Obligation Found For Allegations ‘Straddling’ Vicarious Liability

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.