Fifth Circuit Holds Injured Employee of Insured's Contractor Not Excluded from Coverage

On May 31, 2011, the United States Court of Appeals for the Fifth Circuit Court ruled in Bayou Steel Corporation v. National Union Fire Insurance Company of Pittsburgh, that Bayou Steel Corporation (Bayou) was the principal party to each contract for performance it entered into and had not hired any sub-contractors to complete the work. Accordingly, the policy exclusions under Bayou's insurance policy, provided by New York Marine & General Insurance Company (NYMAGIC), did not apply to the injuries sustained by Bayou's stevedoring contractor because he was an employee of Bayou's contractor and not an employee of a sub-contractor.

Bayou entered into a contract of affreightment calling for Memco Barge Lines ("Memco") to transport cargo from Louisiana to Illinois on one of Memco's barges. Under the contract, Memco's performance obligation did not include loading or unloading the cargo on and off of its barge. Bayou expressly retained responsibility for loading and unloading the cargo. Bayou entered into a second contract with Kindra Marine Terminal ("Kindra") to offload Bayou's cargo in Illinois. It was during the course of Kindra's unloading of the cargo that Kindra's employee, Campbell, was seriously injured.

Campbell sued Bayou in Illinois state court. The parties settled for six million dollars. National Union Fire Insurance Co. of Louisiana (NUFIC-LA), Bayou's primary wharfinger insurer, accepted responsibility for a portion of the coverage. However, coverage was initially denied by Bayou's excess wharfinger insurer, NYMAGIC; Bayou's primary general liability insurer, Evanston Insurance Co.; and Bayou's excess general liability insurer, National Union Fire Insurance Company of Pittsburgh (NUFIC-PA).

Accordingly, Bayou brought an action against its insurance company's for denying coverage. NYMAGIC agreed to fund a substantial portion of the settlement between Campbell and Bayou on the condition that Bayou dismiss all of its claims against NYMAGIC and assign its claims against the other insurers to NYMAGIC. The district court granted summary judgment in favor of Bayou and NYMAGIC, concluding that Campbell's injuries were excluded from coverage under NYMAGIC's policy because Kindra was a sub-contractor of Bayou and therefore excluded from the policy.

On appeal, the Fifth Circuit reversed the lower court's finding that Kindra was a sub-contractor and remanded the case for further proceedings. The Fifth Circuit found that Kindra was Bayou's contractor because Bayou's only obligation under its contract was to pay for the performance of Kindra. Kindra was not a sub-contractor because there was no primary contractor. Accordingly, the Fifth Circuit held that because Bayou was the principal party and not the prime contractor under both its barge transportation agreement with Memco and its offloading agreement with Kindra, there was no way Kindra could have been a sub-contractor of Bayou. Therefore, NYMAGIC's coverage exclusion did not apply to Campbell's injuries because he was the employee of a contractor of Bayou and not a sub-contractor.

Read a copy of the Fifth Circuit Court of Appeals Decision

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