This is part two of a two-part series. Part one was posted on Thursday.

The 7th U.S. Circuit Court of Appeals had to predict whether the Illinois Supreme Court would concur with two Appellate Court opinions — Pekin Insurance Co. v. Centex Homes, 2017 IL App (1st) 153601, and Pekin Insurance Co. v. Lexington Station, 2017IL App (1st) 16328 — on insurance coverage for an additional insured. With Chief Judge Diane S. Sykes dissenting, Circuit Judge David F. Hamilton’s majority opinion affirmed — with a slight modification — a declaratory judgment that United Fire & Casualty Co. had a duty to defend Prate Roofing & Installations against a negligence complaint filed by Carlos Noe Perdomo Ayala’s estate.

United Fire sold a liability policy to All Seasons Roofing, a subcontractor for Prate Roofing on a warehouse project. Prate was listed as an additional insured under the United Fire policy, but the insurance company’s duty to defend Prate was limited to bodily injury cases where Prate faced allegations of vicarious liability for the acts or omissions of All Seasons or others acting on its behalf.

Perdomo Ayala, an employee of 21st Century Roofing, was killed while working on the project when he fell through an unprotected skylight. His estate sued Prate and All Seasons.

United Fire refused to defend Prate and sued for a declaratory judgment.

The 7th Circuit was unanimous on one point — United Fire’s duty to defend Prate ended when it paid its $1 million policy limit to settle the claim against All Seasons. United Fire & Casualty Co. v. Prate Roofing, No. 19-3043 (July 30, 2021).

Here, in the second of two articles on this case, are highlights of Chief Judge Sykes’ dissent (with light editing and omissions not noted):

Determining whether an insurer has a duty to defend requires comparing the language of the insurance policy against the allegations in the plaintiff’s complaint and asking whether there is any possibility that the insurer could be required to indemnify the insured. My colleagues thus ask the right question. But where they see potential liability I see none.

Prate Roofing cannot, as a matter of law, be held vicariously liable for the torts of All Seasons. The underlying complaint states claims against Prate solely for direct liability. The complaint nowhere alleges that an agency relationship, the cornerstone of derivative liability, existed between Prate and any other defendant.

My colleagues mistakenly rely on boilerplate allegations of agency and general assertions of construction negligence — that is, direct liability — in finding a potential for imputed liability.

To understand the court’s missteps, it helps to start with industry norms for the type of insurance policy at issue here. General contractors like Prate routinely require their subcontractors to carry commercial general liability insurance naming the general contractor as an additional insured.

Obtaining additional-insured status gives the general contractor increased protection by transferring risk to the subcontractor.

Coverage for an additional insured is often quite limited — normally it covers only imputed liability or liability causally related to the subcontractor’s acts — because the general contractor carries its own primary Commercial General Liability policy insuring against its direct liability. Since coverage is so limited, these endorsements typically cost little or nothing above the standard policy premium.

This case involves one of these run-of-the-mill endorsements. Prate, a general contractor with its own CGL policy, required that All Seasons, its subcontractor, obtain a CGL policy and name Prate as an additional insured. The additional-insured rider came on the industry-standard form; the endorsement cost just $750 — less than 4% of the total premium; and it covers Prate only with respect to All Seasons’ liability, “which may be imputed to” Prate. In short, this cheap standard endorsement came with a clear standard limit: no imputed liability, no coverage.

It follows that United Fire has a duty to defend Prate if and only if Prate could be held vicariously liable for All Seasons’ conduct. My colleagues rightly explain that answering that question requires looking to the complaint in the underlying litigation. That complaint, however, must be read in light of basic principles of tort and agency law.

Imputed or vicarious liability arises from a principal-agent relationship. Whether such a relationship exists depends on the degree of control retained by the employer.

Three points on the retained-control spectrum are important. If the employer hires a contractor to accomplish a particular result without retaining any control over the means used — i.e., if it hires an “independent contractor” — the employer cannot be vicariously liable for the contractor’s torts.

If the employer maintains some degree of control — e.g., in a supervisory capacity — it may be directly liable for its failure to exercise that control with reasonable care. In such a case, the employer is personally at fault for its own negligence. Only if the employer retains control over the operative detail of the work can the contractor’s liability be imputed to the employer.

