Insurer Must Defend For Vicarious Liability Even Though Not Alleged

By Don R. Sampen, published, Chicago Daily Law Bulletin
[September 5, 2017]

The 1st District Appellate Court recently held that an insurer had a duty to defend an additional insured for possible vicarious liability arising from the named insured’s negligence, even though the underlying complaint did not allege vicarious liability nor any negligence by the named insured.

The insurer in Pekin Insurance Co v. Lexington Station LLC, 2017 IL App (1st) 163284, was represented by Pretzel & Stouffer Chtd. of Chicago. Lindsay Rappaport & Postel LLC of Chicago represented the additional insured, Lexington and its direct insurer, Westfield Insurance Company.

In 2014, Pekin’s insured, ACC Inc., entered into a construction contract with Lexington, as owner, for carpentry services in connection with the development of property in Morton Grove.

The contract provided that ACC was an independent contractor, and that it was responsible for all work and safety on the job.

In addition, the contract required ACC to procure insurance coverage with Lexington as an additional insured. ACC obtained a commercial general liability policy from Pekin having a blanket additional insured endorsement providing coverage solely for vicarious liability. The endorsement specifically excluded coverage for the additional insured’s own negligence.

Marcos Botello, an ACC employee, was injured on the job. He brought suit against Lexington in 2015. His complaint alleged that Lexington had authority to stop ACC’s work and certain other limited authority, that it inspected the work, that it improperly managed the premises through agents, and that it failed to supervise the work being done.

Lexington filed a third-party complaint against ACC, alleging ACC’s negligent acts were the cause of Botello’s injuries, and it sought contribution.

In addition, Lexington tendered its defense to Botello’s claim to Pekin. Pekin refused the tender. It then brought this declaratory action seeking a determination of its coverage obligations. On cross motions for summary judgment, the trial court held that Pekin owed Lexington a duty to defend. Pekin took this appeal.

Potential for negligence

In an opinion by Justice Mary L. Mikva, the 1st District affirmed. She initially sought guidance from Pekin Insurance Co v. Centex Homes, 2017 IL App (1st) 153601. The court there, in a similar type of case involving an additional insured, held that for an insurer to have a duty to defend, the underlying complaint must give rise to a potential for holding the named insured liable for negligence, and for holding the additional insured vicariously liable for that negligence.

Here, the underlying complaint alleged that Botello was injured when working on a ladder without proper safety measures in place. While the complaint did not allege who was responsible for the safety measures, the Lexington/ACC contract placed responsibility on ACC. Considering the contract together with the complaint, Mikva said that a potential existed for finding ACC negligent.

Similar to Pekin Insurance Co v. Wilson, 237 Ill.2d 446 (2010), moreover, Botello had no reason to sue ACC, his own employer, and to allege that it was negligent. As in Wilson, according to Mikva, these were circumstances that allowed the court to look beyond the allegations of the complaint, and to take into account the terms of the construction contract.

Potential for vicarious liability

She then turned to evaluate whether the underlying complaint contained allegations that could support Lexington’s potential vicarious liability. As in Centex, she observed that whether a contractor could be directly liable, vicariously liable, or not liable at all, depended on the amount of control the contractor exercised over its subcontractors.

Courts, however, Mikva said, may decline to parse the underlying complaint for the specific level of control exercised by the contractor, because the underlying plaintiff frequently lacks knowledge of the degree of control that exists. In this case, the underlying complaint alleged that Lexington had control over the work being done by its agents and participated in coordinating the work. That was sufficient to give rise to a potential for vicarious liability.

The fact that ACC may have been an independent contractor, moreover, did not preclude Lexington’s vicarious liability for ACC’s negligence. The contract was not conclusive of ACC’s independent contractor status. And, Mikva noted, the facts of the case could demonstrate that ACC served in an agency relationship with Lexington.

The court therefore concluded that the possibility of Lexington’s vicarious liability for ACC’s negligence brought this action within the broad duty of Pekin’s duty to defend. It affirmed the decision of the trial court in favor of Lexington.

Key points

• An additional insured having coverage limited to vicarious liability may be entitled to a defense by the additional insurer even though the underlying complaint contains no allegations of negligence by the named insured or vicarious liability of the additional insured.
• Allegations in an underlying complaint that the additional insured has control of operations and is liable for the actions of its agents, provide a sufficient basis to impose a defense obligation on an insurer providing vicarious liability coverage for the additional insured.
• According to this court, even if a subcontractor is deemed an independent contractor by contract, the facts may demonstrate that the subcontractor acted as an agent of the contractor.