Vivify Construction, LLC v. Nautilus Insurance Co. , 2018 IL App (1st) 170192 ( 2018 )

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Appellate Court Date: 2018.03.26
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Vivify Construction, LLC v. Nautilus Insurance Co., 2017 IL App (1st) 170192Appellate Court VIVIFY CONSTRUCTION, LLC, Plaintiff and Counterdefendant-
Caption Appellant, v. NAUTILUS INSURANCE CO., Defendant and
Counterplaintiff-Appellee.
District & No. First District, Third Division
Docket No. 1-17-0192
Rule 23 order filed December 20, 2017
Motion to publish
allowed January 24, 2018
Opinion filed January 24, 2018
Decision Under Appeal from the Circuit Court of Cook County, No. 2016-CH-05650;
Review the Hon. Kathleen M. Pantle, Judge, presiding.
Judgment Affirmed.
Counsel on Jeffrey A. Siderius and Nicholas S. Graber, of Cray Huber Horstman
Appeal Heil & VanAusdal LLC, of Chicago, for appellant.
Joshua G. Vincent, Dana A. Rice, and Adam P. Joffe, of Hinshaw &
Culbertson LLP, of Chicago, for appellee.
Panel JUSTICE LAVIN delivered the judgment of the court, with opinion.
Justices Fitzgerald Smith and Howse concurred in the judgment and
opinion.
OPINION
¶1 This appeal arises from the trial court’s order entered against Vivify Construction, LLC
(Vivify), and in favor of Nautilus Insurance Co. (Nautilus) with respect to the parties’
cross-motions for judgment on the pleadings. The court found Nautilus had no duty to defend
Vivify in the underlying action filed by an employee of its subcontractor, Victoria Metal
Processor, Inc. (Victoria), which had procured insurance coverage with Nautilus on Vivify’s
behalf. Specifically, the court found that the Nautilus policy excluded bodily injury to
Victoria’s employees. On appeal, Vivify asserts that the trial court failed to give effect to the
insurance policy’s separation of insureds provision and failed to consider the subcontract
between Vivify and Victoria in interpreting the policy. We affirm the trial court’s judgment.
¶2 I. Background
¶3 On May 18, 2015, construction worker Pablo Vieyra sustained injuries when he fell from
a second story scaffold. Although he was employed by Victoria, Vivify was the general
contractor in charge of the construction project. Vieyra filed a negligence action solely
against Vivify, alleging that it failed to properly supervise work at the job site (case No. 2015
L 6001). In turn, Vivify filed a third-party complaint against Victoria in that action, alleging
that Victoria’s negligence led to Vieyra’s injury.
¶4 Vivify and Victoria had executed a written agreement the year before (subcontract). The
subcontract required Victoria to indemnify Vivify against claims of bodily injury resulting
from Victoria’s work under the subcontract. Additionally, the subcontract required Victoria
to procure insurance on Vivify’s behalf:
“[Victoria] shall cause the commercial liability coverage required by the Subcontract
Documents to include: (1) [Vivify] *** as [an] additional insured[ ] for claims caused
in whole or in part by [Victoria’s] negligent acts or omissions during [Victoria’s]
operations; and (2) [Vivify] as an additional insured for claims caused in whole or in
part by [Victoria’s] negligent acts or omissions during [Victoria’s] completed
operations.”
To that end, Victoria added Vivify as an insured under Victoria’s commercial general
liability policy with Nautilus.
¶5 Under the policy, an “additional insured” included the following:
“any person or organization when [Victoria] and such person or organization have
agreed in writing in a contract *** that such person or organization be added as an
additional insured on [Victoria’s] policy. Such *** organization is an additional
insured only with respect to liability for ‘bodily injury’ *** caused, in whole or part,
by your acts or omissions, or the acts or omissions of those acting on your behalf:
1. In performing ongoing operations for the additional insured:
***
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But only for:
1. The limits of insurance specified in such written contract or agreement, but in
no event for limits of insurance in excess of the applicable limits of insurance of this
policy; and
2. ‘Occurrences’ or coverages not otherwise excluded in the policy to which this
endorsement applies.” (Emphasis added.)
¶6 The policy addressed coverage for bodily injury:
“We will pay those sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to which this insurance
applies. We will have the right and duty to defend the insured against any ‘suit’
seeking those damages. However, we will have no duty to defend the insured against
any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this
insurance does not apply.”
