Seventh Circuit Addresses Coverage Under Workers’ Comp Policy

In its recent decision in YKK USA, Inc., v. Safety Nat’l Cas. Corp., 727 F.3d 782 (7th. Cir. 2013), the United States Court of Appeals for the Seventh Circuit had occasion to consider whether an employee’s common law claim for negligence against its employer qualified as a claim under “Employers’ Liability Laws” in order to satisfy an excess workers’ compensation policy’s insuring agreement.

TKK USA was named as a defendant in an underlying suit alleging negligence brought on behalf of a former employee who became ill and eventually died from mesothelioma. TKK gave timely notice of the lawsuit to its excess workers’ compensation carrier, Safety National. TKK retained primary responsibility for defending, settling, or paying claims up to $275,000 per occurrence. TKK incurred more than $400,000 in legal fees before it settled with the plaintiff in the underlying suit. Safety National denied coverage to TKK, taking the position that the claim of negligence in the underlying suit was not brought under “Workers’ Compensation or Employers’ Liability Laws,” but instead was a common law claim not covered under its policy.

The Safety National policy covered excess “Loss” sustained by TKK. The policy provided:

“Loss”—shall mean actual payments legally made by the EMPLOYER to Employees and their dependents in satisfaction of: (a) statutory benefits, (b) settlements of suits and claims, and (c) awards and judgments. “Loss” shall also include Claim Expenses, paid by the EMPLOYERS, as defined in Paragraph (2) of this section.”

“Claim Expenses” were central to the Court’s determination, and was defined as:

Interest upon awards and judgments and the reasonable costs of investigation, adjustment, defense, and appeal…of claims, suits or other proceedings brought against the EMPLOYER under the Workers’ Compensation or Employers’ Liability Laws [of Illinois] … for bodily injury or occupational disease … even though such claims, suits, proceedings or demands are wholly groundless, false, or fraudulent … .

The Safety National policy did not define the phrase “Workers’ Compensation or Employers’ Liability Laws”. Also relevant to the issue before the Court was the Illinois Workers’ Occupational Disease Act (“ODA”), a statute that provides the exclusive remedy for employees who contract workplace diseases (or suffered workplace injury), but bars common law claims. The ODA thus provided a complete defense for the common law negligence claims by the plaintiff.  For reasons unknown, TKK failed to assert the affirmative defense in response to the claim.

Safety National argued that because the ODA provided the only form of recovery for the claims in the underlying lawsuit, and the lawsuit did not request relief under the ODA, the costs of defending and settling the lawsuit did not qualify as a “Loss sustained by the EMPLOYER because of liability imposed on upon the EMPLOYER by the Workers’ Compensation or Employers’ Liability Laws” of Illinois. TKK countered that the underlying claims for loss fit within the coverage grant for claims under “Workers’ Compensation or Employers’ Liability Laws.” TKK argued further that the fact that it had an affirmative defense available did not have an effect on coverage under the Safety National policy because the policy provided coverage for “claims, suits, proceedings or demands” that were “wholly groundless, false, or fraudulent.”

Thus, whether a common law claim for negligence fell within the meaning of “Employers’ Liability Laws” was central to the Court’s analysis. The Seventh Circuit recognized that the ODA did not cover all potential common law claims. Because of these gaps, the Court concluded that “Employers’ Liability Laws” should not be restricted solely to statutory claims under the ODA. The Court noted also that to interpret the policy term “Employers’ Liability Laws” so that it only applied to statutes was too narrow of a construction absent language in the policy suggesting that the definition was intended to be limited in such a way. Therefore, the Court affirmed the determinations of the district court, holding that “Employers’ Liability Laws” was broad enough to include claims brought under common law, even “groundless claims” for which the employer appeared to have an affirmative defense.