StarNet Insurance Company v. Adam Ruprecht ( 2021 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 20-1192
STARNET INSURANCE COMPANY,
Plaintiff-Appellee,
v.
ADAM RUPRECHT and DANIEL O’REILLY,
as Independent Administrator of
the Estate of PATRICK O’REILLY,
Deceased, as Assignees of DEERFIELD
CONSTRUCTION CO., INC., and
WESTFIELD INSURANCE COMPANY,
Defendants-Appellants.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:19-cv-01425 — Matthew F. Kennelly, Judge.
ARGUED DECEMBER 2, 2020 — DECIDED JUNE 28, 2021
Before EASTERBROOK, RIPPLE, and ROVNER, Circuit Judges.
2 No. 20-1192
ROVNER, Circuit Judge. StarNet Insurance Company filed
suit in diversity seeking a declaratory judgment specifying that
the terms of a workers’ compensation and employers liability
policy it issued to P.S. Demolition, Inc. obligate it to pay
nothing more for a workplace injury than the amounts that
Illinois workers’ compensation law requires P.S. Demolition to
pay its injured employees. The district court entered judgment
on the pleadings in favor of StarNet. StarNet Ins. Co. v.
Ruprecht, 2019 WL 6877599 (N.D. Ill. Dec. 17, 2019). We affirm.
Our reasoning tracks that of the district court.
I.
This insurance coverage dispute arises out of a construction
accident. Deerfield Construction Co. was the general contractor
on a project to convert a defunct Ruby Tuesday restaurant at
a Vernon Hills, Illinois shopping mall into a Maggiano’s Little
Italy restaurant. P.S. Demolition, Inc. had a subcontract with
Deerfield to demolish the façade of the restaurant. In the
demolition subcontract, P.S. Demolition agreed that it would
provide all labor, material, equipment, and other things
necessary to fulfill its obligations in a workmanlike manner,
including taking all necessary safety precautions. P.S.
Demolition also agreed to indemnify and hold Deerfield
harmless from all claims, including a claim for bodily injury
caused in whole or in part by P.S. Demolition, even if Deerfield
itself might have caused or contributed to the injury.
On December 26, 2013, P.S. Demolition employees Patrick
O’Reilly and Adam Ruprecht were engaged in demolition
work at the site when an unsecured piece of capstone fell from
the building, killing O’Reilly and injuring Ruprecht. Ruprecht
No. 20-1192 3
and O’Reilly’s estate each filed personal injury lawsuits in
Illinois state court, which were later consolidated, against
Deerfield as the general contractor and P.S. Demolition as the
subcontractor, charging them with construction negligence.
Deerfield in turn filed a counter-complaint against P.S.
Demolition which, as amended, included a claim for
contribution. See 740 Ill. Comp. Stat. § 100/2(a); Doyle v. Rhodes,
461 N.E.2d 382, 385–87 (Ill. 1984) (although workers’
compensation statute will foreclose suit against employer by
injured employee if raised as affirmative defense, third party
who shares liability for injury may nonetheless seek
contribution from employer).
The Illinois Workers’ Compensation Act sets forth a
schedule to determine compensation for specific workplace
injuries and imposes corresponding limits on an employer’s
liability for such injuries. In this case, the Act limited P.S.
Demolition’s liability to O’Reilly’s estate to the sum of
$5,993.91 and its liability to Ruprecht to the sum of $25,229.15.
By virtue of the Illinois Supreme Court’s decision in Kotecki v.
Cyclops Welding Corp., 585 N.E.2d 1023 (Ill. 1991), those same
limits would ordinarily apply when a third party to the
employment relationship like Deerfield sues an employer in
contribution for its pro rata share of common liability for a
workplace injury. This is known as the “Kotecki cap.”
An employer can enter into an agreement to waive the
Kotecki cap, however. See Virginia Sur. Co. v. Northern Ins. Co. of
N.Y., 866 N.E.2d 149, 155 (Ill. 2007) (collecting cases). The state
court held that P.S. Demolition had done just this when it
agreed to indemnify Deerfield and hold it harmless for any
injuries arising from P.S. Demolition’s work. Thus, Deerfield
4 No. 20-1192
was free to seek contribution from P.S. Demolition for the
latter’s full pro rata share of liability for the injuries to O’Reilly
and Ruprecht, notwithstanding the Kotecki cap.
After a bankruptcy court determined in a Chapter 7
proceeding that P.S. Demolition had no assets, the state court
determined in the consolidated personal injury suits that P.S.
Demolition’s liability would be limited to its available
insurance coverage.
