Obligation Found For Allegations ‘Straddling’ Vicarious Liability

September 9, 2021 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin, September 7, 2021

The 7th U.S. Circuit Court of Appeals recently held that an additional insurer owed a defense to an additional insured covered only for vicarious liability, even though the claims alleged against the additional insured were arguably only for direct liability.

The case is United Fire & Casualty Co. v. Prate Roofing & Installations, LLC, 2021 U.S. App. Lexis 22641 (7th Cir. July 30). The additional insurer, United Fire, was represented by Cassidy & Mueller of Peoria. Swanson, Martin & Bell LLP of Chicago represented the additional insured, Prate Roofing.

Prate Roofing served as the general contractor on a construction project in Illinois, and All Seasons Roofing Inc. became a subcontractor. The subcontract between them required that Prate Roofing be included as an additional insured on All Seasons’ commercial general liability policy.

All Seasons purchased the coverage from United Fire. The policy issued did not cover Prate Roofing for its own negligence.

Rather, it provided liability and defense coverage only “with respect to [All Seasons’] liability for bodily injury … which may be imputed to [Prate Roofing] arising out of” All Seasons’ — or one of its subcontractors’ — acts or omissions. The coverage thus was limited to Prate Roofing’s vicarious liability.

In 2016, an employee of one of All Seasons’ subcontractors became injured on the job and brought suit against Prate Roofing, All Seasons and others. As to Prate Roofing, the complaint alleged negligence in the general contractor’s supervision of the construction site. At least one allegation, however, asserted negligent conduct by “Prate … individually and through its agents….”

Prate Roofing tendered to United Fire, which declined to defend and brought this declaratory action. During its pendency, All Seasons and United Fire reached a settlement in the underlying action, resulting in exhaustion of the United Fire policy.

In this declaratory case, United Fire took the position that All Seasons was an independent contractor such that Prate Roofing could not be held vicariously liable for its conduct. It further argued that the underlying complaint made allegations of only direct liability, and no allegations of vicarious liability, with respect to Prate Roofing.

The district court nonetheless granted summary judgment in favor of Prate Roofing, finding a duty to defend by United Fire. United Fire took this appeal.

Vicarious Liability Allegations

In an opinion by Judge David F. Hamilton, the 7th Circuit affirmed in part and reversed in part. He began by observing that, in Illinois as well as many other states, the duty to defend is decided by applying the eight corners rule, meaning the four corners of the insurance policy and the four corners of the underlying complaint.

Hamilton then reviewed the allegations of the underlying complaint and noted that its allegations against Prate Roofing were phrased “to straddle the line” between direct and vicarious liability. He noted this may often be the case with additional insured coverage because, at the pleading stage, the underlying plaintiff often has no knowledge of the relationship between the additional insured and named insured.

In addition, Hamilton observed that the boundaries between direct liability for negligent supervision of a job site and vicarious liability “are not as crisp and sharp” as United Fire thought them to be. He thus cited to Pekin Insurance Co. v. Centex Homes, 2017 IL App (1st) 163284, and other cases, as examples of where, in Hamilton’s view, the appellate court found a duty to defend for vicarious liability based on allegations similar to those here.

He concluded that the underlying allegations “left room for vicarious liability against Prate Roofing,” and that United Fire had a duty to defend.

Effect Of Settlement

Hamilton further found, however, that upon settlement of All Seasons’ liability to the underlying plaintiff, “things changed.” The settlement removed any potential that Prate Roofing might be held vicariously liable for any tortious actions by All Seasons.

The reason was that, under Illinois law, a settlement between an agent and plaintiff extinguishes the principal’s vicarious liability, a rule set forth in American National Bank & Trust Co. v. Columbus-Cuneo-Cabrini Medical Center, 154 Ill. 2d 347 (1992).

The court therefore concluded that United Fire had a duty to defend Prate Roofing as an additional insured, but that the duty terminated upon the settlement by named insured All Seasons in the underlying case.

Chief Judge Diane S. Sykes dissented on the ground that, in her view, the underlying complaint alleged claims against Prate Roofing only for its direct liability.

Key Points

  • Allegations that “straddle the line” between direct and vicarious liability against an additional insured, will be construed in favor of an insurer’ duty to defend the additional insured when the policy provides coverage for vicarious liability.
  • An insurer’s duty to defend terminates when litigation reaches a point that the insured (or additional insured) can no longer be liable.
  • A settlement between an agent and plaintiff extinguishes the principal’s vicarious liability.
  • Chicago

    Illinois 60603

    10 South LaSalle Street

    Chicago, Illinois 60603

    T: 312.855.1010 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick

  • New York

    New York 10005

    28 Liberty Street 39th Floor

    New York, New York 10005

    T: 212.805.3900 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Tyler Jay Lory

  • Mission Viejo

    California 92691

    27285 Las Ramblas

    Suite 200

    Mission Viejo, California 92691

    T: 949.260.3100 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman

  • Florham Park

    New Jersey 07932

    100 Campus Drive

    Florham Park, New Jersey 07932

    T: 973.410.4130 TF: 800.826.3505 F: 973.410.4169 Office Managing Partner: Carl M. Perri

  • Michigan City

    Indiana 46360

    200 Commerce Square

    Michigan City, Indiana 46360

    T: 219.262.6106 TF: 800.826.3505 F: 312.606.7777 Office Managing Partners: Paige M. Neel, Kimbley A. Kearney

  • Appleton

    Wisconsin 54914

    4650 W. Spencer Street

    Appleton, Wisconsin 54914

    T: 920.560.4658 TF: 800.826.3505 F: 920.968.4650 Office Managing Partner: Patrick L. Breen

  • Stamford

    Connecticut 06902

    68 Southfield Avenue

    2 Stamford Landing Suite 100

    Stamford, Connecticut 06902

    T: 203.921.0303 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Matthew J. Van Dusen

  • Tampa

    Florida 33609

    4830 West Kennedy Boulevard, One Urban Center

    Suite 600

    Tampa, Florida 33609

    T: 813.509.2578 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Anne E. Kevlin

  • San Francisco

    California 94111

    100 Pine Street

    Suite 1250

    San Francisco, California 94111

    T: 415.745.3598 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman