With its April 18th decision in National Union Fire
Ins. Co. of Pittsburgh, Pa. v R. Olson Constr. Contractors, Inc., ___
NE2d ___, 2002 WL 689662, the Illinois Appellate Court has fired the latest
salvo in a war that has raged for 10 years over whether an additional insured
endorsement that excludes the negligence of the additional insured furnishes
illusory coverage. This debate, which so far has taken place in the Illinois
courts alone, has nationwide significance. That is because the exclusion for
the negligence of the additional insured is likely to become the underwriting
weapon of choice for insurers with large books of subcontractor business, faced
with the ever-expanding number of states with court decisions construing Insurance
Services Office, Inc. (ISO), additional insured endorsements broadly in favor
of coverage.
So far, with the exception of AIG, the large commercial general liability
(CGL) insurers do not use these endorsements. But every time a court finds that
these endorsements are not illusory, it gives other insurers an incentive to
use them.
National Union v Glenview Park District
The opening shots of this war were fired in 1992, with the Illinois Appellate
Court's decision in National Union Fire Ins. Co. of
Pittsburgh, Pa. v Glenview Park District, 594 NE2d 1300 (Ill App 1992).
The court in that case rejected the contention that the exclusion for the Park
District's negligence rendered the coverage illusory. The court's analysis,
like that of all of the appellate court decisions in the ensuing 10 years, betrayed
a fundamental misunderstanding of the subject. The court reasoned that the exclusion
did not negate all coverage. Rather, the court said, it merely required that
the negligence of the named insured be established as a condition for the additional
insured's coverage. But the court did not explain how establishing the named
insured's negligence avoids the exclusion for the additional insured's negligence.
It clearly does not.
On appeal to the Illinois Supreme Court, that court held that the exclusion
would not apply to the claim brought under the now-repealed Structural Work
Act. Under the "defend the entire complaint if any part of it is potentially
covered" rule, National Union therefore had to defend the entire complaint (including
the negligence claim), making it unnecessary for the court to determine whether
the exclusion for the Park District's negligence rendered the coverage illusory.
The court vacated the portion of the appellate court judgment holding that the
coverage was not illusory. [National Union Fire Ins.
Co. of Pittsburgh, Pa. v Glenview Park District, 632 NE2d 1039 (Ill 1994).]
Chief Justice Bilandic, joined by Justice Heiple, dissented from that portion
of the majority opinion that found it unnecessary to decide the illusory coverage
issue. The chief justice opined that the exclusion in the National Union endorsement
for the Park District's negligence rendered the coverage illusory. In response
to National Union's argument that the endorsement was not illusory because it
covered the Park District for its vicarious liability for the acts or omissions
of National Union's named insured (the Park District's contractor), the chief
justice said:
The Glenview Park District does not need, nor does it seek, coverage
for vicarious liability in connection with the NDS painting contract. NDS
is an independent contractor and the Glenview Park District cannot be held vicariously liable for its acts except under a narrow exception. [632 NE2d at 1046, emphasis supplied.]
Said the chief justice, the exclusion for the negligence of the additional
insured "deceptively affects the general liability risks that the endorsement
purports to assume," and it therefore "violates public policy and should not
be enforced." [Id.]
It seemed that the stage had been set for the Illinois Appellate Court to
take up the chief justice's challenge and analyze the illusory coverage issue.
Either the repeal of the Structural Work Act in 1995, or a case where indemnity
was at issue (and not just the duty to defend, as in the Glenview Park District case), would have presented
such an opportunity. And yet when it came, in 1998, the appellate court again
rejected the assertion that an exclusion for the negligence of the additional
insured renders the coverage illusory.
American Country v Kraemer Bros.
