This exclusion is best understood by first looking at what a "third-party-over action" is. If a worker is injured his sole remedy is supposed to be worker's compensation. However there may have been a third party that contributed to the claim. This would usually be the general contractor since the GC is responsible for safety at the work site. It could however also be the owner of the property being worked on.
I'll give two scenarios. Let's say an employee for a landscape company is mowing a lawn. The homeowner has a particularly ill tempered dog that is normally kept in a dog run. On this particular day the homeowner decided to let the dog inside then he left the font door open. The dog runs out of the house and bites the employee of the landscaper. Since the injury was on the job his medical bills are paid for by worker's compensation. If the employee then sues the homeowner that is the third-party-over action.
In a similar way an employee of a subcontractor injured at a job site could file a suit against the general contractor alleging that the job site was not safe. In this case the GC would be the third-party that is being sued because the employee of the sub cannot sue his employer directly for a work related injury. The Action Over Exclusion would exclude coverage for such a claim.
In the case of a subcontractor if he signed a Hold Harmless Agreement or Indemnification clause he could see the claim coming back to his general liability policy via a Cross Suit from the general contractor regardless of whether or not the GC's policy had the exclusion. If the subcontractor's policy also has an Action Over Exclusion there would be no coverage from the subcontractor's policy either.
As a general contractor this is a really big exclusion since every employee of each subcontractor could be a potential claim if he is injured. A general contractor however will usually require some sort of Indemnification Agreement or Hold Harmless Agreement from his subs to prevent this transfer this type of claim.
As a subcontractor the contract becomes the more important issue since his employees cannot sue their employer directly for an on the job injury. If the subcontractor assumes the liability from the GC via a contract he could see such a claim coming back to him.
The International Risk Management Institute (IRMI) defines
third-party-over action as:
“A type of action in which an injured employee, after collecting workers’ compensation benefits from the employer, sues a third party for contributing to the employee's injury. Then, because of some type of contractual relationship between the third party and the employer, the liability is passed back to the employer by prior agreement. Depending on the nature and allegations of the action, coverage may be afforded under the contractual liability section of the employer's commercial liability policy or the employers’ liability section of the employer's workers’ compensation policy.”
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