Court splits on insurance coverage
This is part one of a two part series. Part two runs Friday.
In an everyday scenario cover case – a contractor who was charged after an accident on a construction project claimed that he qualified as an additional insured under a subcontractor’s insurance policy because the underlying tort complaint alleged that the contractor was vicariously liable for the Subcontractor Negligence – Chief 7th Judge Diane S. Sykes and U.S. Circuit Court of Appeals Judge David F. Hamilton disagreed on whether the Illinois Supreme Court would follow two 2017 opinions of the Illinois Appellate Court.
The plaintiff in the coverage lawsuit, United Fire & Casualty Co., has sold a liability policy to All Seasons Roofing. All Seasons was a subcontractor for Prate Roofing & Installations on a warehouse project. Prate was listed as an additional insured under the United Fire policy, but the insurance company’s duty to defend and indemnify Prate was limited to personal injury cases where Prate faced charges of vicarious liability for acts or omissions of All Seasons or others acting on All Seasons’ behalf.
Carlos Noe Perdomo Ayala, a 21st Century Roofing employee, was killed while working on the project when he fell through an unprotected skylight. His estate continued Prate and All Seasons.
United Fire declined to defend Prate and sued for a court ruling that this decision was correct.
The negligence complaint against Prate contained a typical set of allegations that the company, acting “by and through its agents, employees and employees”, was liable for 19 negligent acts or omissions.
United Fire eventually settled the lawsuit against All Seasons by paying the $1 million limit of liability, but the deal did not include a release of the claim against Prate.
The district judge ruled against United Fire.
With one minor change – the duty to defend ended with the payment of the policy cap – Hamilton’s majority position confirmed. United Fire & Casualty Co. v. Prate Roofing, no. 19-3043 (July 30, 2021).
Here, in the first of two articles on this case, are brief highlights of Hamilton’s analysis (with minor editing and omissions not noted):
The insurer argues that because the named insured was an independent contractor, Illinois law would — could — impose no liability on the additional insured, so there was no risk of covered liability and thus no obligation to defend. The Subdistrict Court rejected this reasoning. The court explained that the duty to defend depends on the plaintiff’s claims, not on their chances of success.
We agree. A liability insurer’s duty to defend applies to the imposition of a duty to defend allegations that may fall within the liability coverage of the policy, regardless of predictions about the prospects of success. The duty to defend applies even to hopeless lawsuits – whether they be unfounded, false or fraudulent. By that logic, the duty of defense extends even to accusations that seek to impose liability and which require a drastic change in law.
In this case, the plaintiff’s allegations in the underlying complaint were broad enough to include claims against the additional insured who may be covered by the indirect liability coverage. Regardless of their potential earnings, they sought to hold the additional insured liable, at least in part, for the acts or omissions of the said insured.
The Illinois Court of Appeals found a duty to defend against nearly identical facts in: Peking Insurance Co. v. Centex Houses, 72 NE3d 831 (Ill. App. 2017), and Peking Insurance Co. v. Lexington, 84 NE3d 554 (Ill. App. 2017). Both decisions are more broadly in line with Illinois law, and we believe the Illinois Supreme Court agrees.
We follow those opinions and agree to the assignment of summary proceedings by the court to the additional insured who considers it a duty to defend himself in this case.
The duty to defend
Courts broadly interpret liability insurance and complaints in favor of imposing a duty of defense. See Steven Plitt et al., 14 Couch on Insurance Sec. 200:13 (3d ed. 2020) (“If there is any doubt as to whether claims may be covered by the policy, any doubt or ambiguity in the coverage will generally be resolved in favor of the insured.”).
The Illinois Supreme Court applies this standard: The “accusations in the underlying complaint must be interpreted broadly in favor of the insured.” Outboard Marine v. Liberty Mutual, 154 Ill.2d 90, 125, 607. “If the facts alleged in the underlying complaint are within or may be covered by the policy, the insurer’s duty to defend itself arises.” ID card.
An insurer’s refusal to defend itself is “unjustifiable unless it is clear from the face of the underlying complaint that the facts alleged may not be covered by the policy.” ID card.
