The 7th circuit splits on the prediction of the coverage case
This is the second part of a two-part series. The first part was released on Thursday.
The 7th United States Court of Appeals was to predict whether the Illinois Supreme Court would agree with two opinions of the Court of Appeals – Pekin Insurance Co. v. Centex Homes, 2017 IL App (1st) 153601, and Pekin Insurance Co. v. Lexington Station, 2017IL App (1er) 16328 – on insurance coverage for an additional insured. With Chief Justice Diane S. Sykes dissenting, the majority opinion of Circuit Judge David F. Hamilton upheld – with a slight modification – a declaratory judgment that United Fire & Casualty Co. had a duty to defend Prate Roofing & Installations against a negligence claim filed by Carlos The Estate of Noe Perdomo Ayala.
United Fire sold a liability insurance policy to All Seasons Roofing, a subcontractor of Prate Roofing as part of a warehouse project. Prate was listed as an additional insured under the United Fire policy, but the insurance company’s duty to defend Prate was limited to bodily injury cases where Prate faced allegations of vicarious liability for them. acts or omissions of All Seasons or others acting on its behalf.
21st Century Roofing employee Perdomo Ayala was killed while working on the project when he fell through an unprotected skylight. His estate sued Prate and All Seasons.
United Fire refused to defend Prate and sued for a declaratory judgment.
The 7th Circuit was unanimous on one point – United Fire’s duty to defend Prate came to an end when it paid its $ 1 million policy limit to settle the claim against All Seasons. United Fire & Casualty Co. v. Prate Roofing, n ° 19-3043 (July 30, 2021).
Here, in the second of two articles on this case, are the highlights of Chief Justice Sykes’ dissent (with slight modifications and unrated omissions):
In order to determine whether an insurer has a duty to defend, one must compare the wording of the insurance policy with the allegations contained in the plaintiff’s complaint and consider whether there is a possibility that the insurer will be liable to indemnify the insurer. insured. My colleagues are therefore asking the right question. But where they see potential liability, I see none.
Prate Roofing cannot, in law, be held vicariously liable for offenses committed by All Seasons. The underlying complaint sets out claims against Prate only for direct liability. Nowhere does the complaint allege that an agency relationship, the cornerstone of derivative liability, existed between Prate and any other defendant.
My colleagues mistakenly rely on standard agency claims and general claims of construction negligence – that is, direct liability – to find potential for imputed liability.
To understand the court’s missteps, it’s helpful to start with the industry standards for the type of insurance policy at issue here. General contractors like Prate routinely require their subcontractors to purchase commercial liability insurance naming the general contractor as an additional insured.
Obtaining the status of complementary insured gives the general contractor increased protection by transferring the risk to the subcontractor.
Coverage for an additional insured is often quite limited – it normally only covers imputed liability or causal liability related to the actions of the subcontractor – because the general contractor has its own main commercial liability policy covering its liability. direct. Since the coverage is so limited, these endorsements usually cost little or nothing above the standard policy premium.
This case concerns one of these banal riders. Prate, a general contractor with its own CGL policy, demanded that All Seasons, its subcontractor, obtain a CGL policy and appoint Prate as an additional insured. The additional insured rider came on the industry standard form; the rider cost only $ 750, or less than 4% of the total premium; and it only covers Prate with respect to All Seasons’ liability, “which may be attributed to” Prate. In short, this inexpensive standard rider came with a clear standard limit: no liability, no coverage.
It follows that United Fire has a duty to defend Prate if and only if Prate can be vicariously liable for the conduct of All Seasons. My colleagues rightly explain that in order to answer this question one must look at the complaint in the underlying litigation. This complaint, however, must be read in light of the basic principles of tort law and attorney law.
Imputed or vicarious liability arises from a principal-agent relationship. The existence of such a relationship depends on the degree of control exercised by the employer.
Three points on the conserved control spectrum are important. If the employer hires a contractor to accomplish a particular result without retaining any control over the means used – that is, if he hires an “independent contractor” – the employer cannot be vicariously liable for the offenses of the entrepreneur.
If the employer maintains some degree of control – for example, in a supervisory capacity – it may be directly responsible for its failure to exercise that control with due diligence. In such a case, the employer is personally liable for its own negligence. It is only if the employer retains control of the operational details of the work that the responsibility of the contractor can be attributed to the employer.
