Illinois Constructors Corp. v. United Fire & Casualty Co.

2019 IL App (2d) 180786-U

• Court: Appellate Court of Illinois
• Decided: December 16, 2019
• Docket: 2-18-0786
• Status: Unpublished

Opinion

2019 IL App (2d) 180786-U No. 2-18-0786 Order filed December 16, 2019

NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1). ______________________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT ______________________________________________________________________________

ILLINOIS CONSTRUCTORS ) Appeal from the Circuit Court CORPORATION, ) of Kane County. ) Plaintiff/Counterdefendant-Appellee, ) ) v. ) No. 17-MR-407 ) UNITED FIRE AND CASUALTY CO., ) ) Defendant/Counterplaintiff-Appellant ) ) Honorable (Phoenix Corporation of the Quad Cities and ) David R. Akemann, Bob Farster, Defendants/Counterdefendants). ) Judge, Presiding. ______________________________________________________________________________

JUSTICE SCHOSTOK delivered the judgment of the court. Justices Hutchinson and Burke concurred in the judgment.

ORDER

¶1 Held: Trial court correctly found that insurer owed additional insured a defense.

¶2 In this lawsuit, the plaintiff/counterdefendant, Illinois Constructors Corporation (ICC),

sought among other things a declaratory judgment on whether the defendant/counterplaintiff,

United Fire & Casualty Co. (UF), owed it a duty to defend a separate lawsuit. The parties filed

cross-motions for summary judgment on this issue, which the trial court resolved in favor of ICC.

UF appeals. We affirm. 2019 IL App (2d) 180786-U

¶3 I. BACKGROUND

¶4 The following facts are undisputed. In 2013, ICC was a general contractor on a road

construction project at a bridge over I-90. That summer, it entered into a subcontract with Phoenix

Corporation of the Quad Cities (Phoenix) to perform a portion of the work. Among other things,

the subcontract required Phoenix to: supply its own labor, materials, and equipment; follow ICC’s

clean-up and safety procedures; “assume the entire responsibility and liability for all damages or

injury to all persons” related to the performance of its work; and indemnify ICC against all claims

except those arising from ICC’s own negligence.

¶5 The subcontract also required Phoenix to obtain insurance covering ICC as an additional

insured. Phoenix gave ICC proof of this coverage in August 2013. The additional-insured

coverage obtained by Phoenix was under its commercial general liability (CGL) and commercial

auto policies issued by UF. Those policies limited the coverage of additional insureds to vicarious

liability for Phoenix’s acts or omissions:

“Such person or organization is an additional insured only with respect to your liability

which may be imputed to that person or organization directly arising out of ‘your work’

[under] the written contract ***” or “directly arising out of the *** use of the covered

‘autos’ at the location(s) designated ***.”

¶6 On December 12, 2013, Bob Farster, an employee of Phoenix, was injured when a

construction vehicle driven by another Phoenix employee ran over his foot. After the accident,

UF opened a worker’s compensation claim file, which contained notes that the accident was caused

by another Phoenix employee. The notes included an interview with that employee, who testified

that, although the general contractor (ICC) was in charge of the worksite, he took direct

instructions from the Phoenix supervisor on site.

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¶7 Almost two years later, Farster filed a tort action against ICC. His complaint alleged that

ICC “individually and through its agents” caused or permitted a dangerous condition and was

negligent in various ways. Within two weeks, 2015, ICC tendered its defense and indemnification

to UF. In February 2016, UF denied the tender under both the CGL and auto policies. In June

2016, ICC filed (in the tort action) a third-party complaint against Phoenix for contribution. ICC

later added a breach of contract claim as well.

¶8 In March 2017, ICC filed the present suit against UF, Phoenix, and Farster. As to UF, ICC

sought a declaratory judgment that it was entitled to defense and indemnity from UF in the tort

action. UF responded with counterclaims seeking a contrary declaratory judgment.

¶9 Meanwhile, in the underlying tort action, Farster reached a good faith settlement with

Phoenix (as the third-party defendant). As a result of the settlement, the trial court in that case

dismissed ICC’s contribution claim against Phoenix in November 2017. A few months later,

Farster voluntarily dismissed the underlying tort action against ICC.

¶ 10 Back in the declaratory judgment action, discovery was proceeding. ICC obtained a copy

of UF’s worker’s compensation claim file showing UF’s knowledge that the accident was caused

by another Phoenix employee. ICC also deposed the UF senior litigation specialist who handled

the tender of defense and indemnity, Chyrl Johnson. Johnson had drafted the letter denying the

tender. She testified that her denial was based solely on the opinion of an outside counsel. She

also testified that UF’s worker’s compensation file, which showed that the accident was caused by

another Phoenix employee, was never provided to that outside counsel.