In American Country Ins. Co. v Kraemer Bros., Inc.,
699 NE2d 1056 (Ill App 1998), the court acknowledged that "if the claim is brought
by an employee of the subcontractor, as was done in this case, the negligence
cannot be imputed to the general contractor." [699 NE2d at 1062.] In other words,
the court accepted the point in the chief justice's dissenting opinion that
there can be no vicarious liability for the acts or omissions of an independent
contractor. And yet, the court nonetheless rejected the contention that the
coverage was illusory, reasoning that:
[T]he imputed negligence coverage in the policy includes claims based
on strict liability where the general
contractor is held to have a duty that it cannot delegate to someone else.
Restatement (Second) of Torts, sections 416-429.
The court's reasoning was flawed, however. In fact, Illinois law imposes
strict liability in only two situations:
Illinois has recognized strict liability principally in two instances:
(1) when, under certain circumstances, a defendant introduces a product
into the community which is unreasonably dangerous to the user, consumer,
or to his property (product liability cases); and (2) when a defendant engages
in ultrahazardous or abnormally dangerous activity as determined by the
courts[.] [Miller v Civil Constructors, Inc.,
651 NE2d 239, 242 (Ill App 1995) (citations omitted).]
Ordinary construction projects are obviously not product liability cases.
Nor are they ultrahazardous activity as that term is used in section 520 of
the Restatement (Second) of Torts. Thus, there is simply no way, contrary to Kraemer Bros., that a general contractor on an
ordinary construction project can be held strictly liable for the acts or omissions
of its subcontractor.
The Kraemer Bros. court gave two examples
of strict liability. The first example, St. Paul Fire
& Marine Ins. Co. v Frankart, 358 NE2d 720 (Ill App 1976), involved a
question of insurance coverage for a truck, operating under an Interstate Commerce
Commission (ICC) permit, that was involved in an injury-causing accident. The
court recognized that the general rule of nonliability for acts or omissions
of an independent contractor has an exception, contained in section 428 of the
Restatement (Second) of Torts, for activity that can be carried on only under
a franchise granted by a public authority (such as the ICC). The trucking carrier
in that case was held liable for the acts and omissions of its independent contractor
driver, because the interstate hauling of cargo for hire could be carried on
only with an ICC permit.
The activity in Frankart is simply not analogous
to construction activity, however. The Kraemer
Bros. court did not even attempt to explain how Frankart establishes that a general contractor
can be strictly liable for the acts or omissions of a subcontractor. In fact,
a review of the Comments and Illustrations to section 428 of the Restatement
shows that it specifically does not apply to construction activity. Thus, the Kraemer Bros. court misapplied Frankart. Frankart in no way supports the conclusion that a general contractor on a construction
project can be strictly liable for the acts or omissions of a subcontractor.
The second example of strict liability given by the Kraemer Bros. court was Clark v City of Chicago, 410 NE2d 1025 (Ill App
1980). Clark was a case involving demolition
of a building. Demolition is a well-recognized example of ultrahazardous activity
that subjects owners and general contractors to strict liability. But no ordinary
construction activity, such as that carried on by American Country's named insured
(masonry work), has ever been recognized as subjecting anyone to strict liability.
Thus, Clark in no way supports the assertion
that a general contractor on an ordinary construction project could ever be
strictly liable for the acts or omissions of its subcontractor.
Kraemer Bros. simply failed to establish any
legal possibility of a general contractor on an ordinary construction project
being held strictly liable for a subcontractor's acts or omissions. The opinion
failed to take the next logical step after observing that strict liability is
possible under Illinois law. The court should next have asked whether any recognized
case of strict liability in Illinois bore any resemblance whatsoever to the
case before it in particular (ordinary masonry work), or to any ordinary construction
activity in general. The answer, obviously, is "No." Had the court asked that
question, it could not have avoided the conclusion that the American Country
endorsement furnished illusory coverage. Instead, the court simply concluded
that because strict liability does exist, the endorsement's coverage was not
illusory. That conclusion, however, is a non sequitur.
American Country v Cline
Kraemer Bros. was followed in American Country Ins. Co. v Cline, 722 NE2d 755
(Ill App 1999), which, in addition to following Kraemer
Bros., offered three reasons of its own for rejecting the general contractor's
contention that the exclusion for the negligence of the additional insured rendered
the coverage illusory.
