Illinois Second Appellate District Follows "Michael Nicholas" Holding That Indemnification Provision in Construction Contract is an "Insured Contract"
April, 2003
There may be potential coverage under an employer’s CGL policy for allegations brought by a general contractor against the employer seeking indemnification and contribution for injuries to the employer’s employee. This potential coverage may arise despite the existence of an exclusion for bodily injury to an employee. West Bend Mutual Ins. Co. v. Mulligan Masonry Co. Inc., 786 N.E.2d 1078 (Ill. App.).
Facts
Mulligan Masonry Co., Inc. (“Mulligan”) was the named insured under a commercial general liability policy issued by West Bend. Mulligan was also a named insured under a worker’s compensation and employer’s liability policy issued by Virginia Surety Co.
R.C. Wegman Construction Co. (“Wegman”) was a general contractor on a construction project and hired Mulligan to perform masonry work on the project. The Wegman-Mulligan contract contained an indemnification clause in favor of Wegman. The policy issued by West Bend provided no coverage for liability arising out of the claimed negligence of Wegman or any party other than Mulligan.
Donald Weeks, a Mulligan employee, was injured while working on a scaffold when a bundle of bricks fell. He brought a negligence action against the general contractor, Wegman. Wegman brought a third-party complaint against Mulligan. Mulligan tendered the third-party complaint to its insurer, West Bend. West Bend denied coverage and filed a complaint for declaratory judgment. The third-party complaint was amended several times and in its final form sought contribution alleging that Mulligan was negligent and claimed breach of contract alleging “liability assumed by contract” based upon the contractual indemnification clause.
West Bend denied coverage based in part upon the “contractual liability” exclusion, which excludes coverage for liability the insured assumes in a contract. Mulligan argued that under the exception for liability assumed by the insured under an “insured contract,” this exclusion did not apply. The policy defined an “insured contract” as follows:
That part of any other contract or agreement pertaining to your business... under which [the insured] assume[s] the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.
The Wegman-Mulligan contract contained an indemnification clause similar to those found within many construction contracts. Mulligan was required to indemnify and hold harmless Wegman and all of its agents from any claims arising out of the performance of Mulligan’s work provided the claim was attributable to bodily injury or property damage caused by any negligent act of Mulligan or anyone for whose acts Mulligan may be liable regardless of whether it was caused in part by Wegman. The indemnification obligation did not contain any limitation on the amount or type of damages payable under the Illinois Workers’ Compensation Act.
The trial court found that West Bend was required to defend Mulligan for the claims raised in the second amended third-party claim and West Bend appealed.
Analysis
The appellate court found that the decision in Michael Nicholas, Inc. v. Royal Ins. Co. of America, 748 N.E.2d 786 (Ill. App. 2001), controlled. In Michael Nicholas, the court reasoned that as a joint tortfeasor, a general contractor could be held jointly and severally liable for all of the employee’s damages. This liability was the general contractor’s “tort liability” even though a portion of that liability may have been attributable to the subcontractor’s negligence. In Illinois, the subcontractor’s liability arising from an injury to its employee typically would be limited to the amount of its worker’s compensation liability pursuant to the decision in Kotecki v. Cyclops Welding Corp., 585 N.E.2d 1023 (Ill. 1991). However, by agreeing to indemnify the general contractor, the subcontractor waived its “Kotecki cap” and was therefore potentially liable for the entire amount that the general contractor would be required to pay the subcontractor’s employee. Under the indemnity agreement, the subcontractor agreed to assume the tort liability of the general contractor.
The Mulligan court saw no reason to depart from the decision in Michael Nicholas, which found that a party’s tort liability is not necessarily based on that party’s own negligence. In the present case, if the employer’s Kotecki cap is lower than the amount of the employee’s damages that are attributable to the employer’s negligence, then, under principals of joint and several liability, the general contractor can be held liable in tort for the difference. Relying on the indemnification clause, Wegman attempted to recover that amount. If Mulligan waived its Kotecki cap, then it assumed tort liability that otherwise would have been imposed against Wegman.
West Bend also argued that the decision in Michael Nicholas interfered with the “dovetailing” coverage provided under the CGL and the Workers’ Compensation/Employer’s Liability policies. The court disagreed and held that an employee exclusion within the CGL policy contained the “insured contract” exception which contemplates that some losses arising from an injury to an employee of the insured would be covered. Consequently, to the extent that the general contractor sought full contribution beyond the employer’s Kotecki cap, there was a potential for coverage and West Bend owed Mulligan a defense.
Justice McLaren authored an extensive dissent, opining that the decision in Michael Nicholas requires reevaluation. Justice McLaren opined that the analysis contained in Michael Nicholas characterizes aspects of tort liability that are preexisting and imposed by operation of law as being assumed under the indemnification contract. Justice McLaren further opined that the major deficiency in the Mulligan decision and Michael Nicholas is that the decisions ignored the distinction between those matters that were imposed by law and those that have been assumed by the insured through the indemnification contract. Michael Nicholas failed to address the paradox that one cannot assume a preexisting duty. Justice McLaren agreed with West Bend’s position that if an insured waives the Kotecki cap, it is merely waiving an affirmative defense and not assuming any tort liability that did not already exist.
Learning Point:
When faced with a tender under a CGL policy from an insured that is plaintiff’s employer, the first reaction is to consider denying the tender based upon an exclusion for bodily injury to an employee. Yet Mulligan points out a basis under which the insured may claim potential coverage and a corresponding duty to defend. If the insured has waived a defense to tort liability or assumed a legal obligation under an “insured contract”, there may be a potential for coverage and a duty to defend the insured.
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