC defend and indemnify Benchmark, but USLIC denied coverage, citing a “Contractors Employees” endorsement that excluded claims for “Bodily injury” to any . . . “employee” . . . of any contractor . . . arising out of . . . rendering services of any kind . . . for which any insured may become liable in any capacity . . .”

USLIC then filed a declaratory judgment action in federal district court to establish that Bailey’s claim was excluded from coverage. Benchmark counterclaimed, alleging that Bailey’s claim was covered. The District Court ruled in USLIC’s favor, holding that the “Contractors Employees” endorsement excluded Bailey’s claim.
The policy did not define the word “contractor,” but the District Court reasoned that “contractor” unambiguously meant “anyone with a contract.” Therefore, since Egan had contracted to paint and Bailey was a contractor’s employee, her claims were subject to the exclusion.
Where an insurer and an insured offer opposing, but reasonable interpretations of an undefined policy term, Massachusetts courts will deem the term ambiguous and adopt the construction that favors the insured. This is particularly true of coverage exclusions, and insurers should carefully draft exclusions to effect their intentions.
On appeal, the First Circuit focused on whether the cited exclusion was ambiguous and found that it was, in two respects: (1) what the word “contractor” meant as used in the policy, and (2) whether the phrase “for which any insured may become liable” modified “bodily injury” or “services”.
Consistent with the District Court’s interpretation of “contractor” as “anyone with a contract”, USLIC argued that since Egan had a painting contract, Egan was a contractor by definition and Bailey was a contractor’s employee. Benchmark asserted that “contractor”, in the context of the policy, meant only someone under contract with the insured; since Egan had no contractual relationship with Benchmark, Bailey was not a contractor’s employee and the claim was not excluded.
The First Circuit found that both interpretations were reasonable, thereby rendering the word “contractor” ambiguous. Citing to established case law, the Court looked to the reasonable expectations of the insured, Benchmark, to discern the proper meaning of the contested term. Noting that Benchmark’s definition was reasonable and that exclusions must be construed in favor of an insured, the Court rules that the Contractors Employees endorsement excluded only claims by employees of “Benchmark’s contractor”, rather than employees of “anyone with a contract.”
The Court also found that both parties offered reasonable interpretations of the phrase “ ‘[b]odily injury’ to any . . .‘employee’ . . . of any contractor . . . arising out of . . . rendering services of any kind . . . for which an insured may become liable.” According to Benchmark, the phrase modified “services of any kind”, meaning that the policy excluded only claims by contractor’s employees injured while performing services for which the insured had some responsibility.
USLIC argued for a broader interpretation, claiming that “for which an insured may become liable” modified “bodily injury”. It pointed to the word “any” in the exclusion, and interpreted it to mean that the policy excluded bodily injury to “any” employee of “any” contractor arising out of service of “any” kind. Under that theory, the exclusion applied because Bailey was employed by a contractor, she was injured on the job, and Benchmark’s alleged negligence in maintaining the site could expose Benchmark to liability.
The court found that both arguments were reasonable, and therefore the phrase was ambiguous. Again resolving the ambiguity in Benchmark’s favor, the Court ruled that the exclusion applied only where the insured could become liable for the injured party’s services. Since Benchmark could not have been liable on Bailey’s painting contract, the exclusion did not apply to Bailey’s claims and USLIC had a duty to defend and indemnify Benchmark.
Looking forward
Massachusetts state and federal courts will continue to hold that any ambiguity in an insurance policy is to be construed against the insurer and in favor of the insured. This is particularly true of coverage exclusions, and insurers should carefully draft exclusions to effect their intentions.
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