A recent case decided by the United States Court of Appeals for the Seventh Circuit provides a roadmap to the intersection between the concepts of vicarious liability and the duty to defend. In United Fire & Casualty Company v Prate Roofing & Installations, LLC, the Court was required to decide an issue that often arises in the construction industry.
Did the plaintiff/insurance company have a duty to defend the defendant/general contractor as an additional insured under its subcontractor’s commercial general liability policy?
A commercial general liability insurance policy protects a business from claims for property damage and personal injury caused by the operation of its business. It guards against claims asserted by third persons. It can be broad and cover all risks or its coverage can be narrowed, depending upon the needs of the insured.
However, most businesses have some form of commercial general liability coverage.
A company called SparrowHawk, LLC owned two warehouses in Illinois. It contracted with a roofing company called All Seasons Roofing, Inc. to inspect the roof of both warehouses. All Seasons found damage caused by hail that needed to be repaired. However, All Seasons was a Tennessee company and not licensed in Illinois. So, it contracted with the defendant in this case, Prate Roofing & Installation, LLC, an Illinois company, to serve as general contractor. Prate then subcontracted the work back to All Seasons.
As part of the arrangement between Prate and All Seasons, All Seasons was required to obtain a commercial general liability insurance policy and name Prate as an additional insured. That policy was issued by the plaintiff, United Fire & Casualty Company.
As in all insurance disputes, tragedy struck. A worker fell through the roof and died. His estate brought a lawsuit against SparrowHawk, All Seasons and Prate. Prate tendered the defense of the estate’s lawsuit to United Fire, which denied coverage. United Fire then filed this lawsuit seeking a declaration that it had no duty to defend Prate.
The Court in both the majority opinion and the dissent recognized that a subcontractor naming the general contractor as an additional insured is common practice in the construction industry. In fact, it is more than just a common practice. It is usually a requirement. A general contractor wants to be shielded from liability for the actions of its subcontractor.
An additional insured is a third-party, unrelated to the named insured, covered under an insurance policy issued to the named insured. An additional insured is covered for liability resulting from the actions of the named insured. An additional insured is not covered for liability caused by its own misconduct.
Often, the coverage is provided through an endorsement to the policy. An insurance company is willing to add one or more additional insureds to a policy because it does not significantly increase the exposure of the insurance company. The underlying misconduct is the named insured’s, and the damages are those suffered by the claimant as a result of the misconduct of the named insured. The presence of an additional insured under the policy does not generally increase the claimant’s damages, because the policy only covers damages caused by the actions of the named insured, not the additional insured.
This was the situation in the United Fire & Casualty Company case. The policy issued to All Seasons by United Fire named Prate as an additional insured through an endorsement. Even though Prate was not the named insured, United Fire promised to defend and indemnify Prate but only:
with respect to [its] liability for ‘bodily injury’ … which may be imputed to that person or organization directly arising out of: 1. Your [i.e., All Seasons’] acts or omissions; or 2. The acts or omissions of those acting on your [All Seasons’] behalf; in the performance of your [All Seasons’] ongoing operations for the additional insured.
This is what is called vicarious liability.
Vicarious liability is based in the law of agency. It generally requires a principal-agent relationship, and it holds the principal liable for the acts of its agent. It can also be described as imputed or indirect liability because it depends not upon the direct conduct of the principal, but on the actions of the agent.
In answering this question, the Court recognized a difference between a duty to defend and a duty to indemnify. It also said that, under Illinois law, the duty to defend is much broader than the duty to indemnify. The duty to defend depends upon the allegations of the complaint. The duty to indemnify depends upon nature of the judgment, if any, entered against the insured. For example, a duty to defend may arise if the plaintiff simply alleges negligence.
However, the insurance company may have a duty to indemnify the insured only if judgment is entered against the insured for conduct covered under the policy. Furthermore, the duty to defend does not depend upon the plaintiff’s likelihood of success. The issue is whether the complaint alleges conduct covered by the policy; not whether the plaintiff is likely to prove the allegations in the complaint.
This is what Illinois and many other states call the “eight corners doctrine”. Coverage is determined by comparing the “four corners” of the complaint to the “four corners” of the insurance policy.
To determine whether the insurer has a duty to defend the insured, the court must look to the allegations in the underlying complaint and compare those allegations to the relevant provisions of the insurance policy.
If the facts alleged in the complaint fall or potentially fall within the policy coverage, then the insurer must provide a defense.
Both the majority opinion and the dissent agreed that the question was whether the estate’s complaint alleged that Prate was liable for the actions of All Seasons. The majority answered that question in the affirmative based upon the following allegations in the complaint:
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.
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.
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….
The majority recognized that there is a fine line between direct and vicarious liability. It then found that the italicized language quoted above sufficiently alleged that Prate was liable for the acts of All Seasons. The merit or lack of merit of those allegations did not matter for purposes of determining whether United Fire had a duty to defend. The mere allegations were all that mattered.
The dissent found it a bit easier to draw the line between direct and vicarious liability. According to the dissent, the complaint alleged misconduct on the part of Prate, not All Seasons. Prate had “the authority to stop the work . . . in the event that the work was being performed in a dangerous manner”. Prate “had a duty to exercise reasonable care”. Prate “failed to supervise the work”, “failed to provide safe, suitable and proper fall protection measures” and “failed to ensure safe, suitable and proper working conditions”.
In the mind of the dissenting Judge, the complaint alleged wrongdoing on the part of Prate for which it was liable. This was direct liability, not vicarious liability, and, as a result, United Fire had no obligation to provide a defense to Prate as an “additional insured” under the endorsement to All Season’s policy.
The result of this case proves a long-standing legal principal. Sometimes the law matters and sometimes the facts matter. In this case, both the majority opinion and the dissent agreed on the law. However, they reached different conclusions because of their view of the facts. As a judge once said to me – “you get different nudges from different judges”
However, this was not the end of the case.
We already asked this question and appeared to have gotten an answer in the affirmative. However, the facts on the ground changed and so did the outcome of the case.
While United Fire’s lawsuit against Prate was pending, United Fire settled the estate’s lawsuit against All Seasons. United Fire paid the estate its policy limit and, in exchange, obtained a release from the estate releasing All Seasons from any further liability. The result was something that both the majority opinion and the dissent could agree on.
As stated above, vicarious liability is a concept based in agency law. A principal is liable for the acts of its agent only if two conditions are met: 1) there is a principal-agent relationship, and 2) the agent is liable. If the agent has no liability, then the principal cannot be liable for the acts of the agent.
This tenet of agency law follows neatly from the nature of imputed liability. The principal’s liability exists solely because of the agent’s liability; if the latter is erased, so is the former.
The settlement agreement between All Seasons and United Fire, on the one hand, and the estate of the deceased worker, on the other hand, extinguished All Seasons’ liability to the estate. This is because the parties executed a settlement agreement providing that All Seasons had no further liability to the estate.
Since All Seasons had no liability to the estate, Prate could have no vicarious liability for the actions of All Seasons. As a result, United Fire did not owe Prate a defense as an additional insured under the commercial liability policy issued to All Seasons.