First, said the court, because American Country only charged $150 for issuing
a blanket additional insured endorsement, it must have intended to cover "only
a narrow class of claims." This is interesting, if for no other reason, because
it appears to mark the debut of the opposite of Professor Keaton's doctrine
of the "reasonable expectations of the insured." Here, the court ignored what
Pepper Construction Co., the general contractor, reasonably expected when it
bargained to become an additional insured on its subcontractor's CGL policy,
and instead focused on the "reasonable expectations of the insurer."
This perversion of Professor Keaton's doctrine can be answered in three ways.
First, no matter how small the premium and how narrow the expectation of coverage,
if it covers nothing, it's illusory, and nothing can justify that. Second, American
Country already factored in the risk of claims against additional insureds when
it calculated the premium for its named insured, because the named insured's
claims experience already reflected claims against additional insureds in previous
policy periods. The $150 premium reflects administrative costs more than additional
risk. Third, it is settled Illinois law that the amount of premium does not
determine policy coverage. [American States Ins. Co.
v. Liberty Mutual Ins. Co., 683 NE2d 510, 514 (Ill App 1997).]
The court also said that if Pepper wanted additional insured coverage similar
to the coverage it already had with its own insurer, it should have paid a like
premium to American Country. Needless to say, however, Pepper could not reasonably
be expected to arrange for American Country to receive a higher premium than
it charged. Moreover, Pepper's own risk management program—whether that program
consisted of traditional insurance, self-insurance, or some combination of the
two—would have been designed (and priced) with the assumption that Pepper would
enjoy industry standard coverage on its subcontractor's policies. And certainly,
ISO CG 20 10 coverage is the industry standard that undoubtedly would have been
factored in. American Country's additional insured coverage falls far short
of that standard, however. Finally, Pepper's reasonable intent to acquire industry
standard additional insured coverage would have been factored into the contract
price with American Country's named insured.
The court's second reason for rejecting Pepper's illusory coverage contention
was the notion that because American Country agreed to provide Pepper with coverage
for liability arising out of the subcontractor's work, it should not be expected
to provide coverage for liability arising out of Pepper's own work. But the
court did not explain how Pepper could be covered for liability arising out
of its subcontractor's work without being covered for liability arising out
of its own work. How is such a thing even possible? How could any claim against
Pepper involve the subcontractor's work without also involving Pepper's work?
The court seems to have assumed that the one could be separated from the other
(it can't), or that the two were mutually exclusive (they're not). There is
no reason that a claim cannot involve both Pepper's work and its subcontractor's;
in fact, there can't be a claim against Pepper that involves only the subcontractor's
work and not Pepper's. Even if such a thing were a logical possibility, it would
be rendered impossible by the definition of "your work" in Pepper's CGL form,
which includes the work of subcontractors.
Third, the court noted that American Country had filed its manuscript additional
insured endorsement with the Director of the Illinois Department of Insurance,
and the Director had not rejected it. The Director's silence, said the court,
is "entitled to great weight as against the contention that such a provision
is against public policy." But the court overlooked the fact that the Director
filed an amicus curiae brief in support
of the Glenview Park District in National Union Fire
Ins. Co. of Pittsburgh, Pa. v Glenview Park District, supra, 632 NE2d
1039 (Ill 1994). In his brief, the Director urged the Illinois Supreme Court
to find that the National Union endorsement, which contained an exclusion identical
to American Country's, was against public policy because it furnished illusory
coverage. Just why the Director did not reject American Country's identical
endorsement is a matter of speculation. "Bureaucratic snafu" is a phrase that
readily comes to mind. But in light of the Director's brief in the Glenview Park District case, it seems patently
unreasonable to infer consent from the Director's silence.
Great American v West Bend Mut.
