Excess insurer Safety National Casualty Corp. must pay an employer's defense and settlement costs even though an underlying negligence lawsuit against the policyholder was “groundless,” a federal appeals court has ruled.

Wednesday's ruling in TKK USA Inc. v. Safety National Casualty Corp. addressed a dispute over coverage for a widow's lawsuit filed in 2009, alleging TKK's negligence caused her husband, a TKK employee, to become ill and die from mesothelioma.

Safety National sold an excess workers compensation and employer liability policy to TKK, but denied coverage for the negligence claim, the ruling shows.

TKK, formerly known as The Thermos Co., sued Safety National after the St. Louis-based insurer denied coverage for the claim under a policy insuring claims exceeding $275,000. The employer incurred $400,000 in legal fees before settling with the deceased worker's widow, Juanita Perkins, for $15,000.

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A central question addressed by the appeals court was whether the insurer owed its policyholder coverage when a claim alleging an employer's negligence is subject to a solid defense under Illinois Workers' Occupational Diseases Act and the state's workers comp law, as was the case in the lawsuit filed by Ms. Perkins.

“The common law negligence claim was subject to a rock-solid affirmative defense,” the appeals court said. “The Illinois Workers' Occupational Diseases Act bars common law claims by or on behalf of an employee against a covered employer on account of damage, disability or death caused or contributed to by any disease contracted or sustained in the course of the employment.”

But the U.S. District Court for the Northern District of Illinois, Eastern Division, had ruled in 2011 in the underlying lawsuit that the policy's liability protection included coverage for the negligence lawsuit even if the deceased worker's widow “ultimately could not prevail because of (a) statutory bar.”

However, the district court denied TKK's claim for attorney fees and costs in the dispute with Safety National.

Both sides appealed.

On appeal, Safety National argued that because Illinois' occupational disease law provides the only recovery for Ms. Perkins' lawsuit and her lawsuit did not request relief under the law, the costs of defending and settling the lawsuit do not qualify for coverage under its policy's terms.

TKK responded and argued that its affirmative defense under the law did not affect its coverage terms.

The appeals court agreed with the district court rulings “in all respects.”

“Employers buy liability coverage for claims by employees to limit their risks and to buy peace of mind,” the appeals court said. “The latest creative legal theory for avoiding workers compensation statutes may seem doomed to certain defeat, but the employer-defendant must still defend itself and must confront a small but nonzero risk that a new theory or exception might work in the particular case. Yet Safety National … would leave employers exposed to those risks.”