Additional Insured Found to Have Coverage

February 8, 2017 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin
[February 7, 2017]

The 7th U.S. Circuit Court of Appeals recently held that a prospective additional insured could rely on its own third-party complaint against the named insured to help establish additional insured coverage.

The case is Selective Insurance Co. v. Target Corp., 2016 U.S. App. Lexis 23370 (7th Cir. Dec. 29). Selective was represented by Cremer, Spina, Shaughnessy, Jansen & Siegert LLC. Johnson & Bell Ltd. represented the additional insured, Target.

The underlying claimant, Angela Brown, was injured in 2011 at a Target store in Gurnee when a fitting room door came off its hinges and fell on her. She sued Target for her injuries, and Target, in turn, filed a third-party complaint against the supplier of the fitting rooms, Harbor Industries Inc. Ultimately, Target and Harbor settled with Brown.

In the meantime, Target tendered its defense to Selective, which had issued a liability policy to Harbor that was in effect at the time of the injury. Target claimed that it was an additional insured on the policy. Selective filed this declaratory action to determine its coverage obligations.

Upon cross-motions for summary judgment, the U.S. District Court agreed with Target, found that Selective had a duty to defend and indemnify Target and entered judgment in favor of Target in the amount of about $714,000. Selective took this appeal.

Additional Insured Status

In an opinion by U.S. District Judge Elizabeth Magnus-Stinson (sitting by designation), the 7th Circuit affirmed. She initially addressed the additional insured issue by examining the language of the two contracts Target had with Harbor and the terms of Selective’s policy.

The first contract was a supplier agreement that had been in effect between Target and Harbor since 2001 and appeared to continue in effect.

It required that Harbor maintain commercial general liability coverage that designated Target as an additional insured. That contract appeared to provide the general requirements for the relationship between Target and Harbor, and it stated that if any conflict existed between that contract and “the specific Order or Program Agreement” between the parties, the latter would govern.

The second contract was a program agreement for Harbor to supply fitting rooms to Target, entered into in 2009. It was apparently pursuant to this contract that the fitting room doors were supplied. The agreement, however, terminated in 2010.

The Selective policy contained a blanket additional insured endorsement, stating that persons with whom Harbor had a “written contract” to add as an additional insured would become an additional insured with respect to bodily injury liability caused “in whole or in part, by … ‘your product,’” meaning Harbor’s product.

Selective argued that, with the expiration of the program agreement in 2010, no “written contract” was in effect for additional insured purposes when the injury occurred in 2011. It further argued that the terms of the program agreement controlled over the earlier supplier agreement, and the program agreement had expired.

Magnus-Stinson rejected the argument, finding that the 2001 supplier agreement constituted the necessary “written contract,” that it was in effect at all relevant times, and that Target therefore was an additional insured.

Duty to Defend and Indemnify

With respect to Selective’s defense obligation, Selective focused on the allegations of Brown’s underlying complaint, which emphasized Target’s negligence, rather than anything being wrong with the fitting room door. Magnus-Stinson nonetheless observed that the parties did not dispute that the injury “arose out of” Harbor’s product — the door — and, moreover, that the injury fell within the products-completed operations hazard of the policy.

Even if the complaint itself was insufficient to trigger coverage, however, Magnus-Stinson noted that a court may look outside the complaint, including to a third-party complaint, to determine the existence of a duty to defend, at least where, as here, the issue arises in the context of a declaratory judgment action.

And Target’s third-party complaint against Harbor specifically alleged that Harbor was negligent in providing materials for the fitting rooms.

Under these circumstances, Selective had a duty to defend Target, based in part on Target’s own allegations against the named insured.

Magnus-Stinson then took up the duty to indemnify and Selective’s argument that the entirety of Target’s settlement payment could not possibly represent damages for a covered loss. She pointed out two questions that had to be resolved when determining whether a settlement was within coverage.

One is whether the settlement was for an otherwise covered loss in reasonable anticipation of liability. She found that the circumstances here — including the fact that Target had had a problem with the door a week before Brown’s injury — established that Target’s settlement qualified.

The second question was whether, when a settlement involves both covered and non-covered claims, the primary focus of the settlement was the covered claims. See Rosalind Franklin University of Medicine & Science v. Lexington Insurance Co., 2014 IL App (1st) 113755.

Although the settlement here may in part have covered Target’s premises liability, Magnus-Stinson found that its primary focus was for injuries arising from the door, a covered loss.

The court therefore affirmed in favor of Target.

Key Points

  • An additional insured’s own third-party complaint against the named insured may be taken into account in the context of a declaratory judgment action in deciding the additional insurer’s duty to defend.
  • Illinois courts apply the primary focus test in determining insurance coverage for a settlement involving both covered and non-covered claims.
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