The Illinois Appellate Court recently looked at whether additional insureds in two separate coverage disputes were entitled to a defense in underlying construction bodily injury claims, and came to two different conclusions. In both cases, the court considered facts pled in third-party complaints and other facts outside the four corners of the underlying complaint in ruling on the duty to defend.
In Pekin Ins. Co. v. United Parcel Service, Inc., 885 N.E.2d 386 (1st Dist. 2008), the plaintiff in the underlying suit was injured when he fell from a ladder on a job at a UPS facility for his employer, Swan Machinery Installation, Inc. He sued UPS along with the manufacturer of the ladder, alleging joint and several liability against UPS and the ladder manufacturer. UPS was an additional insured under a general liability policy issued to Swan by Pekin Insurance Company. The additional insured endorsement limited coverage to liability incurred solely as a result of the insured’s acts or omissions. UPS tendered the claim to Pekin. Pekin denied coverage because the underlying complaint did not allege that Swan was solely at fault and brought a declaratory judgment action. Pekin filed a motion for judgment on the pleadings and the trial court ruled that Pekin was obligated to defend UPS in the underlying action.
On appeal, the appellate court discussed the allegations of the underlying complaint and then looked at the third-party complaints for contribution filed by UPS and the manufacturer against Swan, the underlying plaintiff’s employer. The court noted that UPS also sued Swan for indemnification based on a provision in the contract between those parties and that UPS’s prayer for relief denied that UPS was solely negligent and sought indemnity for all damages attributable to Swan. The court then addressed UPS’s argument that there was a possibility that UPS could be found vicariously liable for Swan’s acts or omissions, which would be liability incurred solely as a result of some act or omission of Swan.
In analyzing the vicarious liability argument, the court examined cases as well as sections of the Restatement (Second) of Torts. The court found that nothing in the underlying complaint suggested that UPS exerted sufficient control over the manner of Swan’s work so as to be vicariously liable for Swan’s acts or omissions. UPS also urged the court to consider the third-party complaints against Swan to find coverage. The court found that nothing in the third-party complaint changed the results because they do not raise the potential for vicarious liability. The court found that a comparison of the underlying allegations with the language of the additional insured endorsement found no potential for coverage, and reversed the trial court’s finding on the duty to defend.
The same court took a broader approach to the underlying facts in American Economy Ins. Co. v. Holabird and Root, 886 N.E.2d 1166 (1st Dist. 2008). There, Holabird and Root (“H&R”) was allegedly the architect and general contractor on a rehabilitation project on a building owned by DePaul University. The City of Chicago arranged to lease space in that building. The lighting was installed by subcontractor Metrick Electric Company. The underlying plaintiff worked in the City offices at the building and alleged that the fluorescent lighting installed at her worksite aggravated her pre-existing autoimmune disease. She sued H&R, DePaul and others, asserting negligent infliction of emotional distress and professional negligence based on the defendants’ failure to educate themselves on dangers posed by UV rays from fluorescent lighting, negligent selection of the lighting and of the lighting subcontractor. The underlying plaintiff did not Metrick, the lighting installer. DePaul, however, filed a third-party complaint against Metrick alleging negligence in the selection of the lighting.
Metrick was insured under a general liability policy issued by American Economy, under which H&R was an additional insured. The additional insured endorsement provided that certain scheduled entities were additional insureds “but only with respect to liability arising out of ‘your work’ for that insured by you.” H&R tendered the claim to American Economy, and that insurer denied the claim because Metrick was not specifically named in the underlying action and the plaintiff did not specifically allege any negligence on Metrick’s part. H&R responded that because the underlying complaint alleged facts that the plaintiff’s injuries arose, or potentially arose, out of Metrick’s installation of the lighting and because the third-party complaint alleged that that was Metrick’s work, there was a duty to defend.
The court began its analysis by looking at the language of the additional insured endorsement, specifically the phrase “Liability arising out of ‘your work’,” as well as the definition of “your work” in the policy. The court determined that, to establish a duty to defend, H&R needed to show only that “but for” the work performed by Metrick, H&R is liable to the underlying plaintiff.
The plaintiff’s complaint did not refer to Metrick’s work but the third-party complaints in the case did, and American Economy argued that the court was limited to the underlying complaint and could not consider the allegations of the third-party complaints in determining the duty to defend. The court found that it could properly consider the allegations of the third-party complaint in deciding whether American Economy owed H&R a duty to defend. Further, the court noted that American Economy knew that Metrick had installed the lighting based on American Economy’s defense of Metrick in the underlying action. The court then considered those facts in the context of the additional insured endorsement, and found that American Economy had a duty to defend H&R.
It appears from these cases that Illinois has moved away from a strict “four corners” analysis of the duty to defend. In the American Economy Ins. Co. v. Holabird and Root case, the trial courts considered true but unpleaded facts relating to the underlying events evidenced by pleadings and other matters outside the underlying complaint in determining that H&R was entitled to a defense as an additional insured. However, in the Pekin Ins. Co. v. United Parcel Service, Inc. case, the trial court essentially speculated as to a possible legal theory upon which the putative insured could be found liable, which was not supported by the underlying complaint or the third-party complaint and that ruling was reversed by the appellate court.
