Virginia Surety Company, Inc. v. Northern Insurance Company of New York

Slip Opinion dated Jan. 19, 2007

Insurance – “insured contract” policy exclusion defined
At issue was whether the subcontract between the subcontractor and its general contractor was an “insured contract” thereby triggering insurance coverage under the subcontractor’s commercial general liability policy which included liability assumed by the insured under an “insured contract.” The injured employee instituted a third-party complaint against the general contractor and the general contractor filed a third-party complaint for contribution against the subcontractor.

A contribution lawsuit wherein a third party seeks contribution against the employer of an injured employee presents a second type of liability exposure for the employer (in addition to workers compensation). In Kotecki, the Court held that an employer’s maximum liability in a third-party suit for contribution is limited to its liability to its employee under the Workers’ Compensation Act. Thereafter, Illinois courts held that an employer may waive its Kotecki protection by contract and thereby be liable for its full pro rata share of contribution.

The defendant, in this declaratory judgment action, urged the court to follow Hankins v. Pekin Insurance Co., 305 Ill. App. 3d 1088 (1999), a Fifth District case, which ruled that an “indemnity provision” did not constitute an “insured contract” under the policy’s definition of that term because by agreeing to be held liable for unlimited contribution, the employer was simply agreeing to accept the full share of its “own negligence” and was not accepting the “tort liability of another party.”

The Supreme Court agreed with the Fifth District and found that the language of the defendant’s CGL policy with the subcontractor, and the agreement between the subcontractor and its general contractor could not be an “insured contract.” The policy provides that an insured contract is one where subcontractor assumes the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization.” The plain language of the agreement required the subcontractor to indemnify the general contractor only for the subcontractor’s own negligence.

The subcontractor enjoys the option to limit its common law liability to its injured employee by asserting the affirmative defense provided by the Workers’ Compensation Act for the amount of its negligence up to the Kotecki cap. This leaves the portion of the subcontractor’s liability due to its pro rata share of the common liability above the Kotecki cap. Both the sub and general contractors are jointly and severally liable for the portion of the subcontractor’s liability above the Kotecki cap. The Contribution Act says the right exists only in favor of one who has paid more than his pro rata share of the common liability, and therefore allows the general contractor to sue its subcontractor for the subcontractor’s remaining pro rata portion of the common liability because the general is not liable to make contribution beyond its pro rata share of the common liability.

Absent any contract or agreement, the subcontractor’s portion of the common liability above the Kotecki cap is not imposed by law upon the general contractor, but remains with the subcontractor. Both parties are primarily liable for the employees injuries; neither party is secondarily liable. The policy’s definition of “insured contract” has not been met. The subcontractor did not assume the general contractor’s tort liability, which the policy defines as liability that would be imposed by law in the absence of any contract or agreement. Therefore, the defendant was not under a duty to defend or indemnify its insured (subcontractor) under the CGL policy.