Furthermore, the body of the policy originally excluded coverage for certain bodily injury to
“[a]n ‘employee’ of the insured,” but that exclusion was replaced by an endorsement
(employee exclusion) titled “Exclusion-Injury to Employees, Contractors, Volunteers and
Other Workers.” The top of the endorsement warned, “THIS ENDORSEMENT CHANGES
THE POLICY. PLEASE READ IT CAREFULLY.”
¶7 The employee exclusion stated as follows:
“This insurance does not apply to:
***
e. Injury to Employees, Contractors, Volunteers and Other Workers
‘Bodily injury’ to
(1) ‘Employees’, ‘leased workers’, ‘temporary workers’, ‘volunteer workers’,
statutory ‘employees’, casual workers, seasonal workers, contractors,
subcontractors, or independent contractors of any insured; or
(2) Any insured’s contractors’, subcontractors’, or independent contractors’
‘employees’, ‘leased workers’, ‘temporary workers’ ‘volunteer workers’, statutory
‘employees’, casual workers, seasonal workers, contractors, subcontractors or
independent contractors
arising out of and in the course of:
(a) Employment by any insured; or
(b) Directly or indirectly performing duties related to the conduct of any
insured’s business; ***
This exclusion applies:
(1) Regardless of where the:
(a) Services are performed; or
(b) ‘Bodily injury’ occurs; and
(2) Whether any insured may be liable as an employer or in any other
capacity; and
(3) To any obligation to share damages with or repay someone else who must
pay damages because of the injury.” (Emphases added.)
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The foot of the endorsement states, “All other terms and conditions of this policy remain
unchanged.”
¶8 The policy’s other terms included a separation of insureds provision:
“Except with respect to the Limits of Insurance and any rights or duties
specifically assigned in this Coverage Part to the first Named Insured, this insurance
applies
a. As if each Named Insured were the only Named Insured; and
b. Separately to each insured against whom claim is made or ‘suit’ is
brought.”
¶9 This Action
¶ 10 Vivify tendered its defense of Vieyra’s action to Nautilus, which declined to defend
Vivify. Nautilus took the position that the employee exclusion applied to Vieyra’s action
because Vieyra was an employee of Victoria. As a result, Vivify filed this action seeking a
declaration that Nautilus had a duty to defend it against the Vieyra action (case no. 16 CH
05650). Nautilus then filed a counterclaim seeking a declaration that it did not have a duty to
defend Vivify.
¶ 11 The parties filed cross-motions for judgment on the pleadings (735 ILCS 5/2-615 (West
2016)). Nautilus argued that the employee exclusion precluded coverage for bodily injuries
to employees of “any insured.” Because Vieyra was the employee of Victoria, an insured, the
policy did not provide a defense to Vivify, notwithstanding that Vieyra was not Vivify’s
employee. Nautilus argued the broad language of the exclusion showed that the separation of
insureds provision was not intended to provide coverage in this instance. In contrast, Vivify
maintained that the separation of insureds provision required that Vieyra’s status as an
employee of Victoria not preclude coverage of Vivify.
¶ 12 The trial court entered judgment in favor of Nautilus, finding no duty to defend due to the
employee exclusion. The court found that while the first subsection of the employee
exclusion did not apply because Vieyra was not an employee of Vivify, the second
subsection of the employer exclusion was significantly broader, excluding bodily injury to
the employees of an insured entity’s subcontractors. Giving the language its plain and
ordinary meaning, the court found that claims for bodily injuries to employees of Vivify’s
subcontractors, including Victoria, were excluded. Because Vieyra was Victoria’s employee,
Nautilus was not required to defend Vivify. In reaching this determination, the court found
the separation of insureds provision did not change the result. Vivify now appeals.
¶ 13 II. ANALYSIS
¶ 14 On appeal, Vivify asserts that the trial court erroneously entered judgment on the
pleadings in favor of Nautilus. Vivify contends that the court misinterpreted the insurance
policy by failing to give effect to the separation of insureds provision and by failing to
consider the subcontract between Victoria and Vivify.
¶ 15 A motion under section 2-615 of the Code of Civil Procedure tests the pleadings’
sufficiency by requiring the court to determine whether a complaint entitles the claimant to
relief. Pekin Insurance Co. v. Allstate Insurance Co., 329 Ill. App. 3d 46, 49 (2002). The
court must determine whether the pleadings present a factual issue or whether the dispute can
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be resolved as a legal matter. Id. We review judgments on the pleadings de novo. Mount
Vernon Fire Insurance Co. v. Heaven’s Little Hands Day Care, 343 Ill. App. 3d 309, 314
(2003).
