This is part one of a two-part series. Part two runs Friday.
In a coverage case with a commonplace scenario — a contractor sued after an accident at a construction project claimed it qualified as an additional insured under a subcontractor’s insurance policy, because the underlying tort complaint alleged the contractor was vicariously liable for the subcontractor’s negligence — Chief 7th U.S. Circuit Court of Appeals Judge Diane S. Sykes and Judge David F. Hamilton disagreed on whether the Illinois Supreme Court would follow two 2017 opinions from the Illinois Appellate Court.
The plaintiff in the coverage litigation, United Fire & Casualty Co., sold a liability policy to All Seasons Roofing. All Seasons was a subcontractor for Prate Roofing & Installations on a warehouse project. Prate was listed as an additional insured under the United Fire policy, but the insurance company’s duty to defend and indemnify 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 All Seasons’ behalf.
Carlos Noe 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 that this decision was correct.
The negligence complaint against Prate contained a typical set of allegations saying the company, acting “by and through its agents, servants and employees,” was liable for 19 negligent acts or omissions.
United Fire eventually settled the lawsuit against All Seasons by paying its $1 million liability limit, but the deal didn’t include a release of the claim against Prate.
The district judge ruled against United Fire.
With a slight modification — the duty to defend ended with payment of the policy limit — Hamilton’s majority opinion affirmed. United Fire & Casualty Co. v. Prate Roofing, No. 19-3043 (July 30, 2021).
Here, in the first of two articles on this case, are brief highlights of Hamilton’s analysis (with light editing and omissions not noted):
The insurer argues that because its named insured was an independent contractor, Illinois law would not —could not — impose any liability on the additional insured, so that there was no risk of covered liability and thus no duty to defend. The district court rejected this reasoning. The court explained that the duty to defend depends on the claims the plaintiff asserts, not on their prospects for success.
We agree. A liability insurer’s duty to defend applies to impose a duty to defend allegations potentially within the policy’s liability coverage, regardless of predictions about prospects for success. The duty to defend applies even to hopeless suits — whether they are unfounded, false or fraudulent. By that logic, the duty to defend extends even to allegations seeking to impose liability that would require a dramatic change in the law.
In this case, the plaintiff’s allegations in the underlying complaint were broad enough to include claims against the additional insured that potentially fall within the scope of coverage for vicarious liability. Regardless of their potential merits, they sought to hold the additional insured liable, at least in part, for the actions or omissions of the named insured.
The Illinois Appellate Court found a duty to defend on nearly identical facts in Pekin Insurance Co. v. Centex Homes, 72 N.E.3d 831 (Ill. App. 2017), and Pekin Insurance Co. v. Lexington, 84 N.E.3d 554 (Ill. App. 2017). Both decisions are consistent with Illinois law more broadly, and we believe the Illinois Supreme Court would agree.
We follow those opinions and agree with the district court’s grant of summary judgment to the additional insured finding a duty to defend it in this case.
The duty to defend
Courts construe liability insurance policies and complaints liberally in favor of imposing a duty to defend. See Steven Plitt et al., 14 Couch on Insurance Sec. 200:13 (3d ed. 2020) (“When there is doubt as to whether claims potentially fall within policy coverage, any doubt or ambiguity in coverage is generally resolved in favor of the insured.”).
The Illinois Supreme Court applies this standard: the “allegations in the underlying complaint must be liberally construed in favor of the insured.” Outboard Marine v. Liberty Mutual, 154 Ill.2d 90, 125, 607. “If the facts alleged in the underlying complaint fall within, or potentially within, the policy’s coverage, the insurer’s duty to defend arises.” Id.
An insurer’s refusal to defend is “unjustifiable unless it is clear from the face of the underlying complaint that the facts alleged do not fall potentially within the policy’s coverage.” Id.
This standard necessarily means that a liability insurer may not deny a defense on the ground that the suit against its insured is hopeless. General Agents Insurance Co. v. Midwest Sporting Goods, 215 Ill.2d 146, 155, 828 (2005) (“If the underlying complaint alleges facts within or potentially within policy coverage, an insurer is obligated to defend its insured even if the allegations are groundless, false or fraudulent.”).
