Parol Evidence Barred in Coverage Case

By Don R. Sampen, published, Chicago Daily Law Bulletin
[March 6, 2018]

The 1st District Appellate Court recently upheld the validity of a broadly worded exclusion applicable to employee injuries, as applied to coverage sought by an additional insured general contractor under a policy issued to a subcontractor.

The general contractor in Vivify Construction LLC v. Nautilus Insurance Co., 2018 IL App (1st) 170192 (Jan. 24, 2018), Vivify Construction, was represented by Cray Huber Horstman Heil & VanAusdal LLC. Hinshaw & Culbertson LLP represented the insurer, Nautilus Insurance.

Victoria Metal Processor Inc., was a subcontractor of Vivify, the general contractor, on a construction project. Pablo Vieyra, an employee of Victoria, was injured on the job and brought suit against Vivify.

By the terms of the subcontract, Victoria agreed to indemnify Vivify against bodily injury claims resulting from Victoria’s work. It also agreed to add Vivify as an additional insured under commercial general liability coverage to be issued to Victoria.

Victoria procured commercial general liability coverage from Nautilus. Under that policy, Vivify qualified as an additional insured. The policy, however, also contained an exclusion that barred coverage to (1) employees of any insured, and (2) employees of an insured’s contractors and subcontractors, regardless of whether the contractor or subcontractor was an insured under the policy.

The policy also contained a severability clause which required that, with certain exceptions not here relevant, the policy was to apply separately to each insured against whom a claim might be brought.

Vivify tendered its defense of the Vieyra suit to Nautilus, but Nautilus declined coverage based on the employee exclusion. Vivify then brought suit for coverage; Nautilus filed a counterclaim; and the parties subsequently filed cross-motions for judgment on the pleadings. The trial court held for Nautilus, and Vivify brought this appeal.

Analysis

In an opinion by Justice Terrence J. Lavin, the 1st District affirmed. He initially addressed Vivify’s argument that the trial court should have considered the terms of the underlying subcontract between Vivify and Victoria in applying the employee exclusion.

Lavin disagreed. He noted the case law holding that, where a policy provision is unambiguous, a court may not consider parol evidence to interpret the provision.

He said, moreover, that the parol evidence rule is not altered by Pekin Insurance Co. v. Wilson, 237 Ill.2d 446 (2010), where the Supreme Court permitted use of underlying pleadings and subcontracts to help determine coverage. Lavin distinguished Wilson on the ground that Wilson involved determining whether the circumstances of an underlying action fell within the scope of the policy. The issue in the instant case, on the other hand, involved simply interpreting policy language.

Lavin also relied on Pekin Insurance Co. v. CSR Roofing Contractors Inc., 2015 IL App (1st) 142473, which flatly rejected the proposition that a subcontract agreement could render otherwise clear and unambiguous language in an insurance policy ambiguous.

In addition, Lavin observed that the subcontract could not have any bearing on Nautilus’ intent in entering into the insurance policy, since Nautilus was not a party to the subcontract. He further noted that Vivify might have potential recourse against Victoria for failing to procure the requisite insurance. But that question was not before the court, nor was Victoria, and Vivify could have protected itself by reading the policy in any event.

Lavin went on to agree with the trial court that the employee exclusion unambiguously excluded coverage for Vivify. In doing so, he relied upon the second subpart of the exclusion, which barred coverage for, among other things, any insured’s subcontractors. It thus was Victoria’s status as a subcontractor, not its status as an insured, the dictated the result for Lavin.

He also rejected Vivify’s argument that the severability clause should give rise to coverage. He noted that none of the cases on which Vivify relied involved the kind of broad exclusion contained in the Nautilus policy.

The court, therefore, concluded that, because Vieyra was the employee of Vivify’s subcontractor, the employee exclusion applied, and Nautilus had no duty to defend. It affirmed the trial court’s judgment in favor of Nautilus.

Key points

• Parol evidence, or evidence extraneous to the policy itself, is not admissible in interpreting the meaning of an unambiguous insurance policy provision.
• A policy provision excluding coverage for injuries to the employees of an insured’s contractors or subcontractors will be given effect even if the contractor or subcontractor in question is not an insured under the policy.