Chicago Insurance v. Chimnee Cricket, Inc.

Citation: 17 F. App'x 374Docket: Nos. 00-1314, 00-1315

Court: Court of Appeals for the Sixth Circuit; August 24, 2001; Federal Appellate Court

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Defendants Chimnee Cricket Incorporated, Chimnee Cricket, John Cerrito, Jr., and Irina Youdin appeal a district court ruling that granted summary judgment to plaintiff Chicago Insurance Company in a declaratory judgment action regarding a general liability insurance policy under Michigan law. The court affirms the lower court's decision.

Youri Youdin, a Russian immigrant, signed an Independent Dealer Contractor Agreement with Chimnee Cricket on August 12, 1997. On the same day, while inspecting a chimney, he fell from a roof and sustained injuries that resulted in his death the following day. The Agreement specified that Youri was an Independent Contractor, eliminating any employer/employee relationship and associated liabilities such as workers' compensation or other employee benefits. It required him to hold Chimnee Cricket harmless for any claims related to injuries and stated that he would be responsible for his own tax liabilities. 

On April 8, 1998, Youdin filed a lawsuit in Michigan state court against Chimnee Cricket and Cerrito, claiming that they failed to provide workers' compensation insurance and were therefore liable for her husband's injuries and death. She contended that even if he was an independent contractor, Chimnee Cricket was negligent in ensuring safety in the work environment.

In response, Chicago Insurance filed a declaratory judgment action on July 15, 1999, asserting that the general liability insurance policy it issued to Chimnee Cricket did not cover Youdin's claims due to an exclusion for bodily injury to an employee arising from their employment. This exclusion applies regardless of the insured's capacity or any obligation to share damages with others who may be liable.

Chicago Insurance asserts it did not provide employer’s liability or workers’ compensation insurance to Chimnee Cricket. Following a lawsuit filed by Youdin, new evidence revealed she was an employee of Chimnee Cricket, contrary to the company's claims of her being an independent contractor. This evidence included an investigation by MIOSHA, which on November 24, 1997, cited Chimnee Cricket for safety violations linked to Youdin's injuries and death. Chicago Insurance submitted MIOSHA's findings as Exhibit D and a report by Patrick Sullivan from the Michigan Department of Labor as Exhibit E, noting that claims filed by Chimnee Cricket workers established their employee status despite signed Independent Contractor Agreements. These claims, filed under M.C.L. 408.475(1), indicated Chimnee Cricket exercised significant control over the work, including job assignments and pricing. Sullivan's investigation, based on interviews, revealed additional insights about job management and employee provisions, such as training and equipment supply.

The district court granted Chicago Insurance's motion for summary judgment on February 18, 2000, without a hearing and without allowing discovery, which the defendants argue was erroneous. They contend the court relied on inadmissible hearsay, improperly ruled on the merits, and denied them the opportunity for further discovery or a hearing. The defendants have since filed notices of appeal, which were consolidated.

The defendants contest the district court's reliance on a handwritten narrative report by Patrick Sullivan from the Michigan Department of Labor, claiming it constitutes inadmissible hearsay. They assert that summary judgment must be based on admissible evidence and that hearsay cannot be considered, referencing Turner v. Scott and Jacklyn v. Schering-Plough Healthcare Prod. Sales Corp. The defendants challenge Chicago Insurance’s assertion that Sullivan’s report qualifies under the 'business records' exception of Fed. R. Evid. 803(8)(C), arguing it lacks factual findings and consists primarily of hearsay. They emphasize that factual findings from official investigations must be trustworthy and not based on hearsay from unreliable sources, citing Miller v. Field. The district court is deemed to have abused its discretion by admitting Sullivan’s report, which largely relies on statements from interviews rather than independent factual findings. Despite this, the defendants acknowledge that sufficient admissible evidence exists in other exhibits to support the district court's summary judgment for Chicago Insurance.

Additionally, the defendants argue that the district court incorrectly determined that Youri Youdin was an employee of Chimnee Cricket, leading to the exclusion of coverage for his injuries and death under the insurance policy. Their argument is two-fold: they claim the factual evidence supporting the district court's conclusion is unsupported by the record and that the court misapplied the legal standard for employee status.

The defendants contest the district court's reliance on ten 'undisputed' facts to classify Youri Youdin as an employee of Chimnee Cricket, arguing that many of these facts lack support in the record or rely on inadmissible hearsay from Sullivan’s narrative report. Despite this, sufficient facts exist in the record to uphold the district court's conclusion. 

1. **Employment Agreement**: There was no formal contract guaranteeing a specific employment duration. The open-ended Agreement signed by Youdin supports this fact.
2. **Business Operations**: Chimnee Cricket exclusively engaged in chimney maintenance and repair. While Sullivan's narrative report provides limited support, a citation from the Michigan Department of Consumer and Industry Services confirms this fact.
3. **Employment Status**: Youri’s position was full-time and his sole income source. However, Chicago Insurance failed to provide record evidence for this assertion, relying instead on claims that it was undisputed.
4. **Training and Equipment**: Chimnee Cricket trained its workers and supplied materials. Although Sullivan’s narrative report is inadmissible, evidence from wage and hour claims supports this assertion.
5. **Restrictions on Outside Work**: Youri was prohibited from performing outside services, as indicated in the Agreement, which allowed Chimnee Cricket to withhold payment for violations.
6. **Independent Contractor Agreement**: Youri signed an 'Independent Dealer Contractor Agreement' designating his status as an independent contractor, which the defendants argue contradicts the employee classification.
7. **Job Management**: Chimnee Cricket managed all jobs under its name, determining pricing and service methods. This fact is supported by both Sullivan’s narrative report and wage and hour claim determinations.

