Fourth Cir. Denies Coverage Based on Insurance and Related Work Exclusion

Post by Pete Dworjanyn

The Fourth Circuit Court of Appeals recently affirmed a South Carolina District Court judge’s grant of summary judgment to an insurer based on an endorsement excluding coverage for any obligation assumed in connection with an insurance contract or treaty, or any failure to carry out any contractual or other duty in connection with an insurance contract or treaty.  Houston Casualty Company v. St. Paul Fire & Marine Insurance Company, unpublished, No. 10-1835, Dec 6, 2011.

In 2003, Manuel Salazar was badly injured while working on a dam project in South Carolina.  He sued, among others, South Carolina Electric & Gas (SCE&G) the owner of the power lines that caused his injuries and McGriff, the insurance broker for the project. Salazar alleged that in addition to providing insurance brokerage services for the project, McGriff was responsible for performing safety inspections at the site and negligently failed to perform those inspections.  Houston Casualty, McGriff’s professional liability carrier, participated in the settlement of the suit.  St. Paul, McGriff’s CGL and excess insurer, denied coverage. The present insurance coverage litigation was an attempt by Houston Casualty to seek contribution from St. Paul.

McGriff had procured an Owner-Controlled Insurance Program (OCIP) and, as part of the program, had provided a Manual of Insurance Procedures to SCE&G and all contractors.  The OCIP Manual provided that the Owner’s Safety Representative, in conjunction with the general contractor and McGriff, would furnish safety posters, loss and inspection reports and provide overall supervision of the project’s safety effort.  The manual also provided that a safety program had been established by the general contractor to conform with relevant standards and would be supervised and reviewed by the Owner’s Safety Representative and McGriff. 

The St. Paul policies contained an endorsement which provided, in part;

Insurance and related work. We won’t cover injury or damage or medical expenses for which the protected person may be held liable because of:

·         any obligation assumed by any protected person in connection with an insurance contract or treaty; or

·         any failure to carry out, or improper carrying out of, any contractual or other duty or obligation in connection with an insurance contract or treaty.

Houston argued that the exclusion did not apply because McGriff’s duty to inspect arose independently of an insurance contract and, alternatively, there were disputed issues of material fact. 

Affirming the District Court, the Court of Appeals held the plain language of the endorsement excluded coverage.  The exclusion specifically provided that it excluded coverage for claims arising out of “...other duty or obligation in connection with an insurance contract”.  Thus, Salazar’s claims would be excluded if they concerned an obligation that arose “in connection with” an insurance contract even though the contracted issued was not itself an insurance contract. The court held the OCIP Manual provided further support for its decision as claims based on those obligations undoubtedly arose “in connection” with an insurance contract, regardless of whether the manual itself was part of an insurance contract.