United States District Court,

1. New Mexico.

SPIRIT COMMERCIAL AUTO RISK RETENTION GROUP, Plaintiff,

v.

GNB TRUCKING, INC., ERIC HEIN, WENDY HEIN, and LEE HUNT as Personal Representative of the Estate of RILEY HEIN, Defendants.

Case No. 1:17-cv-00842 WJ/SCY

|

Filed 11/14/2017

 

 

MEMORANDUM OPINION AND ORDER DISMISSING CASE WITHOUT PREJUDICE BASED ON BRILLHART ABSTENTION DOCTRINE

*1 THIS MATTER comes before the Court upon a Motion to Dismiss Complaint for Declaratory Judgment Pursuant to the Brillhart Abstention Doctrine or, Alternatively to Stay While Underlying State Action is Proceeding, filed on September 29, 2017 by Defendants Eric Hein, Wendy Hein, and Lee Hunt as personal representative of the Estate of Riley Hein (collectively, the “Heins”) (Doc. 4). Having reviewed the parties’ pleadings and the applicable law, the Court finds that Defendants’ motion is well-taken and, therefore, is granted in that this case shall be dismissed without prejudice.

 

 

BACKGROUND

This is an insurance coverage dispute. In November 2015, GNB Trucking, Inc. (“GNB Trucking” or “GNB”) was hired by a property broker, Choptank Transport, Inc., to transport a load of frozen bread from Muncie, Indiana to Compton, California with a drop-off date of November 14, 2015. Despite being hired as the carrier, GNB did not transport the load itself, but instead hired Barkandhi Express, Inc., a motor carrier alleged to be unsafe, pursuant to a “sub hauler” contract that had been executed in October 2015. While traveling through New Mexico, the Barkandhi truck hired by GNB collided with a car driven by the Heins’ 16 year-old son Riley, causing his death. The Barkandhi Express semi-truck involved in the crash is not listed on GNB Trucking’s insurance policy issued by Spirit. In this federal action, Spirit seeks a declaration that it owes no duty to GNB Trucking, the Heins or any other person or entity for claims arising out of the underlying action.

 

An underlying wrongful death case is currently proceeding in state court. The state action was filed in the First Judicial District, County of Santa Fe on November 18, 2016. As plaintiffs in that action, the Heins sued GNB Trucking and the New Mexico Department of Transportation in a wrongful death action. See Hein et al. v. The New Mexico Dep’t of Transportation, et al., No. D-101-CV-2016-01541; see Doc. 1-1 (Am. Compl.) & Doc. 10-1 (Sec. Am. Compl.).

 

 

DISCUSSION

The Heins filed the instant motion seeking a dismissal—or in the alternative, a stay—of these federal proceedings. They claim that the controversy regarding coverage should be heard in the pending state case under New Mexico’s Declaratory Judgment Act because nothing can be decided in this federal lawsuit until the issues in the underlying state case are decided. See Doc. 4, n.1).1 Plaintiff, the insurer in this case, contends that this coverage action involves different issues than those that are in the underlying state court wrongful death suit and so the request to dismiss or stay this federal action should be denied.

 

 

1. Relevant Law

*2 The Declaratory Judgment Act vests federal courts with power and competence to issue a declaration of rights. 28 U.S.C. § 2201. While this statute vests the federal courts with power and competence to issue a declaration of rights, see Public Affairs Assocs., Inc. v. Rickover, 369 U.S. 111, 112, (1962) (per curiam), the question of whether this power should be exercised in a particular case is vested in the sound discretion of the district courts. St. Paul Fire and Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1168 (10th Cir. 1995). In Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), the United States Supreme Court made it clear that district courts are “under no compulsion to exercise … jurisdiction” under the Declaratory Judgment Act, noting that “it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties.” Id. at 494. Instead, the district court should determine whether the lawsuit “can better be settled in the proceeding pending in the state court.” Id. This question involves a consideration of whether the matters being heard in the state court action are essential to a determination of the collateral federal action, or whether the issue being raised in the federal declaratory action involves no matter—factual or legal—at issue in the state case. In other words, this Court must consider whether the questions in controversy between the parties to this federal lawsuit “can better be settled in the proceeding pending in the state court.” Brillhart, 316 U.S. at 494; see also Wilton v. Seven Falls Co., 515 U.S. 277, 283 (1995) (framing question as “whether the claims of all parties in interest can satisfactorily be adjudicated in [the state court] proceeding”) (quoting Brillhart, 316 U.S. at 495).

