Illinois Appellate Court Finds Duty To Defend Property Owner Based On Potential For Vicarious Liability For Subcontractor’s Negligence

In Pekin Ins. Co. v. Centex Homes, 2017 IL App (1st) 153601, the Illinois Appellate Court Circuit had occasion to consider whether an insurer had an obligation to defend two putative additional insureds when its named insured was not a defendant in the suit and the policy only conferred additional insured coverage where the additional insureds were vicariously liable for the acts or omissions of the named insured.

In June 2009, Centex Homes, the owner of a construction project, entered into a contract with McGreal as the contractor. The contract required McGreal to maintain insurance for Centex Homes and Centex Real Estate Corporation.

Pekin issued a CGL policy to McGreal, which contained an additional insured endorsement that provided that an additional insured was “any person or organization for whom you are performing operations, when you and such person or organization have agreed in a written contract effective during the policy period … that you must add that person or organization as an additional insured on a policy of liability insurance.” The endorsement stated that coverage was available to such entities “only with respect to vicarious liability for ‘bodily injury’ … imputed from [the named insured] to the Additional Insured.” The endorsement further stated that coverage was excluded for liability “arising out of or in any way attributable to the claimed negligence or statutory violation of the Additional Insured, other than vicarious liability which is imputed to the Additional Insured solely by virtue of the acts or omissions of the Named Insured.”

During the effective period of the Pekin policy, an employee of McGreal, Scott Nowak, was injured while working on the construction of the building. He filed suit against Centex Homes and Centex Real Estate Corporation, the owners of the building. Both entities tendered the suit to Pekin, but Pekin denied coverage and filed a declaratory judgment action. Pekin argued that McGreal did not have a written contract with Centex Real Estate, and so it owed no coverage to that entity. Pekin also argued that McGreal was not performing work pursuant to its contract with Centex Homes, and so it owed no duty to defend that entity. Finally, Pekin argued in the alternative that neither entity qualified for coverage as they were sued for their own direct negligence, as opposed to vicarious liability for the acts or omissions of McGreal.

The trial court found that Centex Real Estate was not an additional insured pursuant to the policy. The trial court also held that Centex Homes was not entitled to a defense because the underlying suit alleged only direct, and not vicarious, liability against that entity.

The appellate court affirmed the trial court’s ruling as to Centex Real Estate. The court held that although Centex Real Estate signed the contract, it only did so as the managing partner of Centex Homes. As it did not sign the contract on its own behalf, Centex Real Estate and McGreal were not parties to a contract that required McGreal to procure insurance for that entity.

Turning to Centex Homes, the court found that the contract between the parties did encompass the work being performed by McGreal at the time of Nowak’s injury. The contract recognized that Centex Homes would issue a purchase order to McGreal if it elected to authorize McGreal to perform work under the contract. Although Centex Homes did not issue a purchase order for the project at issue, the court found that fact to be irrelevant to the validity of the contract and its insurance requirement. This was especially true given the fact that the parties performed the work called for in the contract.

Pekin nevertheless insisted that Centex Homes was not entitled to coverage as it was not being sued for vicarious liability for the acts of McGreal. The court rejected that argument and overturned the trial court’s ruling in that regard. The court recognized that Illinois law prohibits an employee, like Nowak, from suing its employer, McGreal, in these circumstances. Thus, the insurer’s duty to defend in this scenario hinged on two factors: (1) a potential for finding that the named insured was negligent; and (2) a potential for holding the additional insured vicariously liable for that negligence.

As to the first issue, the court examined prior decisions which focused on whether the underlying complaint contained allegations suggesting potential negligence by the named insured. In the absence of such allegations, a duty to defend was not owed. In examining Nowak’s complaint, the court found that it alleged that McGreal was charged with erecting the subject wall that fell and struck him. Even though there could be additional facts that support a theory of liability against Centex Homes, the allegations within the complaint were sufficient to create the potential for a finding of negligence against McGreal.

The court then held that the second component of the test was satisfied for a number of reasons. Initially, the court recognized that vicarious liability could exist where a general contractor exercises sufficient control over the operative detail of the work performed by a subcontractor. Applying that standard, the court first found that it was not necessary to parse the underlying complaint for specific allegations of control as all that was required was the potential that such control existed, which can be satisfied by mere general allegations that do not eliminate the possibility of vicarious liability. Second, the court did not desire to rule on issues that would overlap with liability issues to be addressed in the underlying suit, and those issues were likely to be addressed in Nowak’s claims against Centex Homes.

Third, the court found that the underlying complaint would not contain sufficient detail to differentiate between a general contractor’s direct negligence as opposed to its vicarious liability, as both concepts depended on the extent of its control over the subcontractor. Fourth, the complaint against Centex Homes contained allegations that were broad enough to impose vicarious liability on it for McGreal’s acts or omissions. Finally, given the fact that Nowak likely lacked knowledge concerning the degree of control exercised by Centex over McGreal, it was unlikely that he would include allegations that would establish vicarious liability against Centex Homes. As the complaint alleged that Centex Homes had control of operations and was liable for the acts of its agents, there was a potential basis asserted for vicarious liability, and Pekin owed a duty to defend Centex Homes.