No Coverage for Negligent Hiring
June 02, 2009
The 7th U.S. Circuit Court of Appeals recently held that a contractor-subcontractor exclusion in a comprehensive general liability policy issued to an owner excluded coverage for negligent hiring and supervision claims against the owner in connection with damage to adjacent property allegedly caused by contractors and a subcontractor. Nautilus Insurance Co. v. 1452-4 N. Milwaukee Avenue LLC, 2009 WL 922818 (Apr. 7).
The insurer, Nautilus, was represented by Perry M. Shorris of Bollinger, Ruberry & Garvey. Mark M. Lyman of Henderson & Lyman represented the owner, 1452 LLC.
Underlying suits were brought against 1452 LLC, owner of property on North Milwaukee Avenue in Chicago adjacent to the Ann Sather Restaurant. The complaints alleged that 1452 LLC hired the contractor, project manager and subcontractor to perform an excavation on its property and that they botched the job. Specifically, the contractor, project manager and subcontractor were alleged to have failed to properly reinforce the neighboring property, running a backhoe into the side of the restaurant, and committing various other errors and omissions.
The relevant complaints alleged that 1452 LLC, among other things, was negligent in hiring and supervising the contractors and subcontractor, and also violated 765 ILCS 140/1, which requires that a property owner give due notice to adjoining landowners if it intends to do excavation on the owner's property. If notice is not given, the statute imposes liability on the owner for any damage to the adjacent property.
Nautilus issued a CGL policy to 1452 LLC for the relevant time period, the insured tendered the claims to Nautilus, Nautilus denied coverage, and it brought this coverage action in federal court based on diversity jurisdiction. It claimed that coverage was excluded by the policy's "contractors and subcontractors" exclusion and the "classification limitation" exclusion.
In response to motions to dismiss by the defendants, the district court declared that the exclusions were inapplicable and that Nautilus had a duty to defend 1452 LLC. Nautilus took this appeal.
In an opinion by Judge Diane S. Sykes, the 7th Circuit reversed. She first considered the contractor-subcontractor exclusion that excluded from coverage all property damage arising out of operations performed for the insured by contractors or subcontractors it hired or for acts or omissions in connection with the owner's supervision of the operations.
Sykes noted that, in rejecting application of the exclusion, the district court emphasized that 1452 LLC could be liable based on its own conduct, not that of contractors or subcontractors, because the underlying complaints alleged that 1452 LLC failed to give the statutorily required advance notice of the excavation.
She further observed, however, that while the duty of the property owner is independent of the duties of contractors and subcontractors, there is no separate or independent compensable injury. Rather, a failure to comply gives rise to liability under the statute for any property damage "arising from" the excavation.
Thus, the statutory claims in the underlying complaints seek recovery for the same loss as all the other claims, namely, the property damage arising out of the faulty excavation performed by 1452 LLC's contractors and subcontractor. Coverage for that property damage, said Sykes, is excluded by the contractor-subcontractor exclusion.
In support of this conclusion, Sykes relied on Illinois case law holding that there is no coverage for two intertwined claims. All the cases involved application of a standard automobile exclusion in a CGL policy where the underlying lawsuit sought damages arising out of an automobile accident caused by the insured's driver.
One such case was Oakley Transp. Inc. v. Zurich Ins. Co., 271 Ill.App.3d 716, 648 N.E.2d 1099 (1995), where the underlying complaint stated claims against a trucking company for negligent entrustment and negligent supervision of its truck driver in connection with an accident. The automobile exclusion in the policy excluded damages arising out of the use of automobiles owned or operated by the insured, and, despite the negligent entrustment and supervision claims, the court held that the alleged liability was not independent of, but inextricably intertwined with, the employee's use of the truck.
Sykes said that the same result is required here. The claims against 1452 LLC did not allege any property damage or other injury independent of the property damage caused by the botched excavation performed by 1452 LLC's contractors and subcontractor. Although the complaints relied upon 1452 LLC's negligent hiring and its failure to give statutory notice as bases of liability, the loss was caused by the contractors and subcontractor, the exclusion therefore applied, and Nautilus had no duty to defend.
Sykes also commented on the classification-limitation exclusion, which excluded coverage for damage from operations that are not classified or shown on the declarations, endorsements or supplements. The declarations, endorsements and supplements here indicated that the insured property was vacant. Nautilus's argument was that 1452 LLC might nevertheless have been storing property in the building or using it in some other way, making the building not "vacant."
Since Sykes already found that the contractor-subcontractor exclusion applied, she noted that discussing the applicability of another exclusion was academic, but concluded nevertheless that Nautilus's argument seemed week. She pointed out that only the allegations of the underlying complaints were relevant at this stage, and they did not mention that any property was being stored in 1452 LLC's building.
In support of the exclusion, Nautilus argued that Illinois case law permitted it to advance extrinsic evidence in a duty-to-defend case, that it should have been allowed an opportunity to obtain discovery in the district court, and that the district court therefore should not have decided the matter on the pleadings.
Sykes declined to further address the argument, in light of her conclusion on the contractor-subcontractor exclusion. She did note, however, that because the duty to defend is broader than the duty to indemnify, and because Nautilus had no duty to defend, it therefore had no coverage obligation of any kind.
Based on this reasoning, the 7th Circuit reversed the district court.