¶ 11 Thereafter, the parties filed cross-motions for summary judgment on the issue of whether

UF owed ICC a duty to defend and indemnify. On August 23, 2018, the trial court issued a

memorandum order. It first found that UF did not owe ICC a duty of indemnification. As to the

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duty to defend, however—which was subject to a more liberal legal standard—the trial court found

that UF owed ICC such a duty. A few weeks later, the trial court entered judgment for ICC in the

amount of $65,237.53, representing the expenses ICC had incurred in defending the underlying

tort action. 1 UF appeals from this judgment and from the August 2018 order ruling in ICC’s favor

on the duty to defend.

¶ 12 II. ANALYSIS

¶ 13 UF raises a series of arguments challenging the trial court’s determination that it owed ICC

a duty to defend. The starting proposition for these arguments is that its additional-insured policies

were limited and only covered any vicarious liability of ICC for Phoenix’s fault (a proposition

which ICC does not dispute here). UF contends that ICC cannot show that any potential liability

that would come within this coverage, for a variety of reasons. UF first argues that, as a general

matter, long-standing principles of fault apportionment preclude vicarious liability here. It then

argues that the complaint in the underlying case does not allege any vicarious liability. Finally, it

argues that the filing of ICC’s contribution claim, the settlement between Farster and Phoenix in

the underlying case, and the resulting dismissal of ICC’s contribution claim against Phoenix

foreclosed the possibility of vicarious liability.

¶ 14 In analyzing these arguments, we confine our analysis to the sole operative issue on appeal:

whether UF owed ICC a duty to defend in the underlying case. As this is a legal question that led

to the entry of summary judgment, we review the issue de novo. Avery v. State Farm Mutual

Automobile Insurance Co., 216 Ill. 2d 100, 129 (2005) (de novo review of legal issues related to

1 The trial court’s order awarding the defense costs and fees notes that the parties agreed

as to the amount of those costs and fees.

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insurance contracts); Gaylor v. Village of Ringwood, 363 Ill. App. 3d 543, 547 (2006) (de novo

review of resolution of cross-motions for summary judgment).

¶ 15 A. Applicable Legal Standards

¶ 16 To determine whether an insurer owes a duty to defend, we begin by comparing the

coverage under the policy with the allegations of the complaint. If, construed broadly, “the

underlying complaint alleges facts within or potentially within policy coverage, an insurer is

obligated to defend its insured.” General Agents Insurance Co. of America, Inc. v. Midwest

Sporting Goods Co., 215 Ill. 2d 146, 155 (2005). “In addition, if several theories of recovery are

alleged in the underlying complaint against the insured, the insurer’s duty to defend arises even if

only one of several theories is within the potential coverage of the policy.” Id.

¶ 17 Importantly, the complaint need not expressly allege facts demonstrating that the claim is

covered by the policy:

“The insurer’s duty to defend does not depend upon a sufficient suggestion of liability

raised in the complaint; instead, the insurer has the duty to defend unless the allegations of

the underlying complaint demonstrate that the plaintiff in the underlying suit will not be

able to prove the insured liable, under any theory supported by the complaint, without also

proving facts that show the loss falls outside the coverage of the insurance policy.” Illinois

Emcasco Insurance Co. v. Northwestern National Casualty Co., 337 Ill. App. 3d 356, 361

(2003).

Further, a court considering whether a duty to defend is owed may look beyond the allegations of

the complaint and take notice of unpleaded but uncontested facts, including evidence obtained

during discovery and the allegations of third-party complaints, so long as the court does not

actually determine ultimate questions of liability. Pekin Insurance Co. v. Wilson, 237 Ill. 2d 446,

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462 (2010) (“not only the contents of third-party complaints in the underlying action but other

evidence may be considered in determining the insurer’s duty to defend”).

¶ 18 Where, as here, the policy provisions at issue are additional-insured endorsements that

cover only any vicarious liability of the additional insured (typically, a general contractor) for the

negligence of the named insured (typically, the subcontractor/employer of the injured person), two

elements are needed to establish the insurer’s duty to defend the additional insured. “First, there

must be a potential for finding that the named insured was negligent and, second, there must be a

potential for holding the additional insured vicariously liable for that negligence.” Pekin Insurance

Co. v. Centex Homes, 2017 IL App (1st) 153601, ¶ 37.