In February 2019, as the personal injury suits were
proceeding to trial, Deerfield (along with its insurer, Westfield
Insurance Company, which we may ignore for present
purposes) settled with Ruprecht and the O’Reilly estate for a
sum substantially in excess of $75,000 plus an assignment to
them of Deerfield’s contribution claim against P.S. Demolition.
StarNet was P.S. Demolition’s employer liability insurer at
the time of the accident. In the wake of the settlement with
Deerfield, StarNet, stepping into its insured’s shoes, entered
into a stipulated settlement with Ruprecht and the O’Reilly
estate. Among other things, the parties stipulated that
(1) Ruprecht and O’Reilly were P.S. Demolition’s employees at
the time of the accident; (2) P.S. Demolition admitted liability
in the underlying action and agreed to entry of a judgment
against it in the amount of $1 million; (3) this judgment
reflected P.S. Demolition’s pro rata share of the tort liability to
Ruprecht and the O’Reilly estate; (4) StarNet reserved its
defenses to insurance coverage for the accident that injured
Ruprecht and O’Reilly; and (5) in the event that Ruprecht and
the O’Reilly estate prevailed against StarNet in a declaratory
No. 20-1192 5
judgment action as to coverage for the accident, StarNet would
pay them a total of $1 million.
Ruprecht and the O’Reilly estate proceeded to dismiss their
negligence claims against P.S. Demolition. This resolved the
underlying personal injury suits.
Part Two of the workers’ compensation and employers
liability policy that StarNet issued to P.S. Demolition provides
that StarNet will pay all sums that P.S. Demolition is legally
obligated to pay because of bodily injury suffered by its
employees. Those sums include damages for which P.S.
Demolition is liable to a third party to indemnify that party for
any damages that the third party is required to pay as a result
of an injury to P.S. Demolition’s employee. At first blush, then,
the StarNet policy potentially would cover the damages that
P.S. Demolition owes directly to its injured employee as well
as any amounts for which it is liable in contribution or
indemnification to a third party (like Deerfield) based on the
same injuries.
However, the StarNet policy also contains an exclusion
which, as modified by an endorsement, provides that:
This Insurance does not cover
1.liability assumed under a contract, including any
agreement to waive your right to limit your liability
for contribution to the amount of benefits payable
under the Workers Compensation Act and the
6 No. 20-1192
Workers Occupational Disease Act. This exclusion
does not apply to a warranty that your work will be
done in a workmanlike manner.
R. 6-1 at 21.
As anticipated by the stipulation between StarNet and
Ruprecht and the O’Reilly estate, StarNet filed this action
seeking a declaratory judgment to the effect that it owes P.S.
Demolition no coverage vis-à-vis the injuries to O’Reilly and
Ruprecht beyond the modest amounts specified by the Illinois
Workers’ Compensation Act and the Kotecki cap. StarNet relies
on the language of the exclusion quoted above regarding an
“agreement to waive your right to limit your liability for
contribution to the amount of benefits payable under the
Workers Compensation Act.” Here, P.S. Demolition in its
demolition subcontract with Deerfield agreed to indemnify
and hold harmless Deerfield for any damages arising from an
injury to P.S. Demolition’s employees, thereby waiving the
Kotecki cap. That is what opened the door for Deerfield to seek
contribution from P.S. Demolition for its full pro rata share of
responsibility for the injuries to O’Reilly and Ruprecht. But
that contractual agreement to waive the Kotecki cap, in
StarNet’s view, triggers the exclusionary language of the
policy. The O’Reilly estate and Ruprecht, on the other hand,
rely on the exception to the exclusion for “a warranty that your
work will be done in a workmanlike manner.” They argue that
P.S. Demolition’s alleged liability in the underlying personal
injury action arose in relevant part from P.S. Demolition’s
failure to conduct the demolition in a workmanlike manner.
Thus, as they see it, the exception applies and StarNet is
obligated to pay any amount over the Kotecki cap that Deerfield
No. 20-1192 7
could recover on its contribution claim against P.S.
Demolition—which claim has been assigned, of course, to
O’Reilly’s estate and to Ruprecht.
The district court granted judgment on the pleadings to
StarNet, agreeing that P.S. Demolition’s liability in contribution
to Deerfield was specifically excluded from the coverage of the
StarNet policy. Among other things, the court noted that
Deerfield had reserved a breach of warranty claim against P.S.
Demolition based on P.S. Demolition’s alleged failure to
conduct its demolition activities in a workmanlike manner.
That breach of warranty claim, in other words, was not
assigned to the O’Reilly estate and Ruprecht, and so they could
not rely on a breach of warranty to trigger the exception
language in the policy exclusion. StarNet, 2019 WL 6877599, at
*4.
