Splitting the Defense in Construction Site Accident Litigation

By Glenn A. Kaminska

A common and recurrent theme in construction site accident litigation is that the injured plaintiff employee will bring an action against the owner and/or general contractor.   The owner and/or general contractor will then commence an action against plaintiff’s employer.  Generally, this third-party action will include both common law and contractual claims.  This simple fact pattern often leads to an ethical dilemma for counsel representing employers.

Assuming the employer gives timely notice to both its general liability and workers’ compensation carrier, pursuant to Hawthorne v South Bronx Community Development[i], these two insurance providers will split the defense of the employer in the action. The general liability carrier is usually responsible for any contractual liability whereas the workers’ compensation carrier is responsible for any common law liability. 

Employee Exclusion

It is important to note that there is an employee exclusion within most general liability policies stating that the policy does not provide coverage to injuries of employees unless there is an “insured contract”.  Accordingly, it is a good practice for a general liability carrier to disclaim coverage under the exclusion if it appears there is no insured contract or that the insured contract will be void under the General Obligations Law[ii].

Without such a disclaimer, a general liability carrier can be responsible for common law coverage based on the failure to disclaim[iii].   Similarly, standard employers liability coverage contains an exclusion for liability assumed under a contract.  The failure to assert this exclusion may prove detrimental.

Since the Workers’ Compensation Reform Act of 1996, an employer only has common law liability where there is a “grave injury”.  Because of the relatively high standard used in determining a “grave injury,” the compensation carrier will seek to push for a motion with regard to this issue, leaving only the contractual cause of action remaining.

The question presented is whether counsel that has been retained by the general liability carrier is obligated to move to dismiss the common law cause of action if in eliminating it the unlimited coverage provided by the workers’ compensation policy also will be eliminated.  Counsel retained by the general liability carrier need not make this motion. 

Although the attorney is being paid by both the general liability and workers’ compensation carriers, he or she is obligated to pursue a defense that is in the best interests of the insured[iv].  In a situation where the plaintiff is severely injured but not injured to the extent of a “grave injury,” it is in the insured’s best interests to retain as much coverage as possible so as to avoid exposure of the insured’s personal assets.  This position finds support in Nelson Electric Contracting Corp. v Transcontinental Insurance Co.[v]

‘Nelson’

In Nelson, the court determined that where the interests of the insurer are at odds with those of the insured, the attorney may make decisions that benefit the insured without fear of the insured losing coverage for “failure to cooperate.”  As such, the insured’s attorney was not obligated to oppose a motion by a general contractor seeking contractual indemnity against an electrical subcontractor where to do so would have exposed the insured subcontractor to personal liability for a breach of contract.

Based on this analysis, counsel for an employer on a construction site accident claim need not move upon “grave injury” grounds.  Such a motion would be adverse to the client’s interest.

A workers’ compensation carrier is not without recourse under this scenario.  In Frost v Monter,[vi] the court found that carriers can intervene in the underlying tort action to sort out coverage where parties take positions contrary to the carrier’s interest. 

In Frost, the plaintiff brought an action against the defendant sounding in intentional tort and set forth a factual predicate in the nature of intentional criminal acts.   The defendant demanded that his carrier, CNA, defend him but was refused under the complaint as drafted.  A declaratory judgment action supported this disclaimer.  Six years following the intentional acts and three-and-a-half years after the original complaint, plaintiff made a motion to amend the complaint to assert causes of action sounding in negligence.  The defendant did not oppose the motion.

Upon CNA’s receipt of knowledge of the motion, CNA was allowed to intervene in the motion.  Plaintiff argued that CNA had no standing.  CNA, however, argued that it had standing under Article 10 of the CPLR and pursuant to CPLR 5511 as “an aggrieved party.”  Upon reviewing the issues, the Appellate Division determined that not only did CNA have standing in the appeal but also in the underlying action “[s]ince the proposed amendment of the complaint would prejudice only CNA Insurance Companies, and the defendants have no interest in opposing the motion to amend, CNA was the real party in interest and clearly was aggrieved by the amendment within the meaning of CPLR 5511.”[vii]

Under the facts as set forth in a typical Labor Law action example, the workers’ compensation carrier would be able to intervene in the tort action in order to seek the appropriate motion.  Moreover, in a situation where the third-party plaintiff has moved for indemnification based upon a “grave injury” the workers’ compensation carrier can intervene to oppose such motion.

‘Failla’

In addition to Frost, the Third Department has offered another remedy for aggrieved carriers in situations where counsel acts adverse to the insurer.  In Failla v Nationwide Ins.   Co.[viii]it was determined that where the attorney for the insured allowed the case against his clients to go to the jury under a “negligence theory,” the jury’s determination of negligence would not be binding with regard to the insurer’s disclaimer based upon an intentional act.

The court found that Nationwide, the insured’s carrier, was not a party to the underlying action and could not be said to be in privity with the insured for the purposes of applying the doctrine of collateral estoppel. 

As Nationwide’s interests were not represented in the prior proceeding, it could not be said to have fully and fairly litigated the issue of the insured’s conduct so as to determine the scope of the policy.   Accordingly, a trial as to the issue of the intentional act would be conducted in a declaratory judgment action.

Based upon the Failla decision, it is a better practice for counsel to advise the compensation carrier that no motion will be made to affirmatively dismiss any common law cause of action, but at the same time to tender that prospective motion to that carrier.  If the compensation carrier is invited to intervene in any motion practice and does not accept that offer, then the argument can be made that the opportunity to be heard and fully litigate the “grave injury” issue was afforded and that they are estopped from arguing to the contrary.[ix]

In light of the Workers’ Compensation Reform Act of 1996, there is often a conflict for an attorney representing an employer in a construction site accident litigation where the compensation carrier requests a motion made to eliminate the common law indemnification claim. 

Nelson addressed this type of ethical dilemma and allows counsel to fulfill its duty to the client by not making any such motion, thereby retaining the unlimited coverage of the compensation policy.  A compensation carrier is not without recourse.  It may intervene in the action or seek to avoid liability in a subsequent declaratory judgment action.  Counsel are well advised to take all steps possible to ensure that the compensation carrier will be bound by the findings in the underlying dispute.

This article is reprinted from the January 15, 2003 of the New York Law Journal.   © 2003 ALM Properties, Inc.  All rights reserved.  Further duplication without permission is prohibited.