This is vicarious liability without fault, and it is based on the principles of attorney law, not the law of negligence. The principal’s liability is entirely derivative.
With these benchmarks in mind, it’s easy to see why United Fire doesn’t have a duty to defend. Prate is insured under this policy against imputed liability only, but the underlying complaint alleges direct liability claims exclusively.
The complaint sets out five counts against Prate. Each includes identical factual allegations of negligent acts or omissions by Prate:[f]failed to provide adequate guarantees “,”[f]bad to warn [p]requesting unsafe conditions “,”[f]ensured that everyone present at the scene had a protective helmet ”, etc.
If these allegations seem to blame Prate, it’s because they are. Nowhere does the complaint allege that Prate, while blameless, is nonetheless responsible for the actions of its agents.
Since the Ayala Estate has not made any claims even alluding to a vicarious liability recovery theory, there is no legal or factual basis upon which United Fire could be required to indemnify. Prate. United Fire therefore has no duty of defense.
My colleagues point to three specific allegations against Prate in arguing otherwise. Two include the catch-all assertion that Prate acted “individually and through his agents,” language the court considers important. It’s not.
Under Illinois law, this kind of superficial statement is insufficient to plead an agency relationship. “A complaint invoking the agency must invoke facts which, if proven, could establish the existence of an agency relationship. It is not enough to invoke the agency’s legal conclusion. Connick v. Suzuki Motor Co., 675 NE2d 584, 592 (Illinois 1996).
Two Illinois Supreme Court cases illustrate the impact of this rule. Connick ruled that a complaint did not raise an allegation of fraud based on imputed statements because it was not sufficient to simply allege that the statements were made by “agents” of the defendant. And Carney v. Union Pacific RR Co., 77 NE3d 1, 7-8 (Ill. 2016) – a construction negligence case like this – noted that the plaintiff “ha[d] did not pursue a vicarious liability action ”, despite the complaint alleging that the defendant acted“ through and through its authorized agents and employees ”.
The inheritance claims here are also flawed. The complaint claims that Prate acted “through its agents,” but it does not include any allegations to support a conclusion that an alleged agent had authority to act on Prate’s behalf. (Indeed, the complaint here is even more lacking than that in Connick because it doesn’t even allege who the agent is.)
My colleagues read far too much in this rote language, which regularly appears in complaints against corporate defendants since companies can only act through agents.
These catch-all allegations alone do not provide a legal basis for holding Prate vicariously liable and therefore do not trigger United Fire’s duty to defend.
The other allegations identified by my colleagues do not do any better, although they are formulated in somewhat more precise terms. Prate is said to have “participated in the coordination of the work in progress and designated various working methods”; “calendar[d] work “;” had the power to stop the work “;” had a duty to exercise due diligence in the control of [the] construction site “; and”[f]failed to supervise the work.
These assertions are, of course, prudential in nature. But that doesn’t mean that they provide a basis for vicarious liability. Rather, they are common allegations of direct negligence under Sec. 414 of (Second) reprocessing of offenses.
My colleagues characterize the allegations as “straddling the line” between direct responsibility and derivative responsibility. But like the comments in Sec. 414 show, these allegations fall decisively on the side of direct responsibility.
In short, the allegations that Prate carelessly oversaw the construction site are paradigmatic claims of the Direct Sec. 414 responsibility.
As for claims that Prate could “coordinate”, “stop”, “inspect” and “schedule” work on the job site, this is not even sufficient control to impose direct liability under Sec. 414, not to mention vicarious liability.
I recognize, of course, that an Intermediate Court of Appeals in Illinois has twice held that materially identical allegations to those at issue here set forth a potential basis of vicarious liability sufficient to trigger the obligation. to defend an additional insured. See Beijing Ins. Cie c. Centex, 72 NE3d 831 (2017); Beijing Ins. Co. v Lexington Station, LLC, 84 NE3d 554 (2017). But we are forced to determine how the highest court in the state would rule, not the lower courts.
For the reasons just explained, I strongly doubt that the Illinois Supreme Court adopts the erroneous reasoning of the Beijing case.
I would set aside the judgment in favor of Prate and the remand for entry of the judgment for United Fire. So I respectfully disagree.