Duty to Defend Additional Insured

Additional Insured May Attempt To Create Coverage by a Cross Claim

Insurance is a risk transfer device. General contractors use that risk transfer device by requiring its subcontractors to cause the general contract to be named as an additional insured on the policy issued to the subcontractor reducing its need for insurance or the cost of insurance purchased to protect against its own exposures.

In Pekin Insurance Company v. Johnson-Downs Construction, Inc., an Illinois Corporation; Cincinnati Insurance Company, a Foreign Insurance Corporation; and Jeff Barnett, Appellate Court Of Illinois Third District, 2017 IL App (3d) 160601 (July 6, 2017) defendant Johnson-Downs Construction, Inc. (Johnson-Downs), entered into a construction contract with Art’s Landscaping, Inc. (Art’s).

Jeff Barnett, an Art’s employee, was injured at the site and sued Johnson-Downs for construction negligence. Pekin Insurance Company (Pekin) filed a declaratory judgment action in Will County circuit court claiming it did not have a duty to defend Johnson-Downs as an additional insured under Art’s insurance policy. Johnson-Downs filed a motion to stay the action pending the resolution of the underlying case, which the trial court granted.

FACTS

Defendant Johnson-Downs entered into a contract with Art’s, in which Art’s would perform work on the construction of an addition to the Riverside Hospital in Kankakee, Illinois. Section 13.4 of the contract stated that Art’s was required to name Johnson-Downs as an additional insured on its liability insurance policy. Art’s had an insurance policy through Pekin Insurance Company. The relevant portion of the policy regarding additional insured states:

“ADDITIONAL INSURED— OWNERS, LESSEES OR CONTRACTORS— WHEN REQUIRED IN  CONSTRUCTION AGREEMENT WITH YOU PRIMARY AND NONCONTRIBUTORY
This endorsement modifies insurance provided under the following:

“COMMERCIAL GENERAL LIABILITY COVERAGE PART

“1. Section II—Who Is An Insured is amended to include as an insured any person or organization for whom you are performing operations, when you and such person or organization have agreed in a written contract effective during the policy period stated on the Declarations Page (hereinafter referred to as the ‘Policy Period’) and executed prior to the ‘bodily injury’ or ‘property damage’ for which coverage is sought, that you must add that person or organization as an additional insured on a policy of liability insurance (hereinafter referred to as the ‘Additional Insured’). The Additional Insured is covered only with respect to vicarious liability for ‘bodily injury’ or ‘property damage’ imputed from You to the Additional Insured as a proximate result of your ongoing operations performed for that Additional Insured during the Policy Period.” (Emphasis added.)

Barnett filed a suit against Johnson-Downs alleging construction negligence and premises liability. At the time, Johnson-Downs was the only named defendant. Cincinnati Insurance Company, Johnson-Downs’s insurer, tendered the complaint to Pekin for a defense and indemnification. Since May 2013, Pekin has defended Johnson-Downs under its reservation of rights.

ANALYSIS

A circuit court may grant a motion to stay as part of its inherent authority to control the disposition of cases before it. Cullinan v. Fehrenbacher, 2012 IL App (3d) 120005, ¶ 10.

Specifically, any determination of ultimate facts upon which liability or recovery might be found in an underlying case is precluded from review by an appellate court.

In Johnson-Downs’s motion to stay, it requested that the trial court stay Pekin’s declaratory judgment action because Pekin’s count II allegation presents an issue of ultimate fact critical to the underlying case. Count II claims that Pekin does not owe a duty to defend Johnson-Downs because the insurance policy states that an additional insured is only covered for vicarious liability claims and the underlying complaint lacks such allegations.

Since this can be decided without examining the extent of Johnson-Downs’s supervisory control over Art’s alleged negligent acts and, ultimately, determining whether Johnson-Downs is in fact vicariously liable. The appellate court found that the trial court abused its discretion in granting the motion to stay and the declaratory judgment action can proceed to resolution prior to the conclusion of the underlying suit.

THIRD-PARTY COMPLAINT

Pekin argues that Johnson-Downs’s third-party complaint against Barnett cannot be considered by the trial court in its determination because the complaint was prepared by a putative additional insured seeking coverage under the policy in violation of case law.

A trial court may consider evidence beyond the underlying complaint, including a third-party complaint. However, there are exceptions that prohibit the review of third-party complaints. A putative additional insured could not reference his third-party complaint as a way to bolster coverage under the insurance policy. National Fire Insurance of Hartford v. Walsh Construction Co., 392 Ill. App. 3d 312, 322 (2009).

Johnson-Downs, the putative additional insured and the author of the third-party complaint, is requesting the trial court to consider its own complaint in the trial court’s determination of Pekin’s duty to defend. Pekin contended that Johnson-Downs cannot present its own complaint to bolster its position that a claim of vicarious liability is present in the underlying case. After review the appellate court instructed the trial court not to consider Johnson-Downs’s third-party complaint in its determination of Pekin’s duty to defend.

AMENDED COMPLAINT

Pekin argues that Barnett’s amended complaint was a transparent attempt to plead into coverage and, therefore, should not be considered in the trial court’s determination. In Illinois, a pleading is not a transparent attempt to plead into coverage when the facts support a cause of action.

In this case, the amended complaint alleges that Art’s failure to maintain equipment and working conditions resulted in Barnett’s injuries and that Johnson-Downs, as the general contractor, exercised control over Art’s such that Johnson-Downs was liable for Art’s negligent acts and omissions.

The insurance policy covers claims of vicarious liability imputed to Johnson-Downs as a proximate result of Art’s acts or omissions in its performance for Johnson-Downs. We believe the factual allegations in the amended complaint state a vicarious liability claim that falls within the coverage of the insurance policy, and therefore, Barnett’s amended complaint was not an improper or unsupported attempt to plead into coverage. Moreover, the facts supporting the amended claim were present in an undifferentiated form in Barnett’s original complaint. Accordingly, the appellate court instructed the trial court that it may consider Barnett’s amended complaint in its duty to defend determination.

ZALMA OPINION

The additional insured tried to bring coverage by filing a cross-claim alleging vicarious liability. That failed because it was blatantly a pleading into coverage. However, the actions of the plaintiff in the underlying case – attempting to increase its ability to recover damages by drawing in additional coverage – amended its complaint to allege facts that expressed vicarious liability and bring the Pekin policy into coverage. The trial court has its instructions and will consider the underlying plaintiff’s pleadings that will potentially require Pekin to continue to defend and indemnify Johnson-Downs as an additional insured.

 

 

ZALMA-INS-CONSULT © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.

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