Insurer Proves Point on Indemnity Question

By Don R. Sampen, published, Chicago Daily Law Bulletin [October 18, 2016]

The 1st District Appellate Court recently held that an insured’s indemnification obligation, for which coverage might otherwise have been available under a commercial general liability policy as an “insured contract,” was void under the Construction Contract Indemnification for Negligence Act.

The insurer, therefore, had no coverage obligation with respect to the void obligation. Pekin Insurance Co. v. Designed Equipment Acquisition Corp., 2016 IL App (1st) 151689 (Sept. 12, 2016).

The insurer, Pekin Insurance Co., was represented by Pretzel & Stouffer Chtd. Daniel G. Suber & Associates represented the indemnitee seeking coverage, Designed Equipment Acquisition Corp.

The named insured, Abel Building & Restoration, entered into a contract with Designed for Abel’s rental of scaffolding materials to be delivered to Abel’s jobsite. The contract contained an indemnification clause whereby Abel agreed to defend and indemnify Designed for any liability of Designed caused in whole or part by the leased equipment or Designed’s conduct. The contract also required Abel to procure additional insured coverage for Designed.

In 2011, one of Abel’s employees was injured on the jobsite. That employee brought suit against Designed claiming it was negligent, and Abel tendered its defense to Pekin under a policy Pekin had issued to Abel.

The Pekin policy contained a contractor’s endorsement where Pekin extended additional insured coverage to anyone for whom Abel was “performing operations” and for which it agreed in writing to add as an additional insured. The endorsement, however, covered only vicarious liability of the additional insured, excluding any negligence claims.

The policy also contained a contractual liability exclusion that excluded coverage for Abel’s contractual liability subject, however, to an exception for “insured contracts.” An “insured contract” was defined in the policy as one under which the insured assumed the tort liability of another party to pay for bodily injury or property damage to a third person.

Following tender, Pekin denied coverage to Designed as an additional insured because Abel was not performing operations for Designed and the employee’s complaint in any event sought to recover for Designed’s own negligence.

Pekin further denied coverage for the indemnification obligation as an insured contract, because Pekin claimed that the agreement was void under the Construction Contract Indemnification for Negligence Act, 740 ILCS 35/1.

Pekin also brought this declaratory action seeking a determination of its coverage obligations. Upon cross-motions for summary judgment, the trial court found in favor of Pekin; Designed brought this appeal.

Analysis

In an opinion by Justice Maureen E. Connors, the 1st District affirmed. Designed’s main argument on appeal was not that it was an additional insured on the Pekin policy. Rather, Designed contended that the indemnity clause of the contract with Abel constituted an “insured contract” for which Pekin was obligated to provide coverage on behalf of Abel.

While Pekin argued that the indemnity clause was not an insured contract, Connors agreed with Designed on this point. Specifically, she found that Abel had agreed to indemnify Designed for Designed’s own negligence, and that such an obligation fell within the definition of an insured contract.

Notwithstanding the indemnity provision’s status as an insured contract, Pekin attacked it as void under the act. The act applies to indemnification contracts involving the construction, repair or maintenance of a building or structure, including “other work dealing with construction.” Under the act, contracts purporting to indemnify an indemnitee for its own negligence are deemed void.

The question thus arose whether the indemnity provision in the lease agreement for scaffolding materials between Abel and Designed, which did not contain the word “construction,” nonetheless was such a void contract.

Connors said that it was. She said initially that use of the term “construction” was not necessary to bring the provision within the purview of the act. She further noted that the equipment lease listed “Abel Building Restoration” as the lessee, which, by its name, suggested that its work was within the scope of the act. She also observed that Designed delivered the equipment to a jobsite, and Designed’s employees were required to assemble the scaffolding, so Designed knew the type of jobsite at issue.

Ultimately, she said the court could not imagine that a lease of scaffolding equipment by a building restoration company could be reasonably interpreted as not being for the construction or repair of a building.

The court therefore affirmed the trial court decision finding the indemnification obligation void and holding that Pekin had no obligation to provide coverage for the obligation.

Key point

Provisions in contracts dealing with construction work that require one party to indemnify another for the other’s own negligence are void and not insurable as “insured contracts.”