¶ 19 “In order to meet the first requirement, the underlying complaint need not expressly allege

that the named insured was negligent.” Id. ¶ 38. Rather, the first element can be met where the

facts alleged in the underlying complaint (or, as noted above, in any third-party complaint, as well

as other unpleaded but known and undisputed evidence) would support a theory of recovery based

on the negligence of the named insured. See id. ¶ 39.

¶ 20 The second element—that there is a potential basis for holding the additional insured

vicariously liable—is satisfied “where the complaint alleges that the additional insured had control

of operations and was liable for the actions of its agents.” Id. ¶ 56. Accordingly, courts have held

that the second element is met where the underlying complaint alleged that a general

contractor/additional insured caused the injury “by and through its agents,” and the pleadings

alleged that the employer/named insured might be one of those agents. See id. ¶ 57; Illinois

Emcasco Insurance Co. v. Waukegan Steel Sales, Inc., 2013 IL App (1st) 120735, ¶ 23. With these

standards in mind, we turn to the arguments raised by UF.

¶ 21 B. Do General Principles of Fault Apportionment Preclude Liability?

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¶ 22 UF begins with a convoluted argument regarding the source of ICC’s potential liability.

ICC’s third-party complaint against Phoenix cited the Joint Tortfeasor Contribution Act (740 ILCS

100/1 et seq. (West 2014)) and sought pro rata contribution for any vicarious liability ICC might

incur as a result of negligence by Phoenix. It did not allege that Phoenix was solely at fault for the

accident. Nevertheless, UF insists that vicarious liability is founded on the idea that a blameless

principal may be held liable for its agent’s actions based solely on the agency relationship, and

thus vicarious liability is conceptually aligned only with indemnification (fault transfer), not

contribution (fault apportionment). UF contends that ICC’s third-party complaint, which is

premised on vicarious liability, only makes sense if is it viewed as seeking indemnification rather

than contribution. UF then attacks ICC’s supposed quest for indemnification as disfavored,

arguing that the trend in this area of the law has been toward contribution as opposed to

indemnification.

¶ 23 There are several flaws in this argument, the most obvious of which is UF’s effort to rewrite

ICC’s third-party contribution claim. Further, the fact that ICC also could have sought

indemnification for Phoenix’s negligence did not prevent it from bringing its contribution claim,

as parties may raise alternative theories of liability, even inconsistent ones. 735 ILCS 5/2-604

(West 2014); Heastie v. Roberts, 226 Ill. 2d 515, 558 (2007). Finally, the legal support for UF’s

argument is lacking. UF relies on Sperl v. Henry, 2018 IL 123132, ¶¶ 24-27, as support for the

idea that vicarious liability is “incompatible” with contribution, but Sperl (which held that

vicariously liable defendants are within the scope of the Contribution Act as long as they are

potentially capable of being held liable to the injured party) does not support that conclusion.

Further, Sperl did not involve any issue regarding an insurer’s duty to defend, which “is broader

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than its duty to indemnify.” Wilson, 237 Ill. 2d at 456. We find no merit to UF’s contention that

general principles of fault apportionment preclude any assertion of vicarious liability by ICC.

¶ 24 C. Did ICC Establish Its Potential Vicarious Liability?

¶ 25 To give rise to a duty to defend an additional insured such as ICC, the allegations of the

underlying complaint, taken together with the allegations of the third-party complaint and any

uncontested but unpleaded facts, must show (1) potential liability on the part of the named insured

(here, Phoenix) and (2) potential liability by the additional insured (ICC) for Phoenix’s negligence.

Centex Homes, 2017 IL App (1st) 153601, ¶ 37. UF argues that ICC has not met this standard.

¶ 26 In a thorough memorandum order, the trial court addressed each of these requirements. It

noted that Farster’s underlying complaint did not in itself allege any negligent acts or omissions

by Phoenix: although the complaint alleged that Phoenix was Farster’s employer, the only

allegations of negligence related to ICC’s own actions. However, the trial court was also permitted

to consider unpleaded but undisputed facts known to the insurer. See Wilson, 237 Ill. 2d at 462;

Pekin Insurance Co. v. Precision Dose, Inc., 2012 IL App (2d) 110195, ¶ 43. ICC’s motion for

summary judgment presented several such facts, including Phoenix’s contract with ICC (which

provided that Phoenix was to furnish the labor and services including “competent supervision”),

and the fact that another Phoenix employee was driving the worksite vehicle that caused Farster’s

injuries. The trial court found these facts sufficient to establish Phoenix’s potential liability to

Farster, and we agree. We also note that UF knew that the employee who caused the accident said

that he was supervised by Phoenix personnel. All of these facts are sufficient to show that Phoenix

was potentially liable for the accident. Accordingly, the first requirement for UF to owe ICC a

duty to defend was met.

