Illinois Constructors Corp. v. United Fire & Casualty Co. ( 2019 )

2019 IL App (2d) 180786-UNo. 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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2019 IL App (2d) 180786-U¶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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2019 IL App (2d) 180786-Uduty 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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2019 IL App (2d) 180786-Uinsurance 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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2019 IL App (2d) 180786-U462 (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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2019 IL App (2d) 180786-U¶ 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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2019 IL App (2d) 180786-Uthan 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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2019 IL App (2d) 180786-U¶ 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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2019 IL App (2d) 180786-U¶ 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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2019 IL App (2d) 180786-UAgency 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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2019 IL App (2d) 180786-Uto 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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2019 IL App (2d) 180786-Ureject 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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2019 IL App (2d) 180786-U¶ 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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