Against this seemingly impregnable shield guarding the insurers is Great American Ins. Co. v West Bend Mut. Ins. Co.,
723 NE2d 1174 (Ill App 2000). The opinion at first blush appears to furnish
a road map around the exclusion for the additional insured's negligence, showing
how it is at least possible that there could be coverage despite this exclusion.
But close analysis shows that the decision is deeply flawed, because it totally
misunderstands the concept of imputed, or vicarious, liability.
The Great American opinion did not explicitly
analyze the exclusion for the negligence of the additional insured in the West
Bend policy, but the opinion nonetheless should be a part of any analysis of
this issue, because of its discussion of "imputed" liability. As we have seen,
imputed (or "vicarious") liability is all that an endorsement with such an exclusion
could possibly cover. Yet this opinion badly misdefines and misapplies the concept,
so that additional insureds that take refuge in its holding are likely to find
they have entered a trap from which they are unlikely to emerge.
This is what the Great American court said:
Liability for negligence may be imputed where the person to whom the
negligence is imputed had a legal right to control the action of the person
actually negligent. Negligence in the conduct of another will not be imputed
to a party if he did not authorize such conduct, participate therein, or
have the right or power to control it. [723 NE2d at 1177 (quotations and
citations omitted).]
Right away, the question begs to be asked: Is it not negligent to authorize
unsafe conduct, participate in it, or fail to control it? The answer, obviously,
is "Yes." Thus, one who does these things is directly liable, not vicariously
liable. His liability is not imputed to him.
It is important to keep in mind that one who is vicariously liable for the
acts or omissions of another (or, put another way, one to whom liability is
"imputed") is himself totally free of any negligent conduct. Rather, he is liable
only because of his relationship to the
one who committed the act or omission giving rise to liability to a third party.
This is made clear by the definition in Black's
Law Dictionary (6th ed.) of vicarious liability:
The imposition of liability on one person for the actionable conduct
of another, based solely on a relationship
between the two persons. Indirect or imputed legal responsibility for acts
of another; for example, the liability of an employer for the acts of an
employee, or a principal for torts and contracts of an agent. [Emphasis
supplied.]
But if, on the other hand, the person who is liable was guilty of acts or
omissions of his own, then his liability
is not vicarious; it is direct, i.e., he
is liable for his own acts and omissions,
not someone else's. This is true even where his acts or omissions are passive,
in comparison with the active fault of the one he failed to supervise or control,
for example. This was the case with the general contractor in the Great American
case. If that general contractor was guilty of authorizing, participating in,
or failing to exercise the right or power to control unsafe work methods, then
his liability is direct, not vicarious (or imputed), because he himself was
negligent, even though that negligence is passive in comparison with the subcontractor's
negligence.
That the general contractor's liability for authorizing, participating in,
or failing to exercise control over his subcontractor would be direct liability,
as opposed to vicarious or imputed, is made clear by a line of cases deciding
whether the anti-indemnity statute voids an agreement requiring a subcontractor
to indemnify a general contractor for the general contractor's Structural Work
Act liability. The statute prohibits agreements in construction contracts that
call for one party to indemnify another for the indemnified party's own negligence.
In that line of cases, the general contractor (the party seeking indemnification)
contended that the statute did not void the agreement, because liability under
the Structural Work Act can be imputed, and thus, indemnification for imputed
liability is not indemnification for one's own negligence. The courts rejected
this contention, however, holding that though passive or merely technical, a
general contractor's liability for failing to supervise his subcontractor is
not imputed liability; it is direct. See, e.g., Pettie
v Williams Bros. Constr., Inc., 589 NE2d 169, 174 (Ill App 1992) ("liability
under the Structural Work Act only arises out of actual negligence and not vicariously");
accord, Lavelle v Dominick's Finer Foods, Inc.,
592 NE2d 287 (Ill App 1992); Motor Vehicle Cas. Co.
v GSF Energy, Inc., 549 NE2d 884 (Ill App 1989); Ryan v E.A.I. Constr. Corp., 511 NE2d 1244 (Ill
App 1987); Cox v Lumbermens Mut. Cas. Co., 439
NE2d 126 (Ill App 1982).