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¶ 27 The second requirement is that ICC was potentially liable for Phoenix’s negligence.

Centex Homes, 2017 IL App (1st) 153601, ¶ 37. The trial court found that this requirement was

met through allegations in the underlying complaint, which alleged that ICC “was in charge of

construction, repairs, safety, and/or alteration and *** operated, managed, *** and controlled ***

individually and through its agents *** and employees *** the construction site.” See id. ¶ 57

(finding that similar allegations met the second requirement); Pekin Insurance Co. v. Lexington

Station, LLC, 2017 IL App (1st) 163284, ¶ 34 (similar allegations were sufficient to allow a jury

to find that the general contractor retained sufficient control over the work being done by the

subcontractor that the general contractor could be held liable for the negligence of the

subcontractor).

¶ 28 Here again, we agree with the trial court’s analysis. We note that the allegations of direct

liability by ICC do not foreclose the possibility that ICC also could be found vicariously liable for

Phoenix’s negligence. See Centex Homes, 2017 IL App (1st) 153601, ¶ 42; Pekin Insurance Co.

v. CSR Roofing Contractors, Inc., 2015 IL App (1st) 142473, ¶ 49 (“[t]he mere fact that allegations

of direct liability are included in the complaint, however, does not defeat [the additional insured’s]

claim that it could also potentially be held vicariously liable”).

¶ 29 UF does not really challenge the conclusion that, under Centex Homes, Lexington Station,

and their predecessors, ICC has shown the two requirements for a duty to defend. Rather, it argues

that a recent Illinois Supreme Court case, Carney v. Union Pacific R.R. Corp., 2016 IL 118984,

requires a more stringent pleading standard. Specifically, UF argues that, under Carney, ICC must

rely solely on the allegations of the underlying complaint to show that it is potentially vicariously

liable for Farster’s injuries, and that no vicarious liability can be found where that theory is not

specifically alleged in the underlying complaint.

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¶ 30 UF raised this same argument in the trial court, and that court’s memorandum opinion

contains a good analysis of the effect of Carney on duty-to-defend cases. Although we have

engaged in our own analysis as required under the de novo standard of review, we find the trial

court’s analysis and its application of Carney to the present case to be correct.

¶ 31 Carney involved a workplace accident that occurred during the removal of an old railroad

bridge. The owner, Union Pacific, hired Happs, an independent contractor, to remove the old

bridge. Happs in turn hired a subcontractor, Patrick Carney. One of Carney’s employees (his son)

was injured. Carney, 2016 IL 118984, ¶ 6. The employee sued both the independent contractor

and the owner. Id. ¶ 10. The trial court granted summary judgment in favor of the owner. The

appellate court reversed, holding that although an employer ordinarily cannot be held liable for the

negligence of an independent contractor, under section 414 of the Restatement (Second) of Torts,

there is an exception where the employer retains control over any part of the work. The appellate

court found that there was a question of fact as to whether Union Pacific retained such control over

the work performed by Happs that it could become directly or vicariously liable to the plaintiff.

Id. ¶ 12.

¶ 32 The supreme court reversed the appellate court and affirmed the trial court’s grant of

summary judgment to Union Pacific. In doing so, it laid out the difference between vicarious

liability, which does not extend to the actions of an independent contractor, and liability under

section 414, which applies only to an employer’s liability for its own negligence where it retains

some control over the independent contractor’s work. Id. ¶¶ 32-33.

“If the control retained by the employer is such that it gives rise to a master-servant

relationship, thus negating the person’s status as an independent contractor, the employer

may be liable for the negligence of the contractor’s employees under the law of agency.

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Agency law, under which an employer may be vicariously liable for the torts of its

employees, is distinct from the principles encompassed in section 414, under which an

employer is directly liable for its own negligence. In short, ‘section 414 takes over where

agency law ends.’ ” Id. ¶ 38 (quoting Aguirre v. Turner Construction Co., 501 F.3d 825,

829 (7th Cir. 2007)).

The supreme court then examined whether the plaintiff had shown that Union Pacific could be

held either vicariously or directly liable. It declined to consider any assertion of vicarious liability

because the plaintiff had not pled such a theory in his complaint: the complaint alleged only that

Union Pacific was liable for its own actions, not that it was liable for the actions of Happs. Id. ¶

40.

¶ 33 It is this holding of Carney that UF seeks to apply here: the principle that the possibility of

vicarious liability should be assessed only by looking to the complaint. We find this argument

flawed for several reasons.