This is no-fault vicarious liability, and it is based on the principles of agency law, not negligence law. The principal’s liability is entirely derivative.

With these benchmarks in mind, it is easy to see why United Fire has no duty to defend. Prate is insured under this policy against imputed liability only, yet the underlying complaint exclusively alleges claims of direct liability.

The complaint sets out five counts against Prate. Each includes identical factual allegations of Prate’s negligent acts or omissions: that it “[f]ailed to provide adequate safeguards,” “[f]ailed to warn [p]laintiff of the dangerous conditions,” “[f]ailed to ensure that all persons on the premises were provided hard hat protection,” and the like.

If these allegations sound like they’re putting the fault on Prate, it’s because they are. Nowhere does the complaint allege that Prate, though itself blameless, is nonetheless liable for the acts of its agents.

Because the Ayala estate has not made any allegations that even hint at a theory of recovery based on vicarious liability, there is no legal or factual basis on which United Fire could be required to indemnify Prate. United Fire therefore has no duty to defend.

My colleagues point to three specific allegations against Prate in holding to the contrary. Two include the boilerplate assertion that Prate acted “individually and through its agents,” language that the court finds significant. It is not.

This kind of perfunctory statement is insufficient as a matter of Illinois law to plead an agency relationship. “A complaint relying on agency must plead facts which, if proved, could establish the existence of an agency relationship. It is insufficient to merely plead the legal conclusion of agency.” Connick v. Suzuki Motor Co., 675 N.E.2d 584, 592 (Ill. 1996).

Two cases from the Illinois Supreme Court illustrate the impact of this rule. Connick held that a complaint failed to state a claim for fraud based on imputed statements because it wasn’t enough to merely allege that the statements were made by “agents of” the defendant. And Carney v. Union Pacific R.R. Co., 77 N.E.3d 1, 7-8 (Ill. 2016) — a construction-negligence case like this one — noted that the plaintiff “ha[d] not pursued a claim of vicarious liability,” despite the complaint alleging that the defendant had acted “by and through its authorized agents and employees.”

The estate’s allegations here are similarly deficient. The complaint asserts that Prate acted “through its agents” but it includes no allegations to support a finding that any supposed agent had authority to act on Prate’s behalf. (Indeed, the complaint here is even more lacking than the one in Connick because it does not even allege who the agent is.)

My colleagues read far too much into this rote language, which appears routinely in complaints against corporate defendants since corporations can act only through agents.

These boilerplate allegations alone do not provide a legal basis for holding Prate vicariously liable and thus do not trigger United Fire’s duty to defend.

The remaining allegations identified by my colleagues fare no better, though they are stated in somewhat more specific terms. Prate allegedly “participated in coordinating the work being done and designated various work methods”; “schedule[d] work”; “had the authority to stop the work”; “had a duty to exercise reasonable care in the control of [the] construction site”; and “[f]ailed to supervise the work.”

These assertions are, admittedly, supervisory in nature. But that doesn’t mean they provide a footing for vicarious liability. Rather, these are stock allegations of direct negligence under Sec. 414 of the Restatement (Second) of Torts.

My colleagues characterize the allegations as “straddling the line” between direct and derivative liability. But as the comments to Sec. 414 show, these allegations fall decisively on the direct-liability side of the line.

In short, allegations that Prate negligently supervised the worksite are paradigmatic allegations of direct Sec. 414 liability.

As for the allegations that Prate could “coordinate,” “stop,” “inspect,” and “schedule” work on the jobsite, that isn’t even enough retained control to impose direct liability under Sec. 414, let alone vicarious liability.

I recognize, of course, that an intermediate Illinois appellate court has twice held that allegations materially identical to those at issue here stated a potential basis for vicarious liability sufficient to trigger the duty to defend an additional insured. See Pekin Ins. Co. v. Centex, 72 N.E.3d 831 (2017); Pekin Ins. Co. v. Lexington Station, LLC, 84 N.E.3d 554 (2017). But we are obligated to determine how the highest court of the state would rule, not the lower courts.

For the reasons just explained, I highly doubt that the Illinois Supreme Court would adopt the flawed reasoning of the Pekin cases.

I would reverse the judgment in favor of Prate and remand for entry of judgment for United Fire. I therefore respectfully dissent.