¶ 16 An insurer’s duty to defend an insured is broader than the duty to indemnify. Pekin
Insurance Co. v. Wilson, 237 Ill. 2d 446, 456 (2010). An insured has the initial burden of
demonstrating that a claim falls within an insurance policy’s coverage; once satisfied, the
burden shifts to the insurer, which must prove that a limitation applies. Addison Insurance
Co. v. Fay, 232 Ill. 2d 446, 453-54 (2009). More specifically, an insurer has the burden of
demonstrating that an exclusion precludes the insurer’s duty to defend. Phusion Projects, Inc.
v. Selective Insurance Co. of South Carolina, 2015 IL App (1st) 150172, ¶ 46. To satisfy that
burden, it must be free and clear from doubt that the policy’s exclusion precludes coverage.
Pekin Insurance Co. v. Equilon Enterprises LLC, 2012 IL App (1st) 111529, ¶ 14.
¶ 17 An insurer cannot justifiably refuse to defend an action against its insured unless the face
of the underlying complaint clearly shows that the allegations therein fail to bring the case
potentially within the policy’s coverage. General Agents Insurance Co. of America, Inc. v.
Midwest Sporting Goods Co., 215 Ill. 2d 146, 154 (2005). Where the underlying complaint
against an insured raises several theories, only one of which is potentially within the policy’s
coverage, the insurer nonetheless has the duty to defend. Id. at 155. Furthermore, a court can,
under certain circumstances, look beyond the underlying complaint. Wilson, 237 Ill. 2d at
459. Specifically, a court can examine the other pleadings in the underlying case (id. at 460)
and the contract that led one party to procure insurance for another (Equilon Enterprises LLC,
2012 IL App (1st) 111529, ¶¶ 27-28). Before we can determine whether the circumstances of
the underlying case potentially bring it within the policy’s coverage, we must interpret the
policy to determine what coverage it provides.
¶ 18 A court’s primary objective in construing an insurance policy is to ascertain and enforce
the parties’ intentions as expressed in the policy. Mount Vernon Fire Insurance Co., 343 Ill.
App. 3d at 314. We must give a policy’s words their plain, ordinary meaning where
reasonable and apply those provisions as written, binding the parties to the agreement they
made. Western Casualty & Surety Co. v. Brochu, 105 Ill. 2d 486, 495 (1985). Additionally,
courts construe an insurance policy as a whole, considering the type of insurance at hand, the
risks involved, the subject insured and the entire contract’s purpose. Mount Vernon Fire
Insurance Co., 343 Ill. App. 3d at 314.
¶ 19 Where an ambiguity exists, courts strictly construe the policy against the insurer that
drafted it and liberally construe it in favor of the insured. Pekin Insurance Co. v. CSR Roofing
Contractors, Inc., 2015 IL App (1st) 142473, ¶ 26. Ambiguous policies are construed in this
manner because little bargaining, if any, is involved in insurance contracting and the insurer
controls the drafting process. Equilon Enterprises LLC, 2012 IL App (1st) 111529, ¶ 19.
“This rule of construction, however, does not justify construing a contract against an insurer
when no real ambiguity exists.” Western Casualty & Surety Co., 105 Ill. 2d at 495.