In a negligence case, the principle is the same: even liability resulting
from the general contractor's merely passive or technical negligence is nonetheless
the general contractor's own negligence.
In Jandrisits v Village of River Grove, 669 NE2d
1166 (Ill App 1996), the court rejected the indemnitee's contention that cases
holding that Structural Work Act liability cannot be imputed are inapplicable
to a negligence case. On the contrary, the court held, in a negligence case,
one who employs an independent contractor can only be held liable for his own
negligence, and therefore, any contract requiring the independent contractor
to indemnify would violate the anti-indemnity statute. Because liability for
one's own negligence is direct, not vicarious or imputed, it would therefore
be excluded from an additional insured endorsement, such as West Bend's, that
excludes the additional insured's own negligence.
The Great American court, in taking pains
to refute the general contractor's assertion that liability under the Structural
Work Act cannot be imputed, gave an example of how such liability can in fact
be imputed:
If a corporation employs a foreman to take charge of construction, and
the foreman violates the [Structural Work] Act, the corporation is liable,
vicariously, for its employee's acts. Corporations, which necessarily act
through their agents, are vicariously liable for their employees' violations
of the Act, and those violations are imputed to the corporation. [723 NE2d
at 1177.]
But that example involves liability being imputed from agent to principal,
from employee to employer. In fact, agent-principal and employee-employer relationships
are precisely the context in which vicarious liability arises, according to
the definition in Black's cited above.
But it is clear that the general contractor's relationship with the subcontractor
is not agent-principal or employee-employer. Rather, the subcontractor is an independent contractor. And under section
409 of the Restatement (Second) of Torts, one cannot be vicariously liable for
the acts or omissions of an independent contractor:
Except as stated in sections 410-429, the employer of an independent
contractor is not liable for physical harm caused to another by an act or
omission of the contractor or his servants.
Thus, the analysis given by the Great American court does not in any way establish that liability can be imputed from subcontractor
to general contractor. The court made a fundamental error in overlooking the
distinction between those relationships in which liability can be imputed (agent-principal
and employee-employer) and those in which it cannot (general contractor-subcontractor),
and in reasoning that liability under the Structural Work Act can be imputed,
contrary to the holdings in Pettie v Williams Bros.
Constr., Inc., 589 NE2d 169, 174 (Ill App 1992); Lavelle v Dominick's Finer Foods, Inc., 592 NE2d
287 (Ill App 1992); Motor Vehicle Cas. Co. v GSF Energy,
Inc., 549 NE2d 884 (Ill App 1989); Ryan v E.A.I.
Constr. Corp., 511 NE2d 1244 (Ill App 1987); and Cox v Lumbermens Mut. Cas. Co., 439 NE2d
126 (Ill App 1982).
National Union v R. Olson Constr. Contractors
The opinion in this brand new case, cited above, adds nothing to the discussion
not already supplied by earlier cases. It is noteworthy, however, that this
opinion does recognize, as Kraemer Bros. did,
that a general contractor cannot be vicariously liable for the acts or omissions
of a subcontractor. The court said:
There is no indication that Meyer was anything but an independent contractor,
so Olson cannot be vicariously liable for the negligent acts of Meyer resulting in harm to Meyer's employee. [Slip
op. at 5 (emphasis supplied.)]
Endorsements That Exclude the Additional Insured's Negligence Furnish Illusory
Coverage
There is support outside Illinois for the assertion that an exclusion for
the negligence of the additional insured renders the coverage illusory. In Bonner County v Panhandle Rodeo Assoc., 620 P2d
1102 (1980), the Idaho Supreme Court refused to enforce an exclusion in an additional
insured endorsement for the additional insured's "sole negligence." The court
held that to do so would "defeat the very purpose or object of the insurance."
