Workers’ compensation is considered the exclusive remedy for job-related injuries prohibiting injured employees from suing their employer if they’re receiving workers’ compensation benefits; however, this does not stop the employee from suing a third-party for their contribution to the loss. This is called third-party over action or action over.

While this is a tough and confusing topic to discuss, I think it’s important every business, especially those in construction due to the use of subcontractors and general contractors, understand the impacts.

Third-Party Over Action Defined

A third-party over action/action over happens when an injured employee, after they have collected workers’ compensation benefits, sues a third-party alleging fault for their injury. The action over occurs when the third-party tenders the claim back to the employee’s employer due to their contractual relationship.

Any business that agrees to indemnify another in a contract is subject to action over claims. This is because the contract’s indemnity clause shifts risk from one party (indemnitee) to another party (indemnitor) where the indemnitor agrees to reimburse the indemnitee for losses resulting from a claim(s) brought by a third-party.

Indemnification agreements are affected by complicated state laws; therefore, most indemnitees do not rely solely on one’s status as an indemnitee to affect a transfer of risk and seek, through the contract, rights under the indemnitor’s insurance policy as an additional insured. Many also require the indemnitor to waive subrogation rights against them in the event of a loss where they are found negligent, thereby removing the indemnitor’s insurer from subrogating against them to recoup for the loss they paid.

I realize that was a lot of legalese, so let me give you an example:

ABC subcontractor (indemnitor) signs a contract with XYZ general contractor (indemnitee) agreeing to indemnify, defend, and hold harmless XYZ for actions of ABC’s employees. ABC’s employee gets injured while working on a project, collects workers’ compensation from ABC, then files a lawsuit against XYZ for their fault in contributing to their injury. XYZ company tenders the claim back to ABC through contractual indemnity (and maybe insurance).

Indemnity and Insurance

Anti-indemnity statutes limit the amount of liability for one’s own negligence that can be transferred in a construction contract. If the indemnity in place does not violate state law and there is no limitation/restriction or exclusion for contractual liability, many will find coverage for an action over claim in their commercial general liability policy.

Even though courts in most states have found that insurance requirements for additional insured status are independent of indemnity, there are some states that tie the indemnity obligation to insurance, which means courts will not enforce an additional insured obligation that is different from an indemnity obligation.

Court Decisions that Have Impacted Illinois

Through a series of court cases described below, the Illinois courts have affected the transfer of risk and financial protection between indemnitee and indemnitor creating a possible uninsured exposure for the indemnitor/employer. This could have a dramatic impact on the application of insurance to the claim.

• Kotecki v Cyclops Welding Corp., 1991 — Established that an employer’s maximum liability in third-party actions is capped at the amount the employer paid to the employee in workers’ compensation benefits, a. k. a. Kotecki Cap.
• Liccardi v. Stolt Terminals, Inc., 1997 and Braye v. Archer Daniels-Midland, Co., 1997 — Established that an employer may waive their protection of the cap by contract.
• Christy-Foltz, Inc., v. Safety Mutual Casualty Corporation, 2000 — Established that a Kotecki waiver is a voluntary agreement to assume liability beyond the cap; therefore, no coverage under employers’ liability.
• Virginia Surety v. Northern Ins. Co. of NY, 2007 — Established that the waiver is not an assumption of another party’s tort, therefore no coverage under commercial general liability.

The famous case, Kotecki v Cyclops Welding Corp., in 1991, found the employer is protected by the amount they paid to the employee in workers’ compensation benefits (“Kotecki” cap); however, Liccardi v. Stolt Terminals, Inc. and Braye v. Archer Daniels-Midland Co. allows the indemnitor to waive their Kotecki cap protection in a contract. The waivers can be difficult to spot and most often found in the indemnification section.

Christy-Foltz decision claimed there was no coverage in an employer’s liability, but the Virginia Surety v Norther Ins. Co. of NY caused some doubt by finding that no coverage exists in the commercial general liability policy…making the Christy-Foltz decision seem unclear.

The insurers response was to attach an exclusion to the workers’ compensation/employers’ liability policy to avoid paying for liability above the Kotecki cap.

Then, in 2008, the National Council on Compensation Insurance (NCCI) drafted a standard endorsement WC 12 03 06 to exclude coverage for “liability assumed under a contract, including any agreement to waive your right to limit your liability for contribution to the amount of benefits payable under the Workers’ Compensation Act.”

If this exclusionary endorsement, or any other from an insurance carrier, is attached to a workers’ compensation/employers’ liability policy, there is no coverage. The commercial general liability will be looked to for compensation of the loss, and hopefully there is no exclusion on that policy. This can be a difficult topic to discuss when the insured has a different carrier for each of these lines of coverage.

What You Need to Know

I realize this is very confusing. What I’m hoping you learned is that action over claims result in additional and unexpected liability. They are common and unavoidable when you enter into an agreement with another party. Understanding if and how coverage will respond in the event of a claim is crucial.

Coverage will depend on circumstances of the claim, the contract, state law, and the language of the insurance policy. It is not always possible to have commercial general liability and workers’ compensation/employers’ liability policies with one carrier, but when they are it can make negotiations for coverage less difficult.

If you have any questions on this, please don’t hesitate to reach out to us. We’re happy to help explain further.