¶ 20 We reject Vivify’s suggestion that interpreting an unambiguous insurance policy permits
a court to consider evidence outside the policy. It is well settled that courts cannot consider
parol evidence to interpret a facially unambiguous policy. Lee v. Allstate Life Insurance Co.,
361 Ill. App. 3d 970, 979 (2005); Bonnie Owen Realty, Inc. v. Cincinnati Insurance Co., 283
Ill. App. 3d 812, 820 (1996). While our supreme court in Wilson considered pleadings
pertaining to the underlying action in deciding whether the duty to defend was triggered, we
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are not persuaded that Wilson permits using underlying pleadings and subcontracts to
interpret facially unambiguous insurance policies. Wilson, 237 Ill. 2d at 466 (“Having
promised such coverage to Wilson, Pekin cannot now choose to ignore pleadings *** that
indicate a duty to defend under the self-defense exception.” (Internal quotation marks
omitted.)). Vivify fails to comprehend that interpreting the scope of policy coverage presents
a separate issue from whether the circumstances of an underlying action fall within the scope
of that policy. Cf. Pekin Insurance Co. v. AAA-1 Masonry & Tuckpointing, Inc., 2017 IL App
(1st) 160200, ¶ 28 (finding that to determine whether an underlying case triggered coverage,
the reviewing court was required to consider facts outside the pleadings so that the insurer
could not construct a formal fortress out of the underlying complaint and ignore unpleaded
facts within the insurer’s knowledge); CSR Roofing Contractors, Inc., 2015 IL App (1st)
142473, ¶ 48 (finding after interpreting the policy that the court could consider the
subcontract to assess whether the insurer had a duty to defend); Illinois Emcasco Insurance
Co. v. Waukegan Steel Sales, Inc., 2013 IL App (1st) 120735, ¶¶ 24-25 (considering the
underlying contract in determining whether the named insured could potentially be liable for
the accident, thereby triggering coverage); Equilon Enterprises LLC, 2012 IL App (1st)
111529, ¶¶ 27-28 (finding that the court must consider the agreement that led to the
procurement of insurance to determine whether an underlying case triggers a duty to defend);
Fidelity & Casualty Co. of New York v. Envirodyne Engineers, Inc., 122 Ill. App. 3d 301, 304
(1983) (finding an insurer may offer evidence outside of the complaint to prove that the
insured’s conduct fell outside of the policy).
¶ 21 We acknowledge that the appellate court’s language has at times suggested that courts
can consider parol evidence when interpreting an insurance policy. In Pekin Insurance Co. v.
Pulte Home Corp., 404 Ill. App. 3d 336 (2010), the court stated that “in order to construe the
parties’ intent in the instant case, we must look to the language of the subcontract agreement
between Pulte Homes and Kunde Construction, as well as the insurance policy issued by
Pekin to Kunde Construction.” Id. at 343.
¶ 22 As the appellate court’s subsequent decision in CSR Roofing Contractors, Inc., found,
however, Pulte made the aforementioned statement while determining whether the insurer
owed a duty under the circumstances presented, despite referring to the interpretation of the
insurance policy. See CSR Roofing Contractors, Inc., 2015 IL App (1st) 142473, ¶ 29. The
reviewing court stated, “it does not follow, however, that we may find ambiguity in an
insurance policy whenever the policyholder is party to another agreement, i.e., a subcontract,
that requires more coverage than the scope defined by the policy’s clear and unambiguous
language.” Id.¶ 23 Similar to Pulte, Equilon discussed contract construction and stated that “a circuit court
ought not ignore the agreements that serve to drive the named insured to purchase the
liability policy naming the other party as an additional insured, in assessing the risk
undertaken and the subject matter and purpose of the insurance contract.” Equilon
Enterprises LLC, 2012 IL App (1st) 111529, ¶ 28. The reviewing court in Equilon also
stated, “It seems likely that the contract that compels a named insured to add other parties to
its liability policy will inform the circuit court’s decision on the nature of the coverage the
purchased policy was meant to provide to the additional insured.” Id. ¶ 29.
¶ 24 As with Pulte, the reviewing court in CSR Roofing Contractors, Inc., found Equilon made
the aforementioned statements in the context of deciding whether the insurer owed the
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insured a duty to defend, not in interpreting the scope of the contract. CSR Roofing
Contractors, Inc., 2015 IL App (1st) 142473, ¶¶ 30-31. The reviewing court then stated, “[t]o
the extent that [the comments] could be read to support the argument that a subcontract
agreement can render otherwise clear and unambiguous language in an insurance policy
ambiguous, we flatly reject that proposition.” Id. ¶ 31. We find CSR Roofing Contractors,
Inc., to be well reasoned.
¶ 25 Absent any supreme court authority that clearly alters well-settled rules of contract
interpretation, we decline to consider parol evidence in interpreting an otherwise
unambiguous insurance policy. We further observe that Vivify has not explained how the
subcontract has any bearing on Nautilus’s intent in entering into the insurance policy, as
Nautilus was not a party to the subcontract. Whether Vivify may or may not have potential
recourse against Victoria for failing to procure the requisite insurance constitutes a separate
legal matter that is not before us. Moreover, it involves a party that is not before us:
Victoria.1
¶ 26 Having considered the Nautilus policy in its entirety, we agree with the trial court’s
determination that the policy excludes a duty to defend Vivify in the underlying action. The
employee exclusion’s second subsection precludes coverage for claims of bodily injury
sustained by “[a]ny insured’s contractors’, subcontractors’, or independent contractors’
‘employees.’ ” Thus, the second subsection of the employee agreement unambiguously
precludes coverage where an insured is sued for bodily injury sustained by the employee of
one of its contractors or subcontractors, regardless of whether the latter entity is an insured or
not.2 Victoria has offered, and we find, no alternative meaning or purpose for such language.