 

In deciding whether or not to hear a declaratory judgment action, a court considers various factors, including these:

(1) whether a declaratory action would settle the controversy;

(2) whether it would serve a useful purpose in clarifying the legal relations at issue;

(3) whether the declaratory remedy is being used merely for the purpose of “procedural fencing” or “to provide an arena for a race to res judicata”;

(4) whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and

(5) whether there is an alternative remedy which is better or more effective.

St. Paul Fire and Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1169 (10th Cir. 1995) (citing State Farm Fire & Casualty Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir.1994)).

 

 

1. Facts Relating to Policy at Issue

The Heins claim that this federal action should be dismissed or at least stayed because nothing can be decided in this separate federal lawsuit until the underlying issues in the state case are decided. They acknowledge that the Barkandhi Express semi-truck that was involved in the November 13, 2015 crash was not listed on the policy issued to GNB Trucking by Spirit, but contend that the truck may still be insured under the following section of the policy:

Tabular or graphical material not displayable at this time.

Ex. 1, Spirit Policy, Motor Carrier Coverage Form, p. 3.

 

The Heins contend that whether or not this policy applies to their claims against GNB Trucking depends on a factual determination about the reasons GNB hired another motor carrier to transport the load of goods in its place. The Heins also characterize the claims against GNB as arising from the use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980, and for this reason they argue that the claims may be covered under an endorsement in the policy which applies to:

public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980 regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere.

Ex. 1, SIC policy, MCS-90 endorsement, p. 2 (“Form MCS-90”). The Heins note that GNB Trucking has failed to respond to written discovery requests seeking information about the reasons it hired another motor carrier in the first place. See Exs. 3, 4, & 5.

 

 

III. Analysis of Mhoon Factors

*3 The Heins argue that the Mhoon factors weigh in favor of dismissal or at least a stay of the federal action. Plaintiff gives barely a passing nod to those factors, choosing instead to narrow the sole question to whether or not the same coverage dispute is before the state court, and arguing that the Court should deny dismissal when the coverage claims are presented only in the federal action. However, there is no case law supporting Plaintiff’s suggestion that such an approach is sufficient. Plaintiff relies on several unpublished cases which did not actually adopt the very narrow analysis Plaintiff urges this Court to espouse here, but instead embarked on an analysis of the Mhoon factors. See Doc. 8 at 7-8 & n.2. While there is no requirement to follow a formulaic approach in discussing the Mhoon factors, there should be some adherence to its framework. The Mhoon factors can be conveniently grouped into a consideration of (a) the first and second factors; (b) the third factor; and (c) the fourth and fifth factors.

 

 

1. First and Second Mhoon Factors.

The first two factors are (1) whether a declaratory action would settle the controversy; and (2) whether it would serve a useful purpose in clarifying the legal relations at issue.

 

Spirit, the insurer and Plaintiff in this federal action, argues that there is no coverage dispute in the underlying state action because the complaint in that venue alleges claims of negligent and intentional acts against GNB Trucking, the named insured under a policy issued by Spirit. Plaintiff also maintains that none of the facts at issue in the state court action are necessary to the resolution of the underlying tort suit.

 

The Heins assert that a key issue in the underlying case is GNB’s decision to hire another motor carrier instead of transporting the load itself. See Ex. 1 (Sec. Am. Compl., ¶¶54-57). They contend that the reason GNB hired Barkandhi Express is highly relevant to several issues, including whether GNB Trucking breached its duty to the traveling public as a motor carrier and its violation of federal law in acting as a broker without a license; as well as the issue of motive—which in turn may be key to determining whether GNB’s conduct meets the threshold for punitive damages. For example, if GNB hired Barkandhi Express as a “temporary substitute” for a vehicle covered under GNB’s policy issued by Spirit, then the policy will afford coverage as a matter of law. See Doc. 4-2, p. 3 (provision on coverage for “Temporary Substitute Autos”). The Heins contend that the coverage issue under the “temporary substitute autos” provision must be determined before the Court can proceed to the next question: whether the Form MCS-90 endorsement provision applies, since it applies only if GNB is not covered by the temporary replacement provision. They argue that the facts underlying these issues are already being explored as part of the state court proceeding, although still in the discovery stages.