The policy and complaint in this case
The proper question here is whether the Perdomo Ayala estate’s allegations sought to hold Prate Roofing liable — at least in part — for actions of others, especially All Seasons and 21st Century Roofing.
Within the scope of that question, one way to invoke a duty to defend is to ask whether, if the Perdomo Ayala estate proves its allegations, there is any potential that Prate Roofing could be held liable for the actions or omissions of those other entities.
We emphasize: “[A]n insurer’s duty to defend the insured is determined primarily by the pleadings in the underlying lawsuit without regard to their veracity, what the parties know or believe the alleged facts to be, the outcome of the underlying case, or the merits of the claim. … Even if the allegations are groundless, false, or fraudulent, the insurer is obligated to defend.” 14 Couch on Insurance Sec. 200:20; accord, Midwest Sporting Goods, 215 Ill.2d at 155.
As the district court pointed out, “the underlying complaint alleges that All Seasons committed one or more of 19 alleged acts of negligence or omission.” The question is whether any of those 19 alleged acts or omissions could be alleged acts or omissions by other entities for which the estate seeks to hold Prate Roofing liable.
We highlight three portions of the estate’s complaint. Paragraph 3 of Count 1 alleges:
“Prate … individually and through its agents, servants and employees ... participated in coordinating the work being done and designated various work methods, maintained and checked work progress and participated in the scheduling of the work and the inspection of the work. In addition, … Prate … had the authority to stop the work, refuse the work and materials and order changes in the work, in the event the work was being performed in a dangerous manner or for any other reason.”
Paragraph 4 alleges:
“Prate … had a duty to exercise reasonable care in the control of said construction site, including the provision of safe, suitable and proper work site conditions, and any fall protection measures for plaintiff and others then and there working.”
And Paragraph 5 alleges:
“Prate … by and through its agents, servants and employees, was then and there guilty of one or more of the following careless and negligent acts and/or omissions: . . . (f) failed to supervise the work being done on the aforesaid premises; (g) failed to provide safe, suitable and proper fall protection measures; (h) failed to ensure safe, suitable and proper working conditions.”
To decide the duty to defend, we need not predict whether the estate was likely to prove any of these claims against Prate Roofing. Rather, the question is whether — if the estate were to win on any of these theories — the liability for Prate Roofing would be liability for bodily injury imputed to it directly arising out of All Seasons’ acts or omissions, the acts or omissions of anyone acting on behalf of All Seasons, or All Seasons’ performance of its ongoing operations for Prate Roofing.
This framing of the question is a paraphrase of the vicarious liability endorsement.
Nothing in the estate’s allegations made it impossible for Prate Roofing to be held liable for actions or omissions of All Seasons and/or All Seasons’ agents. The estate’s allegations against Prate Roofing were phrased so as to straddle the line between holding it liable for its own actions and omissions and holding it vicariously liable for acts and omissions of non-employee agents, such as, potentially, All Seasons. That straddle should not be surprising, especially at the pleading stage of the estate’s lawsuit.
As far as we know, the estate was free to postpone committing itself to a choice among direct liability, vicarious liability, or a combination of both for Prate Roofing. That means we could not exclude the possibility, based on the pleadings, that any liability for Prate Roofing would fit within the vicarious liability endorsement. That’s why the district court was correct.
Our analysis tracks closely the reasoning of the Illinois Appellate Court in similar construction insurance disputes in Centex Homes and Lexington Station.
When facing a question of state law, federal courts try to predict how the state’s highest court would rule.
We see no persuasive indication that the Illinois Supreme Court would decide the question differently than the Illinois Appellate Court did, so we follow Centex Homes and Lexington Station in holding that the allegations of the Perdomo Ayala estate in this case left room for vicarious liability against Prate Roofing.
The estate’s claims against Prate Roofing potentially fell within United Fire’s coverage and triggered the duty to defend.