We decline to interpret this exclusion in a manner that would render it meaningless.
Furthermore, our interpretation does not render the separation of insureds provision
meaningless, as that provision must still be applied to the policy’s other exclusions.
¶ 27 We recognize that defendant relies on several cases finding a separation of insureds
provision, otherwise called a severability clause, precluded application of a coverage
exclusion. See United States Fidelity & Guaranty Co. v. Globe Indemnity Co., 60 Ill. 2d 295,
297-99 (1975) (finding the policy required the insurer to defend one insured against an action
by the other insured’s employee where the policy excluded “bodily injury to any employee of
the insured arising out of and in the course of his employment by the insured” but included a
severability clause (internal quotation marks omitted)); Cook v. Country Mutual Insurance
Co., 126 Ill. App. 3d 446, 446-47 (1984) (reaching a similar result ); see also Willett Truck
Leasing Co. v. Liberty Mutual Insurance Co., 88 Ill. App. 3d 133, 135-38 (1980) (finding that
even in the absence of a severability clause, an exclusion for “bodily injury to any employee
1
Vivify misrepresents the import of Pekin Insurance Co. v. Lexington Station, LLC, 2017 IL App
(1st) 163284. That case did not reject an insurer’s attempt to disregard a construction contract in
determining insurance coverage; rather, the case rejected an insurer’s attempt to treat the construction
contract as dispositive. Id. ¶ 35. Furthermore, we disregard Vivify’s reliance on cases addressing
whether an insurer satisfied a duty to defend, rather than whether an insurance policy created a duty to
defend. See Cincinnati Cos. v. West American Insurance Co., 183 Ill. 2d 317 (1998).
2
We note that an unreported federal decision has agreed with Nautilus that an identical exclusion
unambiguously barred coverage “for work-related injuries of an insured’s or subcontractor’s
employees or workers.” Certain Underwriters at Lloyd’s London v. G&P Boston Properties LLC, No.
13-12796-GAO, 2015 WL 1243398, at *2 (D. Mass. Mar. 18, 2015).
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of the insured arising out of and in the course of his employment by the insured” did not
permit an insurer to deny one insured coverage where that insured was sued by the employee
of another insured (internal quotation marks omitted)). Yet, none of those cases involved
policies containing the broad exclusionary language at issue here.
¶ 28 Having interpreted the policy, we now apply it to the circumstances before us. Vivify is
an insured under the policy. Victoria is Vivify’s subcontractor, and Vieyra is Victoria’s
employee. Thus, Vivify, the insured, is seeking coverage for bodily injury sustained by the
employee of one of its subcontractors. The exclusion clearly applies, and neither Vieyra’s
complaint, Vivify’s third-party complaint, nor the subcontract could alter these essential
underlying circumstances to potentially bring the underlying action within the policy’s
coverage. To be clear, Victoria’s status as Vivify’s subcontractor dictates this result, not
Victoria’s status as an insured. We would reach the same result if Victoria were not an
insured under the policy whatsoever. See also Nautilus Insurance Co. v. K. Smith Builders,
Ltd., 725 F. Supp. 2d 1219, (D. Haw. 2010) (finding under a similarly broad exclusion that
there was no duty to defend, notwithstanding a separation of insureds provision). We observe
that while Vivify contends it is unlikely that Victoria will be able to pay Vivify’s legal
expenses and any judgment against it, Vivify could have protected itself by reading the
policy to ensure that it satisfied the subcontract. We cannot rewrite an insurance policy to suit
Vivify’s needs.
¶ 29 III. CONCLUSION
¶ 30 Vieyra was the employee of Vivify’s subcontractor, Victoria. Accordingly, the broad
employee exclusion applied, negating any duty of Nautilus to defend Vivify in the underlying
action.
¶ 31 For the foregoing reasons, we affirm the trial court’s judgment.
¶ 32 Affirmed.
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