This standard necessarily implies that a liability insurer cannot refuse a defense on the ground that the lawsuit against its insured is hopeless. General Agents Insurance Co. v. Midwest Sporting Goods, 215 Ill.2d 146, 155, 828 (2005) (“If the underlying complaint alleges facts within or possibly within policy coverage, an insurer is obligated to defend its insured even if the allegations are unfounded, false or fraudulent.” ).
The policy and the complaint in this case
The correct question here is whether the charges made by the Perdomo Ayala estate were intended to hold Prate Roofing – at least in part – liable for the actions of others, most notably All Seasons and 21st Century Roofing.
In the context of that question, one way to invoke a duty of defense is whether, if the Perdomo Ayala estate proves its claims, there is any possibility that Prate Roofing could be held liable for the acts or omissions of those other entities. .
We emphasize: “[A]An insurer’s duty to defend the insured is primarily determined by the pleadings in the underlying lawsuit, regardless of their veracity, what the parties know or believe to be the facts alleged, the outcome of the underlying case, or the merits of the claim . … Even if the allegations are unfounded, false or fraudulent, the insurer is obliged to defend itself.” 14 Bank on insurance Sec. 200:20; agreement, Midwest Sporting Goods, 215 Ill.2d out of 155.
As the court noted, “the underlying complaint alleges that All Seasons committed one or more of the 19 alleged acts of negligence or negligence.” The question is whether any of those 19 alleged acts or omissions could possibly be acts or omissions of other entities for which the estate intends to hold Prate Roofing liable.
We highlight three parts of the estate’s complaint. Paragraph 3 of Item 1 states:
“Talk … individually and through his agents, clerks and associates … participated in the coordination of the work performed and instituted different working methods, maintained and monitored the progress of the work and participated in the planning of the work and the inspection of the work. In addition … Prate … had the authority to suspend the work, refuse the work and materials and order changes to the work, if the work was performed in a dangerous manner or for any other reason.”
Paragraph 4 states:
“Prate … had a duty to exercise reasonable care in the control of the construction site, including to provide safe, suitable and proper conditions in the workplace, and any fall protection measures for Plaintiff and others on the job then and there. “
And in paragraph 5 it is stated:
“Talk … through and through its agents, servants and employees, was guilty then and there of one or more of the following careless and negligent acts and/or omissions: . . . (f) has failed to supervise the work being carried out in the aforesaid buildings; (g) have failed to take safe, suitable and proper fall protection measures; (h) has failed to ensure safe, suitable and decent working conditions.”
To decide on the duty to defend, we don’t have to predict whether the estate was likely to prove any of these claims against Prate Roofing. Rather, the question is whether – if the estate were to win on any of these theories – Prate Roofing’s liability would be liability for personal injury directly attributable to the act or omission of All Seasons, the act or omission of anyone acting on behalf of All Seasons, or the implementation of All Seasons’ ongoing activities for Prate Roofing.
This wording of the question is a paraphrase of the approval of vicarious liability.
Nothing in the estate’s claims made it impossible for Prate Roofing to be held liable for the actions or omissions of All Seasons and/or All Seasons agents. The estate’s allegations against Prate Roofing were worded in such a way that it crossed the line between holding accountable for its own acts and omissions and holding vicariously liable for acts and omissions of non-employee agents, such as, possibly, All Seasons. That straddle shouldn’t be surprising, especially in the pleading phase of the estate’s lawsuit.
To the best of our knowledge, the estate was free to defer the choice between direct liability, indirect liability or a combination of both for Prate Roofing. That means that based on the pleadings, we could not rule out that any liability for Prate Roofing would fit within the vicarious liability statement. Therefore, the court was right.
Our analysis closely follows the Illinois Court of Appeal’s reasoning in similar construction insurance disputes in Centex Houses and Lexington Station.
On a matter of state law, federal courts try to predict how the state’s highest court would rule.
We see no convincing indication that the Illinois Supreme Court would rule the matter differently than the Illinois Court of Appeals, so we follow Centex Houses and Lexington Station in holding that the charges of the Perdomo Ayala estate in this case left scope for vicarious liability to Prate Roofing.
The estate’s claims against Prate Roofing may have fallen within United Fire’s coverage and led to the defense duty.