II.
We review the district court’s decision granting judgment
on the pleadings to StarNet de novo. E.g., Scottsdale Ins. Co. v.
Columbia Ins. Grp., Inc., 972 F.3d 915, 917 (7th Cir. 2020).
As set forth above, P.S. Demolition’s liability for workplace
injuries to its employees was limited, in the first instance, to the
amounts specified by the Illinois Workers‘ Compensation Act.
By virtue of Kotecki, that limitation included amounts sought
in contribution by third parties to the employment
relationship, including Deerfield. But by agreeing to fully
indemnify and hold harmless Deerfield for any amounts that
Deerfield might be required to pay as a result of injuries to P.S.
Demolition’s employees, P.S. Demolition waived the Kotecki
cap. So there was no limit on Deerfield’s ability to seek
8 No. 20-1192
contribution from P.S. Demolition for the injuries to O’Reilly
and Ruprecht, and by virtue of the settlement with Deerfield
and the assignment of the contribution claim to O’Reilly’s
estate and Ruprecht, they now stand in Deerfield’s shoes as
against P.S. Demolition.
However, because P.S. Demolition lacks any assets, the
O’Reilly estate and Ruprecht can look only to StarNet as P.S.
Demolition’s insurer for compensation. And the express terms
of the StarNet policy exclude from coverage “liability assumed
under a contract, including any agreement to waive your right
to limit your liability for contribution to the amount of benefits
payable under the Workers Compensation Act.” Although the
underlying personal injury suit was one in tort, not contract,
P.S. Demolition’s liability in that suit—whether to O’Reilly’s
estate and Ruprecht or to Deerfield—was limited by the terms
of the Workers’ Compensation Act and the Kotecki cap.
Anything above the Kotecki cap is recoverable solely as a result
of P.S. Demolition’s agreement with Deerfield, which waived
the Kotecki cap. Consequently, liability on Deerfield’s
contribution claim against P.S. Demolition, which is what the
O’Reilly estate and Ruprecht are pursuing now, is liability that
P.S. Demolition assumed by contract. (Otherwise, it could have
claimed the protection of the Kotecki cap.) And the policy
expressly excludes such assumed liability.
The parties’ dispute is one focused on the exception to this
exclusion for a warranty that P.S. Demolition’s work would be
done in a workmanlike manner. This exception makes clear
that although, as a general matter, “liability assumed under a
contract” is excluded from the coverage of the employers
liability policy, liability for breach of the employer’s
No. 20-1192 9
contractual promise to complete its work in a workmanlike
fashion is not excluded. Western Cas. & Sur. Co. v. Brochu, 475
N.E.2d 872, 877–78 (Ill. 1985). Under Illinois law, when one
contracts to perform construction work, he impliedly warrants
that he will do the work in a reasonably workmanlike manner.
See Economy Fuse & Mfg. Co. v. Raymond Concrete Pile Co., 111
F.2d 875, 878–79 (7th Cir. 1940) (Illinois law); Springdale
Cemetery Ass’n v. Smith, 32 Ill. 252, 259 (1863); Pyramid Dev.,
LLC v. Dukane Precast, Inc., 40 N.E.3d 1185, 1194 (Ill. App. Ct.
2014); Meyers v. Woods, 871 N.E.2d 160, 170–71 (Ill. App. Ct.
2007); Vicorp Restaurants v. Corinco Insulating Co., 584 N.E.2d
229, 234 (Ill. App. Ct. 1991) (collecting cases). “‘Workmanlike’
means ‘worthy of a good workman,’ ‘well performed’ or
‘skillful.’” Riverfront Lofts Condominium Owners Ass’n v.
Milwaukee/Riverfront Properties Ltd. Partnership, 236 F. Supp. 2d
918, 930 (E.D. Wis. 2002) (quoting WEBSTER’S THIRD NEW INT’L
DICTIONARY 2635 (3d ed. 1986)). Put another way, it signifies “a
proper, safe, and non-negligent way of doing something. It
describes an ordinary standard of care, the breach of which
standard is equivalent to negligence.” Sheldon Livestock Co. v.
Western Engine Co., 301 N.E.2d 485, 488 (Ill. App. Ct. 1973)
(citing Italia Soc. per Azioni di Nav. v. Oregon Stevedoring Co., 310
F.2d 481, 484 (9th Cir. 1962), j. rev’d, 376 U.S. 315, 84 S. Ct. 748(1964)); see also Riverfront Lofts, 236 F. Supp. 2d at 930 (noting
that warranty of good workmanship is a warranty not to act
negligently); Rozny v. Marnul, 250 N.E.2d 656, 660–62 (Ill. 1969)
(performance of private contract can give rise to duties in tort).