Overall, the court's conclusion regarding Youri's employment status is bolstered by a combination of supported and undisputed facts, despite some contested elements.

Youri was required to report to work, where a chalkboard indicated his assigned job, but no direct evidence confirmed this requirement specifically for him, aside from inadmissible statements in Sullivan’s narrative report regarding general practices. Chimnee Cricket employed Youri and had the authority to terminate his employment, supported by his signature on an Agreement. Although he received payroll checks, Chimnee Cricket did not withhold taxes; Youri was responsible for his own tax liabilities and income reporting. The Agreement specifically stated that he was not considered an employee for payroll tax purposes and indicated he would receive a 1099 Form for tax documentation. Despite the inadmissibility of some evidence from Sullivan’s report, sufficient admissible evidence indicated that: 1) Youri had an open-ended contract; 2) Chimnee Cricket operated in chimney maintenance, providing similar services; 3) the Agreement restricted Youri from side jobs, requiring any earnings from such work to be given to Chimnee Cricket; 4) Chimnee Cricket supplied necessary equipment to its workers; and 5) the Agreement allowed Chimnee Cricket to terminate Youri’s employment. These facts enabled the district court to assess Youri’s employment status as either an employee or independent contractor. The defendants contested the district court's conclusion that Youri was an employee at the time of his injuries and death, arguing there was an error in applying the "economic reality test," utilized by Michigan courts to differentiate between employees and independent contractors for worker's compensation eligibility.

The economic reality test is applied to determine the classification of a worker as either an employee or an independent contractor, focusing on four primary factors: control over duties, wage payment, the right to hire and discipline, and the worker's contribution toward a common goal. Michigan courts consider seven additional factors, including employer liability upon termination, the integral nature of the work to the employer's business, the employee’s dependence on wages for living expenses, provision of equipment, public representation of work capability, customary independent contractor practices, and the overall control exercised by the employer. 

In the case presented by Chicago Insurance, key uncontested facts indicate that Youri was likely an employee of Chimnee Cricket rather than an independent contractor. These facts include an open-ended contract, the performance of services aligned with the employer's business, restrictions on side jobs, provision of equipment by Chimnee Cricket, and the ability of Chimnee Cricket to terminate the Agreement. 

The defendants reference Luster v. Five Star Carpet Installations, Inc., where the court found a worker to be an independent contractor based on specific facts: a written contract labeling the worker as such, payment structure, absence of tax withholding, and freedom to seek other employment without using company equipment. These contrasting interpretations of the economic reality test highlight the nuances in the classification of workers under Michigan law.

Youri and Chimnee Cricket entered a written contract identifying Youri as an independent contractor responsible for his own taxes, with Chimnee Cricket issuing a 1099 form to him. However, evidence shows that Chimnee Cricket exercised significant control over Youri's work, limited his tasks, provided supplies, and restricted him from taking side jobs, with any income from such jobs accruing to Chimnee Cricket. Despite the Agreement designating Youri as an independent contractor, Chicago Insurance presented additional evidence supporting the conclusion that Youri functioned as an employee, including the Agreement's terms allowing Chicago Insurance to terminate it at any time. The district court granted summary judgment in favor of Chicago Insurance, recognizing Youri as an employee, thereby applying exclusion (e) from Chimnee Cricket’s policy.

The defendants claimed insufficient time for discovery, citing a statement from a status conference suggesting a need for further discussions on settlement, which they interpreted as an indication that discovery would be irrelevant. They argued this led to their lack of preparation for Chicago Insurance’s summary judgment motion. However, the court found this reasoning unpersuasive, noting that the defendants could have conducted discovery concurrently with Chicago Insurance. Additionally, neither Chimnee Cricket nor Youdin objected to the court’s schedule or sought more time for discovery. They also failed to utilize Fed. R. Civ. P. 56(f) to argue their inability to present essential facts, which could have led to a delay in the summary judgment. As such, there was no basis for reversing the court's decision.

Local Rule 7.1(e) grants the district court discretion to decide on the submission of briefs without conducting oral arguments, and the defendants failed to show that this discretion was abused. Consequently, the district court's judgment is affirmed. The defendants contend that the Michigan Occupational Safety and Health Act (MIOSHA) investigation and wage determinations are irrelevant to the construction of an insurance policy. They assert that the definitions of "employee" under MIOSHA and related wage statutes are overly broad; however, neither the district court nor Chicago Insurance claimed these investigations and determinations were conclusive regarding Youri's employment status with Chimnee Cricket. Instead, they were appropriately used to inform factual findings relevant to the 'economic reality test.' The eighth factor, which prioritizes elements that best fulfill statutory objectives, pertains only to workers' compensation claims. Chicago Insurance argues that the case of Luster is not relevant since it involved workers’ compensation rather than insurance, and that amendments to the workers’ compensation statute occurred after the magistrate's ruling. However, these arguments do not provide adequate grounds to disregard Luster's guidance. Chicago Insurance fails to present a legal rationale against applying the economic reality test outside the workers’ compensation context, and despite the statute's amendments, the principle allowing the economic reality test in insurance matters remains valid. The Michigan Court of Appeals upheld the magistrate's finding, which aligns with the amended statute.