Courts Consider Effect of Employee Classification on Coverage

By Burke Coleman | February 4, 2015

A person’s classification as an employee, temporary worker, or independent contractor can often affect various insurance coverages. While the distinction arises frequently in the context of workers’ compensation claims and unemployment benefits, it can also impact coverage grants and exclusions in general liability policies. Recently, two courts considered employment classifications to determine if coverage obligations were triggered in commercial general liability (CGL) policies.

In Western World Ins. Co. v. Armbruster, 773 F.3d 755 (6th Cir. 2014), the Sixth Circuit Court of Appeals considered whether an injured worker was an “employee” for purposes of determining coverage obligations under the employer’s CGL policy. After a farmers’ market hired a worker to operate a wagon for hay rides for eight weekends during the peak season, an accident left the worker severely injured and the worker sued the employer for negligence and the employer’s insurer, seeking coverage under its CGL policy.

While a workers’ compensation claim and state tort claim remained pending, the court was faced with the coverage implications under the employer’s CGL policy. The policy excluded coverage for bodily injury to “employees,” “temporary workers,” and “independent contractors.” The policy did not define “employee” and defined “temporary worker” as “a person who is furnished to you [the employer] to substitute for a permanent ‘employee’ on leave to or to meet seasonal or short-term workload conditions.” The parties agreed that the worker was not an independent contractor and was not a “temporary worker” as defined by the policy because she was not “furnished” to the employer by a third party. The worker argued that she also was not an employee, because she was hired only as a short-term, seasonal worker, not for a permanent or indefinite term, and that she “fell through the cracks of the policy exclusions” and must be covered. She contended that while she did not fit the policy definition of “temporary worker” she was also not an employee for purposes of the policy, and should be considered under a separate, undefined classification as a “temporary seasonal worker” to which the exclusion did not apply.

Both the district court and the Sixth Circuit rejected this argument. Applying the “economic reality test,” which weighs various characteristics of an individual’s work and relationship with the employer to determine if an individual is an “employee,” the district court found that the injured worker “fit the common understanding of an employee,” even if a temporary one, and was excluded from coverage.

The Sixth Circuit observed that the lower court’s use of the economic-reality test “could potentially have been in tension with the Michigan Supreme Court’s instruction that undefined terms in an insurance policy should be interpreted with their ‘commonly used meaning.’” Nevertheless, the court quickly dismissed the tension as “academic,” affirmed the district court ruling, and held that whether under the “economic reality test” or the common understanding of the term, the injured worker was an employee for purposes of the CGL policy and therefore excluded from coverage. The court added that its finding is consistent with the normal purpose of a CGL policy which is intended to protect against injuries to the public-at-large, not a businesses’ workers.

In Ruksznis v. Argonaut Ins. Co., No. 13-2472, 2014 U.S. App. LEXIS 23881 (1st Cir. Dec. 18, 2014), the First Circuit similarly considered the effect of an individual’s employment classification on the applicability of a CGL policy. In the case, a town executive made negative comments regarding the town’s appointed plumbing inspector and subsequently had the plumbing inspector removed from his position. The inspector sued the town executive for slander and won a judgment. He then sought recovery of the judgment from the town’s insurer.

The town’s CGL policy and Public Officials Liability (POL) policy both provided coverage for personal injury claims but excluded coverage for “employment-related” activity including claims arising out of “coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person.” Neither policy defined “employment” or “employment-related.”

The inspector argued that coverage was available because he was an independent contractor, who set his own hours, provided his own tools, paid his own expenses, and served in the same role simultaneously for a number of neighboring towns. The insurer countered that the inspector was an employee and, even if an independent contractor, was in an “employment relationship” with the town sufficient for the employment-related practices exclusion to apply.

The inspector argued that the policies’ references to “employment” mean an employer-employee relationship and do not contemplate independent contractors. The court acknowledged that he may be an independent contractor but explained that while the distinction between an employee and an independent contractor is “critical in the context of collecting unemployment benefits and workers’ compensation, [it] is immaterial in the instant case.” Using a general definition, the court found that “employment” broadly includes “a number of arrangements between two parties in which one party performs services or duties for another” and the policy was not amenable to the inspector’s formal distinctions. The court concluded that the town executive’s slander “was a claim arising out of [the plumbing inspector’s] performance” and was therefore “unambiguously an employment-related claim subject to the employment-related practices exclusion.”

The decision follows a plain, clear and logical application of the policy language and affirms that independent contractors are subject to employment-related practices exclusions.

In both cases, the First and Sixth Circuits dismissed the injured parties’ attempts to work around common understandings of “employment” with technical and formal distinctions. In affirming the district court’s ruling, the Sixth Circuit carefully sidestepped the lower court’s technical use of the economic-reality test, and instead used a dictionary definition to interpret the common understanding of “employee.” Likewise, the First Circuit relied on a simple dictionary definition to find the ordinary meaning of “employment.” As the courts emphasized, classifying employees remains an important consideration in many contexts, including workers’ compensation and unemployment benefits, but in the general liability context, the plain meaning of the term “employee” or “employment” will control, consistent with the purpose of the CGL policy.

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About Burke Coleman

Burke Coleman is Legal Counsel and Compliance Manager for Demotech, Inc. Burke can be contacted at This article is for informational purposes only, is not intended as legal advice, and is not a substitute for independent legal analysis and advice on a particular issue. More from Burke Coleman

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