 

Plaintiff likens this case to the Mhoon case, where the court declined to stay the federal declaratory action while the state court case continued. This Court, however, finds that Mhoon is more of a contrast to the instant case than a comparison. Mhoon arose out of a dispute between neighbors which resulted in Mr. Mhoon shooting Mr. Fujiwara. Mhoon was convicted of aggravated battery in a criminal proceeding, and while that action was pending Fujiwara and his wife sued Mhoon in a civil action in state court. Mhoon was covered under a State Farm homeowner’s policy only for accidental, not intentional harms that he might commit. 31 F.3d at 982. Ruling in favor of the insurer on the insurer’s summary judgment motion, the federal district court easily found that there was no triable issue with respect to whether Mhoon’s conduct could be termed accidental under the policy: while the complaint alleged that Mhoon’s actions were accidental, the court found that it offered “no facts whatsoever that suggest this was the case.” Id. at 984-985. Other evidence, including Mhoon’s own testimony, precluded any serious suggestion that he accidentally shot his neighbor and the court further noted that the issue had also been resolved by the application of collateral estoppel in the criminal case.

 

*4 The court in Mhoon found that addressing these issues involved no “undue interference” with the state proceeding because there was no material dispute that needed to be settled on either the duty to defend or the coverage issue:

The duty to defend issue, as will be explained below, involved only an examination of the state court complaint to see if its allegations of fact triggered the duty. Determining that duty involved no matter, factual or legal, at issue in the state case. Nor was the coverage issue, under the trial court’s approach, a complicated one: it involved only a search of the relevant record to ascertain whether there was any triable issue with respect to whether Mhoon’s conduct could be termed accidental under the terms of the homeowner policy. Any ambiguities, moreover, had to be resolved in appellant’s favor. It is very doubtful that this approach and the summary judgment threatened any substantial interference in the state court proceedings.

Mhoon, 31 F.3d at 984. Plaintiff in this case ignores that there are factual matters relating to key issues for coverage that are being developed in the state court, whereas in Mhoon, the state court was not expected to make any further findings that were necessary to resolve the coverage issue.

 

The facts in the Runyon case are in stark contrast to those in Mhoon. In Runyon, the Tenth Circuit affirmed the district court’s decision to decline the exercise of jurisdiction, applying the Mhoon factors. 53 F.3d 1167. Runyon, a nurse anesthetist, was sued by two coworkers who alleged, inter alia, that Runyon abused patients and withheld medically necessary services to patients because they either lacked insurance or because of their race. Runyon’s malpractice carrier declined to provide a defense, asserting that the coworkers’ lawsuit did not implicate professional liability coverage, and when the insurer filed a declaratory judgment action in federal court, Runyon filed a bad faith and breach of contract suit against the carrier in state court the following day. The Tenth Circuit observed that the core question in both cases was the same—whether the insured was protected from liability in a separate court action under his insurance contract, and agreed with the district court that both the insured and the insurer were parties to the pending state contract action, and that the federal action involved the identical issue. 53 F.3d at 1169.

 

Plaintiff characterizes Runyon as distinguishable from this case because disputes over coverage were at issue in both the state and federal lawsuit in Runyon, where in the instant case disputes over coverage are presented only in the federal action. However, while Spirit is not a party in the underlying state action and coverage is not an asserted or prominent claim in the underlying case, nevertheless fact-dependent issues relating to coverage will most likely be decided in the pending state court proceeding. See Kunkel v. Cont’l Cas. Co., 866 F.2d 1269, 1276 (10th Cir. 1989) (“a district court ‘should not entertain a declaratory judgment action over which it has jurisdiction if the fact-dependent issues are likely to be decided in another pending proceeding’ ”).

