Workers’ Compensation Exemption Extended

In Illinois National Insurance Co. v. Hagendorf Construction Co., the United States District Court for the Western District of Texas considered whether the “worker’s compensation” exclusion of a liability policy applied to an underlying suit involving a non-subscribing employer. 337 F.Supp.2d 902 (W.D. Tex. 2004). In the case, an employee was injured while driving a truck in the course and scope of his employment. The employee sued the employer, which had not subscribed to the Texas worker’s compensation insurance system. The employer—Hagendorf—tendered the suit to Illinois National under a business auto policy issued by Illinois National.

Illinois National contended that it owed no duty to defend or indemnify, in part, based on the worker’s compensation exclusion. That exclusion bars coverage for “any obligation for which the insured or the insured's insurer may be held liable under any worker’s compensation, disability benefits or unemployment compensation or similar law.”

The district court agreed with Illinois National that a suit against a non-subscribing employee is not an ordinary common law negligence suit; rather, it is a suit arising under the Texas worker’s compensation system. The court reasoned that the defenses and burdens of proof in non-subscriber cases are still dictated by the Texas Labor Code. The court also noted that federal courts have concluded that suits against a non-subscriber arise under the worker’s compensation system for the purposes of determining whether such suits may be removed to federal court.

The case appears to be one of first impression in Texas and is one of few reported cases in other jurisdictions analyzing the issue. Therefore, the case offers welcome guidance in Texas and elsewhere.