Summary: TDH Mechanical provided heating, ventilating, and air conditioning construction services for a building construction project in Chicago. A TDH employee plunged through an unguarded opening and fell 22 feet, sustaining serious injuries. The employee sued the construction manager, Prairie Management and Development, and the project owner, Rockwell Properties, alleging negligent supervision and monitoring of the work of the subcontractors and of the worksite; the lawsuit also included claims against other project participants. The lawsuit did not contain any direct or express claims or allegations against TDH Mechanical, which was not subject to injury litigation by an employee, by virtue of the workers’ compensation laws.
The TDH Mechanical subcontract required TDH to carry commercial general liability (CGL) insurance under which the owner and the construction manager would be additional insureds. Columbia Insurance Group provided that insurance. After the injury lawsuit was filed, Rockwell (the owner) and its insurance company, Scottsdale Insurance, demanded that Columbia provide Rockwell and Prairie (the CM), as additional insureds, with a defense. Columbia declined, citing a clause in TDH’s CGL policy that said:
“Such person or organization [referring to the owner, and the CM] is an additional insured only with respect to liability arising out of your [TDH’s] ongoing operations performed for that [additional] insured.”
Columbia contended that because the lawsuit did not implicate or blame TDH for the injuries, the potential liability of the owner and CM did not arise out of TDH’s ongoing operations, and hence there was no entitlement to defense as an additional insured.
Scottsdale Insurance filed an action in federal court seeking a declaration that Columbia Insurance had a duty to defend Rockwell and Prairie, and to reimburse Scottsdale for defense costs incurred in the interim. The district court granted the motion, declaring that Columbia had a duty to defend and awarding Scottsdale approximately $50,000 in defense costs already incurred on behalf of Rockwell and Prairie. Columbia appealed the decision to the Seventh Circuit Court of Appeals.
Decision: The Seventh Circuit affirmed the district court’s decision. The court noted several key principles of insurance law that governed its analysis of the issue:
**An insurer’s duty to defend is broader than its duty to indemnify (pay damages).
**The insurer can refuse to provide a defense only “if the allegations of the underlying complaint preclude any possibility of coverage.”
**A policy exclusion will apply only if it is free from doubt that it precludes coverage.
**The reviewing court may look beyond the underlying complaint, to any third-party complaints, to determine the duty to defend, as long as such third-party complaints are not self-serving.
Any doubts about the duty to defend are resolved in favor of the insured.
With respect to the “arising out of” limitation in the policy, the Seventh Circuit concluded that the limitation “does not keep Columbia off the hook to defend” because the underlying injury lawsuit suggests, and does not foreclose the possibility, “that some fault lies with TDH.” For example, the allegations of the injury lawsuit referred to inadequate owner/CM supervision resulting in “subcontractors”—presumably an oblique reference to TDH—engaging in the unsafe practice of not covering or guarding dangerous floor openings during construction.
Also relevant to the analysis were the allegations by other defendants against TDH. The defendants in the injury lawsuit had filed third-party complaints against TDH, contending that TDH negligently failed to maintain safe conditions in its work area. Although allegations by the owner and CM would be disregarded as self-serving, the similar allegations by other defendants provided support for a holding that the injuries arose at least in part out of TDH’s operations.
Comment: An additional insured has less protection than a primary insured (policyholder) has; in particular, as this case shows, under a typical policy an additional insured must first establish that the liability to which it is exposed has a connection back to the primary insured’s operations. In the construction project context this will ordinarily not be difficult to establish, as long as “the underlying allegations do not preclude the possibility of coverage.” In some cases, of course, the wording of the underlying complaint may preclude coverage, by describing alleged wrongdoing that is wholly independent of the activities of the primary insured, but this will be the exception.
Because the insurance company’s duty to defend is broader than its duty to indemnify, it is possible to establish a threshold defense obligation because the underlying allegations do not preclude the possibility of coverage, but later, as the case develops, to reach the conclusion that the additional insured is not entitled to coverage. The Seventh Circuit pointed this out: “As the district court correctly concluded, the issue of indemnity can wait.”
The subcontract clause requiring TDH to name the owner and CM as additional insureds was reasonably clear and not in dispute; a confirming certificate of insurance was required, and TDH furnished it.
One minor anomaly of this case is that the Court of Appeals asserts that “Prairie [CM] and Rockwell [owner] contracted with TDH….” In this author’s experience, it would be very rare for an owner and CM to jointly enter into a contract with a subcontractor (constructor). If the CM here was acting merely as an advisor to the owner, then presumably it was the owner that contracted directly with TDH. If the CM was a CM at risk, then presumably the CM contracted with TDH. In either case the “subcontract” with TDH would contain a clause requiring that both CM and owner (and often other parties, such as the A/E) be named as additional insureds under the subcontractor’s CGL policy.