Determining when an insurer has the duty to defend or indemnify a named defendant in a suit involving a worksite injury to a subcontractor's employee was recently addressed by the Appellate Court of Illinois, First District, in the case of State Automobile Mutual Insurance Co. v. Habitat Construction Co., 2007 Ill. App. LEXIS 1028 (1st Dist. 2007). In that case, State Auto filed a declaratory judgment action against Habitat Construction alleging that it did not have a duty to defend or indemnify Habitat in an underlying personal injury action. The trial court granted State Auto summary judgment, ruling that State Auto did not have a duty to defend nor indemnify Habitat. However, after comparing the language of the insurance policy and the established case law regarding an insurer's duty to defend, the appellate court reversed the ruling.
The facts of State Auto are very similar to many construction accident cases. Habitat was the general contractor on the project. Habitat subcontracted certain services to Central Building & Preservations. The written contract between Habitat and Central Building required Central Building to add Habitat as an additional insured on the commercial general liability policy Central Building had with State Auto. Larry Medolan, a Central Building employee, was then allegedly injured while working on the project and filed a complaint for the injuries, naming Habitat and others as defendants. Central Building was not named in the compliant due to the exclusive remedy provision of the Illinois Workers' Compensation Act.
Habitat then filed a third-party complaint against Central Building denying liability, and alternatively alleging that, if it was found liable, Central Building was negligent and that its actions or omissions were the cause of the accident. Habitat also forwarded the Medolan complaint to Central Building for defense and indemnification. Central Building's insurer State Auto then rejected the tender and filed the declaratory action because it claimed that there was no coverage under the policy with respect to the Medolan action.
In reviewing the matter, the appellate court first discussed the proper analysis to determine whether Habitat was an additional insured under the Central Building policy. The court determined that it must first look at the plain language of the State Auto policy and determine whether an exclusionary provision exists. Once there was a determination that there was no express exclusion denying coverage, the court looked to determine whether the "but for" test was met. The "but for" test is basically an analysis in which the court looks at the underlying complaint and determines if there is causal connection between the accident and the named insured's work.
To determine if Medolan was working within the scope of the policy, the court looked at the State Auto general liability policy language. The same language in the policy was addressed in State Automobile Mutual Insurance Co. v. Kingsport Development, LLC, 364 Ill. App. 3d 946, 846 N.E.2d 947 (2005). The court, citing Kingsport, concluded that the State Auto policy only required that liability arise out of the insured work and did not require a more detailed examination of whose acts and omissions are alleged to have caused the injury. Basically, it did not matter whether Habitat or Central Building was negligent; the only consideration was whether Medolan was working for Central Building at the time of the alleged injury. As a result, the court held that it did not matter which acts or omissions Medolan claimed caused his injuries. Rather, the determinative factor was that fact that Medolan alleged that he was injured as a result of the insured work as listed by the policy.
The court also noted that in other standard insurance policies issued to construction companies there are clauses that essentially limit coverage to liability arising from the work of its named insured, the subcontractor, but expressly exclude coverage for the general contractor's own negligence. Importantly, the State Auto policy failed to include this limiting language. Therefore, the court concluded that the allegations of the Medolan complaint, when liberally construed, established that Medolan was injured in the furtherance of his work for Central Building and, therefore, the injuries at least potentially arose out of Central Building's work.
State Auto also argued that the policy's professional services exclusion barred coverage to Habitat. State Auto argued that Medolan's complaint alleged Habitat failed to make proper inspections of the premises. The court rejected this argument because Habitat, as a general contractor, also had responsibilities to control the project schedule and insure that the structure complied with the project specifications. This work was not the same as performing architect, engineer, or surveyor work that was excluded by the professional services exclusions of the policy.
Finally, the court addressed the issue of whether the State Auto policy, once determined to apply, was only an excess policy to Habitat's own general liability policy. The court discussed the targeted tender rule and the implication of the horizontal exhaustion doctrine. The court, citing Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 368 Ill. App. 3d 665, 856 N.E.2d 452 (2006), determined that an insured cannot selectively tender a defense to an excess insurer where primary coverage remains unexhausted. The court remanded this issue to determine whether the State Auto policy apples on an excess basis, and also to determine whether State Auto not only has a duty to defend, but also has a duty to indemnify under the policy. (Editor’s Note: The recent decision of the Illinois Supreme Court in Kajima is discussed in another article in this Newsletter. As you will see, it appears the First District Appellate Court properly anticipated the Illinois Supreme Court’s ruling.)
As the court pointed out, typically a general contractor will be added as an additional insured on a subcontractor's policy. However, if the subcontractor's policy has written exclusions in it, the general contractor may not have the coverage it expects. Therefore, it is imperative that a general contractor review the subcontractor's insurance policy to determine whether any exclusion within the policy will limit the general contactor's ability to tender the defense of a suit, particularly when a subcontractor's employee is injured on a project due to the negligence of either the subcontractor or a third party.
The last point is important to consider. In many construction cases we often see that the common practice is for contractors to simply check to ensure the subcontractor provided a certificate of insurance showing that coverage has been obtained with the proper limits as called for in the subcontract. However, if the terms of the policy are not properly considered, the coverage limits set out in the certificate may be completely illusory.
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Nicholas Johnson, an associate in our Waukegan, Illinois office concentrates his practice in general civil and construction litigation. Should you have any questions regarding this article, please feel free to contact Nick at njohnson@querrey.com. If you have questions regarding your companies insurance practices, please contact Jennifer Medenwald, Group Chair of our Insurance practice group, via jmedenwald@querrey.com, or via 312-540-7588.