[620 P2d at 1106.] See also, Douglas R. Richmond & Darren S. Black, Expanding Liability Coverage: Insured Contracts
and Additional Insureds, 44 Drake Law Review 781, 806 (1996) ("an endorsement
that provides coverage only for the additional insured's vicarious liability
may be illusory and provide no coverage at all").
Numerous other courts have recognized that the purpose of additional insured
coverage is to furnish coverage for the additional insured's own, even his sole,
negligence. See Marathon Ashland Pipeline LLC v Maryland
Cas. Co., 243 F3d 1232, 1240 (10th Cir 2001) ("it is obvious that additional
insureds expect more from an endorsement clause than mere protection from vicarious
liability"); Shell Oil Co. v National Union Fire Ins.
Co. of Pittsburgh, Pa., 44 Cal App 4th at 1643-44, 52 Cal Rptr 2d at
585-86 (Cal App 1996) ("restricting the CGL to indemnifiable claims, and thus
excluding from it those involving Shell's sole negligence, would have left Shell
unprotected for those claims for which it most needed insurance"); Freund v Utah Power & Light Co., 793 P2d 362
(Utah 1990) ("[o]ne reason, at least, why the licensor wanted to be an additional
insured was to have coverage for its own negligence"); Chevron U.S.A., Inc. v Bragg Crane & Rigging Co., supra,
180 Cal App 3d 639, 644, 225 Cal Rptr 742, 745 (Cal App 1986) ("a fundamental
purpose of insurance [is] to protect against liability for one's own negligence").
If an exclusion defeats the very purpose of such coverage, it renders that coverage
illusory.
Other cases, outside the additional insured context, illustrate that courts
will not hesitate to find coverage illusory where there is no tangible scenario
in which the coverage would apply. See, e.g., Fidelity
& Guaranty Ins. Underwriters, Inc. v Everett I. Brown Co., 25 F3d 484,
490 (7th Cir 1994) (Indiana law) (an insurance provision is considered illusory
"if a premium was paid for coverage which would not pay benefits under any reasonably
expected set of circumstances").
Indeed, coverage has been found illusory even where there are actual circumstances
where coverage might conceivably apply, if the possibility of those circumstances
coming into existence is too remote. For example, in the leading Illinois case, Glazewski v Allstate Ins. Co., 466 NE2d 1151
(Ill App 1984), aff'd. in relevant part sub nom. Glazewski
v Cornet Ins. Co., 483 NE2d 1263 (Ill 1985), the court held that an insurer
was guilty of fraud when it sold underinsured motorist coverage with limits
equal to the minimum liability limits mandated by statute. The court reasoned
that the coverage was virtually non-existent because the lowest liability limits
another motorist could ever have would be the statutory minimum, yet the underinsured
motorist limits were also the minimum; therefore, there could never be a claim.
The court acknowledged that the insured could get into an accident in a state
with lower statutory minimum liability limits than Illinois, and that there
were 16 states with lower limits. Thus, there would be actual coverage for accidents
occurring in those states with minimally insured motorists. Nonetheless, the
court found the coverage fraudulent, because it would never apply to accidents
occurring in Illinois. Although Glazewski was
not an illusory coverage case per se, it was recognized as the standard for
determining illusory coverage in American Country Ins.
Co. v Cline, supra, 722 NE2d 755, 763 (Ill App 1999) ("courts will not
construe or enforce a policy in a way that renders the coverage provided of
no value to the insured," citing Glazewski).
Conclusion
The time has come for Illinois courts to confront this issue squarely. General
contractors can only be liable for their own negligence, and an additional insured
endorsement that excludes the additional insured's own negligence covers nothing.
It is therefore illusory. The judicial gymnastics employed by the Illinois Appellate
Court in the last 10 years to avoid that simple conclusion have left confusion
and injustice in their wake. If the Illinois Appellate Court will not reexamine
this issue, the Illinois Supreme Court should take up the challenge of its late
chief justice and hold these endorsements illusory. Courts outside Illinois
would be well advised to avoid getting mired in the quicksand these decisions
have produced.