Conflict Between Breadth of CGL AI Coverage And Subcontract Requiring it Doesn’t Create Policy Ambiguity

An intermediate Illinois state appellate court has rejected an additional insured’s argument that contradictions between a building subcontract and a CGL policy additional insured endorsement gave rise to ambiguity in the policy, but the insurer must defend the additional insured if it could potentially be found liable within the coverage terms of the endorsement. The case, filed September 21, 2015, is Pekin Insurance Co. v. CSR Roofing Contractors, Inc., 2015 IL App. (1st) 142473; 2015 IL App. LEXIS 715.

The facts were that roofing general contractor CSR subcontracted certain work on a project to Zamastil, and one Jordan Lake, an employee of Zamastil, was injured on the job when he fell off of a roof at the work site. The subcontract between CSR and Zamastil required Zamastil to procure a commercial liability insurance policy that named CSR as an additional insured. The subcontract specified that CSR’s coverage must not be limited to vicarious liability. Pekin issued a CGL policy to Zamastil with an additional insured endorsement in favor of CSR, but contradicting the subcontract by limiting CSR’s coverage to vicarious liability imputed from Zamastil to CSR. An exclusion under the CGL policy underscored the vicarious liability limitation of CSR’s coverage.

Lake and his wife sued CSR for bodily injury with allegations of active negligence by CSR itself, which was charged with directing Lake to move shingles from one roof to another, but required him to place shingles upon the wrong building. As Lake moved the shingles with a wheelbarrow, it got stuck and jammed on part of the roof, causing him to fall off of the roof onto the ground and concrete below.

CSR tendered its defense in the Lake lawsuit to Pekin, the insurer, and Pekin denied the tender and filed a declaratory judgment action asking the court to rule that Pekin had no duty to defend CSR as an additional insured. CSR then filed an amended counter-claim attaching a copy of the subcontract. CSR and Pekin filed cross-motions for judgment on the pleadings. The trial court granted Pekin’s motion and denied CSR’s motion.

On appeal, CSR contended that the subcontract’s terms must be considered in addressing the duty to defend under the Pekin policy additional insured endorsement. Specifically, CSR maintained that the court must consider both the policy language and the language of the subcontract in determining whether Pekin’s policy was ambiguous. CSR cited two previous decisions of the Illinois Appellate Court for this proposition. The Appellate Court held that nothing in those decisions would support what CSR was asking the Appellate Court to do here: Use a subcontract agreement requiring an additional insured endorsement to create an ambiguity in an insurance contract that is otherwise clear and not ambiguous. In other words, “it does not follow that [the court] may find ambiguity in an insurance policy whenever the policyholder is party to another agreement, [here] a subcontract, that requires more coverage than the scope defined by the policy’s clear and unambiguous language.”

CSR alternatively argued that Pekin expressly incorporated the subcontract into the CGL policy by making reference in the additional insured endorsement to a “written contract.”

This argument was rejected by the appellate court, which stated that in order to incorporate another document in the policy by reference, the reference must disclose the parties’ intention to incorporate the document and make it part of the contract, here the CGL policy. In this case, the court noted, the CGL policy extends additional insured coverage to any person or organization for whom the named insured is performing operations under a written contract that requires the insured to add that person or organization as an additional insured under the policy. Nowhere in the CGL policy, the court observed, does Pekin refer specifically to the subcontract between CSR and Zamastil, and the mere reference to a written contract “in the generic, should not be construed as a willingness by the insurer to incorporate, or acquiesce to, terms of a separate agreement — such as the [subcontract here], that were not negotiated and agreed to by the insurer and its insured(s), particularly if the terms contradict or alter the scope of coverage under the policy.”

That did not end the matter, however. CSR contended that Pekin owed it a defense even if CSR’s coverage was limited to vicarious liability. A duty to defend CSR under the additional insured endorsement would be triggered if CSR could potentially be found vicariously liable for amounts stemming from Lake’s injuries. The potential for that to happen, the court said, was based initially upon the allegations of the underlying bodily injury complaint and amended complaint, but the Illinois Supreme Court has held that a court may appropriately rely on evidence outside of the underlying complaint to determine whether there is a duty to defend. The only time such evidence may not be considered is when it tends to determine an issue crucial to the determination of the bodily injury lawsuit itself, presumably so the insurer will not deprive the right of the insured to litigate its liability without facing collateral estoppel from prior litigation with its insurer. The rationale for this rule is that, with the exception so noted, “to require the trial court to look solely to the complaint in the underlying action to determine coverage would make the declaratory proceedings little more than a useless exercise possessing no attendant benefit and would greatly diminish a declaratory action’s purpose of settling and fixing the rights of the parties.” (Pekin Insurance Co. v. Wilson, 237 Ill.2d 446, 461.)

The court then stated that it agreed with CSR that under the Wilson decision and others, the court may consider the subcontract, the policy and the amended complaint in determining whether Pekin owed a duty to defend CSR. The court held that in the case it was considering, it was apparent that the amended complaint asserted a theory of direct liability against CSR, but the mere fact that the allegations of direct liability are included in the complaint does not defeat CSR’s claim that it could also potentially be held vicariously liable in the bodily injury case for acts or omissions of Zamastil. If CSR could be held vicariously liable for Zamastil’s alleged negligence, CSR is entitled to a defense under the additional insured endorsement of the CGL policy. The appellate court then examined the amended complaint and found that it contained several allegations suggesting that CSR could in fact be subjected to vicarious liability. The Lakes alleged that CSR was negligent in that it allowed its subcontractors to not be competent in violation of OSHA regulations and failed to require its subcontractor, Zamastil, to comply with OSHA regulations.

Although the Lakes’ allegations, on their surface, amounted to an allegation of the failure to properly supervise the subcontractor, at the core the Lakes alleged that Zamastil is the party that failed to be competent and failed to comply with OSHA regulations, leading to the accident. These allegations do not preclude the possibility that CSR could be found liable solely as the result of the acts or omissions of Zamastil. “To the contrary, these allegations can be read as the grounds for the claim that Lake was injured as a result of the failure by both CSR and Zamastil to supply or provide him with the necessary safety equipment during his work on the roof. Although the elements of a negligence claim were not specifically alleged against Zamastil, the amended complaint suggests that Zamastil’s acts or omissions were an underlying cause of Lake’s injuries.”

In somewhat contradictory fashion, the court stated “A review of the [subcontract] confirms that that [sic] the parties sought to limit CSR’s potential exposure to vicarious liability, thus ensuring that CSR was covered in case of [a] worksite accident such as occurred here.” Although the court marshalled subcontract terms supporting this position, the court’s observation does not fit well with the language of the additional insured endorsement that says that coverage must not be limited to vicarious liability.

Illustrating the principle that the only time evidence outside the pleadings should not be considered in deciding liability insurance coverage is when it tends to determine an issue crucial to the determination of the underlying lawsuit, the court declined to address the applicability of Section 414 of the Restatement of Torts, Second Edition, because it believed it might tend to determine an issue crucial to the determination of the underlying lawsuit. Although Restatement Section 414 is important in determining whether an independent contractor is vicariously liable, the court pointed out that at this juncture, the question is not whether CSR is vicariously liable. Rather, the issue is whether Pekin has a duty to defend CSR because it could potentially be found vicariously liable for Lake’s injuries. The court stated, “Because we find that the amended complaint contains allegations that could result in a finding that CSR is liable for Lake’s injuries, solely on the basis of the acts or omissions of Zamastil, we conclude that the court erred in granting judgment on the pleadings in favor of Pekin.”