The O’Reilly estate and Ruprecht argue that the personal injury
suits they filed against Deerfield, for which Deerfield in turn
sought contribution from P.S. Demolition as its subcontractor,
10 No. 20-1192
are actions that essentially turn on P.S. Demolition’s breach of
this warranty.
But as Deerfield’s assignees, the claim that the O’Reilly
estate and Ruprecht are pursuing against P.D. Demolition is
one for contribution based on P.S. Demolition’s pro rata share
of liability in tort for the accident. See 740 Ill. Comp. Stat.
§ 100/22(a) (recognizing that a claim for contribution arises
when “2 or more persons are subject to liability in tort arising
out of the same injury to person or property, or the same
wrongful death”); Vroegh v. J&M Forklift, 651 N.E.2d 121, 125
(Ill. 1995); Peters v. Riggs, 32 N.E.3d 49, 69 (Ill. App. Ct. 2015).
The warranty of reasonable workmanship is a contractual
promise, and a claim for breach of that warranty is a claim
sounding not in tort but in contract, as the cases discussing the
warranty uniformly recognize. See Springdale Cemetery Ass’n, 32
Ill. at 259; Pyramid Dev., 40 N.E.3d at 1194; Meyers, 871 N.E.2d
at 170–71; Vicorp Restaurants, 584 N.E.2d at 234; Sheldon
Livestock Co., 301 N.E.2d at 488.
We understand the O’Reilly estate and Ruprecht to argue
nonetheless that the underlying tort action for their injuries
required them to prove that P.S. Demolition conducted its
demolition operations in an unworkmanlike manner and that
was why the injuries occurred. They view proof of the breach
of P.S. Demolition’s reasonable workmanship warranty as
essential to their tort claim. To that end, they have produced
affidavits from experts (whose testimony they were prepared
to present at trial in the state court actions) positing that P.S.
Demolition failed to observe appropriate safety procedures at
the demolition worksite and in this way breached the warranty
of reasonable workmanship and proximately caused the
No. 20-1192 11
injuries to O’Reilly and Ruprecht. This, they reason, triggers
the policy exception for the warranty that work would be
completed in a workmanlike manner.
We may readily assume that proof of P.S. Demolition’s
failure to conduct its demolition activities in a workmanlike
manner—including in particular its failure to observe
applicable safety standards—would have a bearing on a claim
for construction negligence, which is what the O’Reilly estate
and Ruprecht were asserting against both Deerfield and P.S.
Demolition. To that extent, there might be some degree of
overlap between the underlying negligence claims and a claim
for breach of the reasonable workmanship warranty. See
Sheldon Livestock Co., 301 N.E.2d at 488 (noting that “the duty
under either theory is the same”); Essex v. Ryan, 446 N.E.2d
368, 370–71 (one who contracts to perform services may
commit both breach of contract and tort of negligence when he
negligently fails to perform in workmanlike manner).
But, again, the underlying action pursuant to which
Deerfield (and now Ruprecht and the O’Reilly estate) have
sought contribution from P.S. Demolition is a tort action for
negligence. Whatever relevance to, or overlap with, the breach
of P.S. Demolition’s warranty of reasonable workmanship
conceivably might have to that claim, the underlying claim
remains one for the tort of negligence, not breach of warranty.
See Sheldon Livestock Co., 301 N.E.2d at 488 (rejecting as
“improper” the premise that because a common duty of care
underlies both contract and negligence claims, the theory of
recovery is identical). The negligence and breach of warranty
claims have different legal underpinnings and distinct
elements of proof. And the warranty of reasonable
12 No. 20-1192
workmanship was one that P.S. Demolition owed to Deerfield,
not to O’Reilly and Ruprecht.
Although there is some question whether Deerfield has in
fact pursued a claim for breach of this warranty against P.S.
Demolition in state court, there is no dispute that the one and
only claim it assigned to Ruprecht and the O’Reilly estate was
one for contribution, not breach of warranty. See R. 28-1 Ex. D
at 4–5 ¶ 4. So the estate and Ruprecht have no ability to invoke
the warranty exception here.
The estate and Ruprecht have suggested on appeal that the
warranty exception in the policy gives rise to an ambiguity as
to just how far the exclusion for liability assumed by contract
extends. But this is not an argument that they pursued below.
We agree with StarNet that any such argument was waived.*
III.
For these and the other reasons set forth in the district
court’s opinion, we AFFIRM the judgment.
*
Because we conclude that the plain policy language forecloses coverage
on the contribution claim, we need not reach StarNet’s explanation as to
why the warranty language was included as an exception to the exclusion.