Interlocutory Appeal Properly Taken from Declaratory Judgment on Insurer’s Duty to Defend; Ambiguous Exclusion Construed in Favor of Coverage

When a liability insurer seeks a declaratory judgment on whether it has a duty to defend and indemnify an insured, and the district court enters an order finding a duty to defend but putting off a decision on the duty to indemnify, is that nonfinal order subject to interlocutory appeal? In James River Insurance Co. v. Ultratec Special Effects Inc., 22 F.4th 1246 (11th Cir. Jan. 13, 2022), the Eleventh Circuit confirmed that, yes, such an order is appealable, and affirmed summary judgment for the insureds in that case after concluding that the relevant policy exclusion was ambiguous and did not preclude coverage under Alabama law.

The underlying action involved horrific injuries suffered by three employees of Ultratec Special Effects HSV, Inc. (“Ultratec HSV”) during a pyrotechnic explosion at their workplace. Two of the employees died, and their representatives and the surviving employee brought tort claims in state court against several defendants, including Ultratec HSV as well as its parent company Ultratech Special Effects Inc. (“Ultratech Parent”), an individual employee of Ultratech Parent, and an associated business called MST Properties, LLC (“MST”).

Ultratec HSV and Ultratec Parent were named insureds under a commercial general liability (“CGL”) policy issued by James River Insurance. The Eleventh Circuit’s decision centered on two provisions of the policy. First, the policy contained an “Employer’s Liability Exclusion,” which limited coverage for bodily injury claims as follows:

“This insurance does not apply to any claim, suit, cost or expense arising out of ‘bodily injury’ to … [a]ny employee of any Insured arising out of and in the course of … [e]mployment by any insured[] or … [p]erforming duties related to the conduct of any insured’s business.”

Second, the policy contained what often is termed a “severability of interests provision” or “severability clause.” Here, the “Separation of Insureds Provision” stated that “this insurance applies [a]s if each Named Insured were the only Named Insured; and [s]eparately to each insured against whom claim is made or ‘suit’ is brought.”

Everyone agreed that the Employer’s Liability Exclusion precluded coverage for the plaintiffs’ claims against Ultratec HSV, but they disagreed about whether it also excluded coverage for the claims against the other insureds (Ultratec Parent, its employee, and MST).

James River took the position that the exclusion unambiguously applied equally to all the insureds, because the plaintiff employees’ claims arose out of bodily injury they suffered while employed by one of the insureds—i.e., “any Insured.”

The insureds and the plaintiffs, on the other hand, argued that the exclusion was ambiguous, because the phrase “any Insured” could also be interpreted to apply only to the plaintiff employees’ claims against their employer—Ultratec HSV—but not against the other insureds. That is, the exclusion could exclude coverage for claims that an employee brings against her employer but not affect coverage for claims that employee brings against another insured who is not her employer. Under this reading, the other insureds would be covered under the policy for the claims against them brought by Ultratec HSV’s employees, and James River would have a duty to defend them.

With coverage in dispute, James River defended the insureds (other than Ultratec HSV) in the state-court action under a reservation of rights and, while that suit was pending, filed an action in the Northern District of Alabama against the insureds and the plaintiffs in the state-court action, seeking a declaratory judgment as to its obligations to defend and indemnify.

The district court granted summary judgment in favor of the insureds on the duty to defend and stayed ruling on the duty to indemnify pending the outcome of the state-court suit. James River took an interlocutory appeal, and the Eleventh Circuit affirmed.

Before turning to the coverage issue, the Eleventh Circuit sua sponte took up the issue of its appellate jurisdiction. The district court’s grant of summary judgment on James River’s duty to defend, while staying the question of its duty to indemnify, did not resolve all issues before the court and was therefore a nonfinal order. As the Eleventh Circuit noted, it is common for insurers to seek declaratory judgments on their duty to defend and their duty to indemnify at the same time, “before the duty to indemnify becomes ripe.” And district courts have recognized that the duty to indemnify cannot be determined at a “preliminary stage in the proceedings” and so generally decline to address the duty to indemnify when determining whether there is a duty to defend.

The Eleventh Circuit confirmed that is does have jurisdiction over interlocutory appeals of nonfinal orders on an insurer’s duty to defend. Under 28 U.S.C. § 1292(a)(1), an appellate court has jurisdiction to review a nonfinal order that grants an injunction, and this jurisdiction extends to orders that have “injunctive qualities.” The court therefore has jurisdiction to review declaratory judgments that have “the practical effect of granting or denying injunctions.” Here, “[b]y entering an order declaring that the Insureds have a right to be defended by James River, the district court made the declaratory judgment akin to an injunction,” and this decision was thus immediately appealable.

Turning to the issue on appeal—James River’s duty to defend—the court agreed with the insureds that the employer’s liability exclusion, and particularly the phrase “any Insured,” was ambiguous. Under Alabama law, an ambiguous exclusion must be construed in favor of coverage. Moreover, even if the exclusion alone were not ambiguous, the court continued, the Separation of Insureds Provision “adds ambiguity.” The court rejected James River’s argument that this provision did not apply to the portions of the policy containing coverage exclusions, again citing Alabama law.

The court therefore concluded that the exclusion did not preclude coverage and that James River did have a duty to defend Ultratec Parent, its individual employee, and MST in the state-court tort case, affirming the district court.

Posted by Stacey Mohr.

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