Contribution Rights Turn On 'Same Risks'
February 10, 2010
The 2d District Appellate Court recently held that insurers for two subcontractors whose policies also provided additional insured coverage for the general contractor, covered the "same risks" of the general contractor, thereby entitling one insurer to contribution against the other. The court also held that one insurer's nearly five-month delay in filing a declaratory judgment action to determine rights and obligations under its policy did not give rise to sanctions under 215 ILCS 5/155. American States Insurance Co. v. CFM Construction Co., 2010 WL 145123 (2d Dist. Jan. 12, 2010).
One insurer, American, was represented by the Carlson Law Offices, Chicago. Jump & Associates of Chicago represented the other insurer, Michigan Mutual Insurance Co.
CFM was the general contractor on a construction project in Libertyville. It hired NF as a subcontractor to serve as, among other things, construction supervisor. CFM also hired International Decorators as a subcontractor.
NF's general liability carrier was American. International's general liability carrier was Michigan. CFM was an additional insured under both the American and Michigan policies.
An employee of International, Flores, was injured on the job site. He brought separate lawsuits against CFM and NF, and they were consolidated for trial. CFM tendered its defense to Michigan. Michigan asked American to contribute to CFM's defense, but American refused.
American then waited nearly five months to file a declaratory judgment action to determine its defense obligation. The trial court decided that American had a duty to defend, and that decision was affirmed in an earlier appeal.
Prior to the earlier appeal, the parties settled the Flores lawsuits. Michigan paid $700,000 on behalf of CFM but American refused to contribute. American did, however, pay $200,000 on behalf of NF. As part of the settlement process, Michigan acquired an assignment of CFM's rights to sue American for breach of the duty to defend and to indemnify.
On remand of the earlier appeal, American filed an amended complaint against CFM and Michigan seeking a declaration that it had no duty to indemnify CFM under its policy issued to NF. Michigan and CFM filed an amended countercomplaint seeking reimbursement for half of the $700,000 settlement amount based on the "other insurance" provisions of the two policies and equitable contribution. They also sought attorney fees and prejudgment interest from American.
After cross-motions for summary judgment, the trial court held that Michigan (in its own right and/or as CFM's assignee) could not recover against American on a contribution theory because the Michigan and American policies covered different risks, but that Michigan could recover half the settlement cost by virtue of operation of the "other insurance" clauses. The court denied Michigan's claims for attorney fees and interest. American thereupon appealed and Michigan cross-appealed.
In an opinion by Robert D. McLaren, the 2d District affirmed, but on different grounds. McLaren first addressed Michigan's contribution rights. He acknowledged that under Home Insurance Co. v. Cincinnati Insurance Co., 213 Ill. 2d 307 (2004), equitable contribution is only available where the concurrent policies cover, among other things, the same risks.
With respect to the identity of risks, American argued that equitable contribution did not apply because its policy insured CFM only for CFM's liability arising out of NF's work, whereas Michigan's policy insured CFM for liability arising out of International's work, which, according to American, involved a different risk.
McLaren, however, examined the blanket additional insured provision under the American policy and noted that it provided coverage for an additional insured "with respect to liability arising out of your [i.e., NF's] ongoing operations performed for that insured." He further noted that, as part of the disposition of the prior appeal, the "ongoing operations" language applied to any ongoing work that NF was performing for CFM, including NF's construction supervision.
McLaren then reasoned that, since CFM hired NF to supervise, and that obligation included supervision of International, both American, through NF's supervision of the site, and Michigan insured CFM for supervisory liability arising out of International's acts or failures to act. In McLaren's view, the risks due to NF's negligent supervision and International's negligence were the same, and the policies therefore covered the same risks, entitling Michigan to contribution.
American nevertheless argued that, since the duty to indemnify is narrower than the duty to defend, the court could not accept Flores' inconsistent allegations that CFM was the construction supervisor, and also that NF was construction supervisor, in deciding whether American had an obligation to share in the settlement payment, even though the court might have accepted the allegations for purposes of the duty to defend.
McLaren rejected the argument on the ground that American had not provided any facts that demonstrated why the court's prior decision regarding the duty to defend should be different from its analysis here regarding the duty to indemnify. Moreover, said McLaren, the cases had been consolidated for trial, and the court need not read Flores' two sets of allegations as incompatible.
In Michigan's cross-appeal, it argued that it was entitled to recover penalties under section 155 of the Insurance Code based on positions taken by American in the coverage litigation.
As an initial point, McLaren rejected American's counter-argument that Michigan lacked standing to raise the right to relief under section 155, because it is the insurer and not insured. He noted that, as CFM's assignee, Michigan had adequate standing.
He nevertheless rejected Michigan's claim for section 155 remedies based on American's delay of nearly five months in bringing its declaratory judgment action and based on its claim of lack of coverage. McLaren said that the five-month delay was not inherently vexatious or unreasonable, and that American raised its coverage defenses in good faith, even though it lost.
Finally, as to Michigan's claim for prejudgment interest on its claim for half the settlement cost, McLaren took the position that the trial court did not abuse its discretion.
The court therefore affirmed Michigan's right to recover half its settlement payment and the denial of any further relief on behalf of Michigan.