¶ 34 As an initial matter, Carney did not involve any issue regarding an insurer’s duty to defend,

which involves a different standard for pleading. See Wilson, 237 Ill. 2d at 456 (“the insurer’s

duty to defend its insured is broader than its duty to indemnify”). As noted above, a duty to defend

arises whenever the insured is potentially liable, and may be found even where the complaint does

not expressly allege any facts supporting vicarious liability, so long as the facts pled do not

foreclose the possibility of vicarious liability. Northwestern National, 337 Ill. App. 3d at 361.

Carney did not address the standards applicable in a duty-to-defend analysis, and in our view it

cannot be read as altering those standards. In an earlier decision, Wilson, 237 Ill. 2d at 459, the

supreme court held that courts may look beyond the allegations of the underlying complaint to

determine whether an insurer owes a duty to defend. If the supreme court in Carney had intended

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to reconsider Wilson, it would have said so. But Carney did not even mention Wilson.

Accordingly, we reject the argument that Carney changed the standards applicable to duty-to-

defend cases or required courts to look only to the allegations of the underlying complaint.

¶ 35 This is not to say that Carney has no relevance to a duty-to-defend analysis. Carney

clarified that, in determining whether the possibility of vicarious liability exists, a court must

consider whether the facts alleged are compatible with a level of control that could give rise to a

master-servant relationship. Carney, 2016 IL 118984, ¶ 38. However, in declaratory judgment

cases where the issue is whether an insurer owes a duty to defend, the court assesses only the

potential liability of the insured and must refrain from making any determination about actual

liability. See American Family Mutual Insurance Co. v. Savickas, 193 Ill. 2d 378, 387 (2000) (“it

is inappropriate to resolve a declaratory judgment action in such a manner as would bind the parties

in the underlying litigation on any issues therein”); Murphy v. Urso, 88 Ill. 2d 444, 456 (1981)

(same); CSR Roofing, 2015 IL App (1st) 142473, ¶ 55 (declining to address actual liability of

additional insured because doing so “may tend to determine an issue crucial to the determination

of the underlying lawsuit” and because the duty to defend requires only potential liability). Thus,

the sole issue in a suit such as this one is whether the allegations of the underlying complaint are

incompatible with the potential vicarious liability of the additional insured. See Centex Homes,

2017 IL App (1st) 153601, ¶¶ 51-56 (explaining in detail why, even after Carney, courts

considering the duty to defend should not “pars[e] the underlying complaint for allegations”

regarding the level of control by the additional insured over the employer or decide whether those

allegations rise to the level of a master-servant relationship). As we have held, here the underlying

complaint alleges facts from which a jury could find ICC liable for Phoenix’s negligence. To the

extent that Carney has any applicability here, it is not contrary to our conclusion. We therefore

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reject UF’s argument and find that ICC adequately demonstrated the two requirements for a duty

to defend.

¶ 36 D. Effect of the Settlement and Dismissal of ICC’s Contribution Claim

¶ 37 Lastly, UF argues that ICC negated any possibility of vicarious liability by filing its third-

party contribution claim against Phoenix in the underlying suit. It also argues that vicarious

liability was further rendered impossible when that contribution claim was dismissed following

the settlement between Farster and Phoenix. Essentially, UF is raising a backward-looking

argument, contending that these later events show that vicarious liability was never a real

possibility and thus it owed ICC no duty to defend.

¶ 38 This argument overlooks or ignores the fact that UF’s duty to defend its additional insured

ICC arose before any of these events occurred. An insurer’s duty to defend is triggered when it

knows of a lawsuit against its insured. See Cincinnati Companies v. West American Insurance

Co., 183 Ill. 2d 317, 329 (1998). Here, UF learned of Farster’s lawsuit against ICC no later than

the end of 2015, when it acknowledged receiving ICC’s tender of defense and indemnification. At

that point, if ICC was potentially subject to vicarious liability for Phoenix’s actions (as we have

held it was), then UF owed ICC a duty to defend. ICC did not file its third-party claim until

approximately six months after UF denied ICC’s tender of defense. “When the underlying

complaint against the insured alleged facts within or potentially within the scope of policy

coverage, the insurer taking the position that the complaint is not covered by its policy must defend

the suit under a reservation of rights or seek a declaratory judgment that there is no coverage.”

Midwest Sporting Goods Co., 215 Ill. 2d at 155. Here, however, UF did neither. It is therefore

liable for the cost of ICC’s defense.

¶ 39 III. CONCLUSION

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¶ 40 For the reasons stated, the orders entered by the circuit court of Kane County dated August

23, 2018, and September 17, 2018, are affirmed.

¶ 41 Affirmed.

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