Third-Party Complaint Claims Can Be Considered in Duty to Defend

By Don R. Sampen, published, Chicago Daily Law Bulletin, October 6, 2020

The 7th U.S. Circuit Court of Appeals, applying Illinois law, recently held that allegations contained in third-party complaints could be considered in determining whether an additional insurer owed a duty to defend, so long as such complaints were not filed by the parties seeking the additional insured coverage.

The case is Scottsdale Insurance Co. v. Columbia Insurance Group, Inc., 2020 U.S. App. Lexis 27211 (7th Cir., Aug. 26). The insurer for the entities seeking additional insured coverage, Scottsdale, was represented by Goldberg Segalla LLP of Chicago. Quinn Johnston Henderson & Pretorius of Peoria represented the additional insurer, Columbia.

The underlying plaintiff, Eduardo Guzman, fell and sustained injuries while performing HVAC work as an employee of TDH Mechanical in Chicago. The work was being performed on property owned by Rockwell Properties and managed by Prairie Management & Development. TDH was a subcontractor of Prairie.

The contract between TDH and Prairie required that TDH procure liability insurance on which Rockwell and Prairie were additional insureds. TDH purchased liability coverage from Columbia, which contained an endorsement extending coverage to persons with whom TDH had agreed to provide coverage, but “only with respect to liability arising out of your ongoing operations performed for that insured.”

In 2017, Guzman sued Rockwell, Prairie and certain subcontractors in state court, not including TDH. He alleged, among other things, that Rockwell and Prairie failed to adequately supervise the work, thereby allowing the subcontractors to engage in unsafe practices. Some of the subcontractors filed third-party complaints against TDH for contribution, claiming it was at fault in causing the accident.

Scottsdale, which insured Rockwell, initially defended Rockwell and Prairie but subsequently took the position that Columbia should take over the defense and reimburse Scottsdale for the defense costs incurred.

When Columbia refused, Scottsdale brought this declaratory action in federal court. Upon a motion for judgment on the pleadings, the district court held for Scottsdale and found that Columbia had a duty to defend. Columbia brought this appeal.

Analysis

In an opinion by Judge Daniel A. Manion, the 7th Circuit affirmed. He initially observed, in accordance with the Columbia endorsement, that the additional insured coverage for Rockwell and Prairie was triggered so long as their claimed liability arose at least in part out of TDH’s ongoing operations.

In response to Columbia’s argument that the underlying complaint failed to allege sufficiently that the injury arose out of TDH’s conduct, Manion said it did because the complaint alleged that “subcontractors” engaged in unsafe practices, and TDH was a subcontractor.

Manion then considered the appropriateness of relying on the allegations in the third-party complaints that contended, with even greater clarity, that TDH was at fault. He said that reliance on such “extraneous” evidence was proper under Pekin Insurance Co v. Wilson, 237 Ill.2d 446 (2010), and other cases.

Columbia, however, argued that National Fire Insurance of Hartford v. Walsh Construction Co., 392 Ill.App.3d 312 (1st Dist. 2009), bore on both the adequacy of the underlying complaint and the third-party complaints in determining whether additional insured coverage had been triggered.

In that case, a subcontractor’s policy provided additional insured coverage to an owner and general contractor, subject, however, to an exception if the injury arose from the “sole negligence” of the additional insured. Walsh held that allegations in the underlying complaint of an “unspecified breach of the subcontractor’s duty to provide a safe work place” were not sufficient to plead around the exception and implicate coverage.

Manion found this aspect of the case distinguishable because here, unlike in Walsh, the underlying complaint did not allege merely an unsafe workplace but suggested more affirmatively that Prairie and Rockwell failed adequately to supervise, which, in turn, allowed the subcontractors to engage in unsafe practices.

The Walsh court further declined to rely on a third-party complaint in the underlying action to show some potential for negligence by the subcontractor, such that the “sole negligence” exception to coverage would not apply. The third-party complaint at issue in that case, however, according to Manion, was one filed by the general contractor who was seeking additional insured coverage.

Manion said it would not be appropriate to base additional insured coverage on the third-party pleading of a party who filed it to bolster its claim of coverage. In the case here, by contrast, at least two of the third-party complaints in the underlying case were not filed by the proposed additional insureds or related entities. Those allegations were thus appropriate for consideration.

The court therefore affirmed in favor of Scottsdale and found that Columbia owed a duty to defend Prairie and Rockwell.

Key point

Allegations in a third-party complaint in an underlying lawsuit may be relied upon by the court in the coverage action to determine the availability of additional insured coverage, but only if the third-party complaint was not filed by a party seeking the additional insured coverage.