General Liability Policy Does Not Cover Waiver of the Kotecki Limitation

Attorneys: Madormo, Anthony J.

The Illinois Supreme Court recently held that an employer's liability resulting from a waiver of the Kotecki limitation was not insurable under a commercial general liability policy (CGL). Virginia Surety Company v. Northern Insurance Company of New York, 2007 Ill. LEXIS 3 (2007). The contract between the general contractor and subcontractor usually has an indemnity provision, requiring the subcontractor to indemnify the general contractor. Illinois Courts have held that, the indemnity provision constitutes a waiver of the subcontractor's Kotecki limitation. The Kotecki limitation limits an employer's liability for injuries to its employees to the amount of the employer's liability under the Worker's Compensation Act, 820 ILCS 305. See Kotecki v. Cyclops Welding Corp. 146 Ill 155, 5 N.E. 10 (1991)

Most CGL policies exclude claims for damages to an employee of the insured, except where the employer's liability was assumed in an "insured contract." An "insured contract" was defined under the policy at issue as a contract or agreement pertaining to the insured's business by which the insured assumed the tort liability of another party to pay for bodily injury or property damage to a third party.

TheVirginia Surety court held that the indemnity provision in the contract was not an "insured contract" as that term was defined under the insurance policy. The court reasoned that under Illinois law, pursuant to the Illinois Contribution Act, 740 ILCS 100, a party is only liable for its pro rata share of the total liability. The court further reasoned that the waiver of the Kotecki limitation did not shift liability, but was a decision by the employer (subcontractor) to not assert an affirmative defense, and therefore, remain liable for a claim for which it had a legal defense. Based upon this reasoning, the Virginia Surety court concluded that the indemnity provision in the contract between the general contractor and subcontractor was not a true indemnity clause, but was a waiver of the right to raise an affirmative defense. The subcontractor did not agree to assume liability, it only agreed not to assert a defense to its liability.

TheVirginia Surety court concluded since the agreement was not an "insured contract" the exclusion for liability to the named insured's own employees applied, and no coverage existed. Therefore, there was no duty to defend or indemnify the named insured under the CGL policy. The Virginia Surety court rejected the assertion that the employer subcontractor assumed the joint and several liability of the general contractor.
The Appellate Court's decision in Christy-Foltz, Inc. v. Safety Mutual Insurance Casualty Corp., 309 Ill. App.3d, 686 (4th Dist. 2000), held that a worker's compensation/employer's liability policy did not apply to liability arising out of the waiver of the Kotecki limitation, because entering into an agreement to waive theKotecki limitation voided coverage because it voluntarily assumed a duty. We anticipate, in light of the Virginia Surety decision, the Christy-Foltz holding will be challenged in a subsequent lawsuit.

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