Insurer Found To Have No Warranty Liability To Assignees Of Tort Claim

By Don R. Sampen, published, Chicago Daily Law Bulletin, August 10, 2021

The 7th U.S. Circuit Court of Appeals recently held that a subcontractor’s waiver of the Kotecki cap did not subject the subcontractor’s insurer to liability for the subcontractor’s alleged breach of warranty, in a suit brought by injured employees as assignees of tort rights.

The case is StarNet Insurance Co. v. Ruprecht, 2021 U.S. App. Lexis 19143 (7th Cir. June 28). The insurer, StarNet, was represented by Flaherty & Youngerman P.C. of Chicago. Power Rogers LLP of Chicago represented the claimants.

Deerfield Construction Co. was the general contractor on a construction project in Vernon Hills. It subcontracted certain demolition work to P.S. Demolition. As part of the contract, P.S. Demolition agreed to indemnify and hold Deerfield harmless from all claims, including for bodily injury caused in whole or in part by P.S. Demolition, even if Deerfield contributed to the injury.

In the course of the work, one of P.S. Demolition’s employees was killed, and another injured, due to capstone falling from a building. The surviving employee and estate of the other brought suit against Deerfield, and Deerfield in turn brought a contribution claim against P.S. Demolition.

P.S. Demolition then filed for bankruptcy, and the bankruptcy court found that the company had no assets. As a result, any recovery against the company would be limited to insurance coverage.

Subsequently, Deerfield settled with the two employee claimants, as part of which settlement it assigned to them its contribution claim against P.S. Demolition. StarNet provided workers’ compensation and employer liability coverage to P.S. Demolition. Hence, the claimants pursued coverage under the StarNet policy based on Deerfield’s contribution rights.

Part one of the StarNet policy provided workers’ compensation coverage, and part two provided employer liability coverage. Under part two, StarNet agreed to pay all sums P.S. Demolition became legally obligated to pay because of bodily injury suffered by its employees, including damages for which P.S. Demolition became liable to third parties for indemnification.

However, an exclusion in an endorsement to the policy stated that StarNet would not cover liability assumed under a contract by which P.S. Demolition agreed to waive its right to limit its liability to its workers’ compensation obligations. An exception to exclusion applied to claims against P.S. Demolition’s based on breach of warranty for work not performed in a workmanlike manner.

In light of the exclusion, the district court entered judgment on the pleadings in favor of StarNet, noting, among other things, that Deerfield’s assignment to the claimants had not included any claim for breach of warranty. The claimants brought this appeal.

Analysis

In an opinion by Judge Ilana Diamond Rovner, the 7th Circuit affirmed. She noted early in her opinion that, under Virginia Surety Co. v. Northern Insurance Co. of New York, 224 Ill.2d 550 (2007), P.S. Demolition’s agreement to indemnify Deerfield would be treated as a waiver of the Kotecki cap, which, in the absence of such waiver, would have limited P.S. Demolition’s liability to its workers’ compensation obligation.

Thus, Deerfield was free to seek contribution from P.S. Demotion of the latter’s full pro rata share of liability to the claimants, with no Kotecki cap limitation.

Due to P.S. Demolition’s bankruptcy, however, any recovery by the claimants turned on the availability of coverage under the StarNet policy. That policy, moreover, expressly excluded coverage for liability that P.S. Demolition assumed in excess of its workers’ compensation liability (i.e., the Kotecki cap) by virtue of P.S. Demolition’s indemnity agreement.

The claimants nonetheless focused on the exception to the exclusion for a warranty that P.S. Demolition’s work would be done in a workmanlike matter. They contended that the personal injury suits they filed against Deerfield, for which Deerfield in turn sought contribution from P.S. Demolition, were actions that essentially turned on P.S. Demolition’s breach of warranty.

Rovner disagreed. She pointed out that, as Deerfield’s assignees, the claim the claimants were pursuing against P.S. Demolition is one for contribution based on its pro rata share of liability in tort for the accident.

By contrast, a warranty action for faulty workmanship is one sounding in contract, not a tort action for negligence. Rovner acknowledged that “there might be some degree of overlap” between the contract and tort causes of action.

Nonetheless, she said the warranty was an obligation P.S. Demolition owed, not to the claimants, but to Deerfield, and Deerfield did not assign the warranty claim to the claimants.

The court therefore affirmed the judgment in favor of StarNet.

Key Points

• A construction subcontrator’s agreement to indemnify the general contractor for injuries arising from the subcontractor’s work, under Illinois law, may be construed as an agreement by the subcontractor waive the Kotecki cap.
  
• The assignees of a tort claim arising from faulty workmanship may not pursue an action for breach of warranty involving faulty workmanship if they were not owed a warranty and the warranty claim was not included as part of the assignment.