Insurance Coverage and Bad Faith

Employer’s Liability Exclusions typically apply to claims for bodily injury to employees arising out of and in the course of their employment by the insured. But, to what extent might such exclusions apply to claims for bodily injury to an employee’s spouse arising from an exposure to asbestos? The Superior Court of Pennsylvania addressed this issue in Cont’l Ins. Co. v. Pennsylvania Electric Co., 2024 WL 4440953, (Pa. Super. Ct., Oct. 8, 2024), holding that an Employer’s Liability Exclusion did not apply to obviate Continental Insurance Company’s (“Continental”) duty to defend Pennsylvania Electric Company (“Penelec”) against claims of a former employee and his spouse that they were exposed to asbestos.

Cont’l Ins. Co. arose out of an asbestos action filed by Ronald L. Suman and his wife, Mary Alice Suman, against Penelec. In this action, the Sumans alleged that Mr. Suman was diagnosed with mesothelioma as the result of his exposure to asbestos dust and fibers during his employment with Penelec between 1975 to 1996. The original Complaint alleged claims for negligence, breach of warranty, strict liability, and medical monitoring against Penelec, as well as a claim for loss of consortium on behalf of Mrs. Suman. Mrs. Suman later filed an Amended Complaint subsequent to Mr. Suman’s death, and, in addition to incorporating all of the allegations and claims in the original Complaint, further alleged a claim for wrongful death on behalf of herself and the Sumans’ children.

Continental initially defended Penelec pursuant to a reservation of rights, but, on or about July 27, 2020, it informed Penelec that it would be withdrawing its defense and denying indemnification with respect to the Sumans’ claims based upon an Employer’s Liability Exclusion that provided:

This insurance does not apply: ….

(j)   to bodily injury to any employee of the insured arising out of and in the course of his employment by the insured or to any obligation of the insured to indemnify another because of damages arising out of such injury, but this exclusion does not apply to liability assumed by the insured under an incidental contract ….

Continental thereafter filed a declaratory‑judgment action against Penelec, and sought a declaration that, among other things, the Employer’s Liability Exclusion operated to exclude all coverage for the Sumans’ claims. Penelec counterclaimed against Continental, alleging that, among other things, the Employer’s Liability Exclusion did not bar coverage and that Continental, therefore, was obligated to defend it against the Sumans’ claims.

The trial court denied Continental’s Motion for Judgment on the Pleadings, and granted Penelec’s cross Motion for Judgment on the Pleadings. It held that pursuant to Tooey v. AK Steel Corp., 81 A.3d 851 (Pa. 2013), Mr. Suman’s claims against Penelec were not subject to the Pennsylvania Workers’ Compensation Act because, as alleged in the Amended Complaint, his asbestos disease did not manifest itself until more than 300 weeks after his last occupational exposure. Because the Workers’ Compensation Act did not bar Mr. Suman from filing a common law claim against Penelec, the trial court concluded that the Employer’s Liability Exclusion did not eliminate the potential that his claims fell within the Policy’s coverage. Turning to Mrs. Suman’s claims against Penelec, the trial court concluded that the Employer’s Liability Exclusion did not exclude coverage for claims of bodily injury to non‑employees, and, therefore, did not bar coverage with respect to the claims of Mrs. Suman and the Sumans’ children.

On appeal, the Superior Court agreed with Continental that the trial court erred in relying upon Tooey in concluding that Mr. Suman’s bodily injury did not arise out of and in the course of his employment. Tooey addressed provisions of the Workers’ Compensation Act, and thus enabled the Sumans to sue Penelec outside of the Workers’ Compensation Act, but these considerations were not relevant to the scope of insurance afforded by liability insurance coverage. Mr. Suman’s bodily injury began when he was first exposed to asbestos, and the Amended Complaint alleged that Mr. Suman’s exposure to asbestos occurred while he was working for Penelec. As such, the Superior Court concluded that Mr. Suman’s bodily injury arose out of and in the course of his employment by Penelec, and that his claims, therefore, fell within the scope of the Employer’s Liability Exclusion.

The Superior Court, however, disagreed with Continental’s argument that the Employer’s Liability Exclusion barred coverage for all of Mrs. Suman’s claims. Although Continental argued that all of Mrs. Suman’s claims were exclusively based upon Mr. Suman’s alleged bodily injury, which was excluded from coverage, the Superior Court determined otherwise in concluding that Mrs. Suman alleged bodily injury separate and apart from that alleged by Mr. Suman.

In reaching this conclusion, the Superior Court stressed that, in analyzing an insurer’s duty to defend its insured, courts must take the allegations against the insured as true and liberally construe them in the insured’s favor. Courts may not dismiss allegations against the insured as the result of poor or inartful drafting, nor may they ignore or writing allegations out of the underlying complaint. Rather, they must do the exact opposite by reading allegations broadly and assuming them to be true.

Under these principles, the Superior Court concluded that the Amended Complaint potentially stated a claim that Mrs. Suman sustained bodily injury that was separate and apart from Mr. Suman’s bodily injury through her own asbestos exposure. More specifically, the Amended Complaint alleged that, despite the fact that Penelec knew or should have known of the danger that exposure to its asbestos products would and could cause to all plaintiffs, it failed to provide adequate warnings regarding its products to plaintiffs such that plaintiffs would be required to undergo regular medical monitoring. The Superior Court rejected Continental’s argument that the Amended Complaint’s references to the plural “plaintiffs” should be disregarded as inartful drafting, and concluded that “plaintiffs” could reasonably interpreted to refer to both Mr. Suman and Mrs. Suman. This was particularly true in light of the fact that the Amended Complaint, in other places, specifically differentiated between Mr. Suman and Mrs. Suman when necessary. Accordingly, the Superior Court concluded that the Amended Complaint could be reasonably interpreted to allege that Mrs. Suman herself had been exposed to asbestos through Penelec’s conduct and omissions such that her medical‑monitoring claim was based upon her own bodily injury and not that of Mr. Suman.

The Superior Court, therefore, concluded that the Employer’s Liability Exclusion did not operate to relieve Continental of its duty to defend Penelec. Claims based upon Mrs. Suman’s own bodily injury were not subject to the Employer’s Liability Exclusion because she was not an employee of Penelec and thus did not suffer injury arising from and in the course of any employment with Penelec. And, because Ms. Suman stated a claim that potentially fell within the insurance policy’s coverage, i.e., one for her own bodily injury, Continental was obligated to defend Penelec unless and until such time that the Sumans’ action was confined to claim that were definitely not within that coverage. The Superior Court, therefore, affirmed the trial court’s judgment.