 

One of the unpublished cases relied on by Plaintiff was before the undersigned where the Court denied a motion to abstain from exercising jurisdiction over the federal declaratory action. In that case, Those Certain Underwriters at Lloyd’s London Subscribing Policy No. C111271/054 v. New Mexico Psychiatric Servs. Corp., plaintiff Shaw filed a complaint in state court against New Mexico Psychiatric Services (“NMPS”), the Board of Commissioners of Chaves County, New Mexico and several individual defendants, alleging counts of negligence and loss of consortium relating to the death of her husband while he was jailed at the county’s detention center. NMPS was under contract to provide medical care at that facility. No. CV 14-00178 WJ/CG, 2015 WL 11622957, at *3 (D.N.M. Feb. 11, 2015). NMPS’ insurer sought a declaration in federal court of the rights and obligations of the parties under the policy with respect to the state court lawsuit instituted by the deceased’s wife. The county was not an additional named insured under the policy, nor was the insurer a party to any relevant agreement between NMPS and the county. This Court engaged in an analysis under the Mhoon factors and concluded that the issue of coverage and the insurer’s obligations to NMPS and/or the county in the federal lawsuit would not have any impact on the dispute between plaintiff and the county in the underlying state court action. Id. at *2. The parties could obtain complete relief in the federal action despite the absence of Chaves County as a party and so the federal action could proceed without encroaching on the state court’s jurisdiction to resolve the underlying issues.

 

*5 The Court’s conclusion in Those Certain Underwriters was based on a consideration of the Mhoon factors, and in that case there was a very real disconnect between the coverage issue in the federal action and the tort action in the state court case. The circumstances are not the same in the instant case, where facts relating to coverage will necessarily be developed and addressed in the state court litigation as the case proceeds. It would make little sense in terms of both efficiency and comity to adjudicate those same factual issues here.

 

The first two Mhoon factors weigh strongly in favor of abstention.

 

 

1. Third Mhoon Factor: Procedural Fencing

The third factor concerns whether the declaratory remedy is being used merely for the purpose of “procedural fencing” or to “provide an arena for a race to res judicata.”

 

The Heins point out that Spirit filed this declaratory action nine months after the state court claims were brought against GNB, and only after a mediation that failed to resolve the case. Cmp. Runyon, 53 F.3d at 1170 (affirming finding of procedural fencing by district court where insurer filed its federal suit one day before the date the insured promised to file his state court contract action against insurer). Also, Spirit is not a party to the state court action even though it has participated in mediation and has tendered a defense on behalf of GNB Trucking and while Spirit could have intervened to resolve the coverage issue in the state court case, it chose not to do so.

 

Plaintiff offers no counter to the Heins’ arguments on this factor. The Mhoon court based its decision to retain the case in part on the fact that neither party had suggested the insurer “was, or could have been made, a party to the state tort action, thus obviating any need for an independent declaratory action and providing a simpler and more efficient resolution of [the insurer’s] obligations toward Mhoon.” Id. at 984. Here, there is no dispute that Spirit can be made a party to the state tort action—which would also obviate any need for an independent declaratory action and providing a more streamlined resolution of Spirit’s obligations toward GNB, its insured, as well as the Heins. See Addison Ins. Co. v. Rippy, 2009 WL 723322, at *7 (D. Colo. Mar. 18, 2009) (“The discussion that tends to dominate the analysis of the fifth Mhoon factor focuses on whether the parties could adjudicate the issue in the underlying action.”) (citing U.S. v. City of Las Cruces, 289 F.3d 1170, 1188–89 (10th Cir.2002) and Mhoon, 31 F.3d at 984).

 

Without any responsive argument from Plaintiff on the procedural fencing question, this third factor weighs in favor of a finding that Spirit filed this action because it viewed federal court as a more favorable forum and thus is using this action for procedural fencing. See St. Paul Fire & Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1170 (10th Cir. 1995) (district court may choose to avoid a declaratory judgment action because the plaintiff is using the action for procedural fencing).

 

 

1. Fourth and Fifth Mhoon Factors

The final factors in the analysis consider whether use of a declaratory action would increase friction between federal and state courts and improperly encroach upon state jurisdiction; and whether there is an alternative remedy which is better or more effective.

 

The Heins contend that the appropriate forum for factual questions underlying coverage is the underlying state case. See Lopez v. New Mexico Pub. Sch. Ins. Auth., 1994-NMSC-017, ¶ 11, 117 N.M. 207, 210, 870 P.2d 745, 748 (“Generally, a determination of whether an exclusion relieves an insurer from a duty to defend must be made in the primary lawsuit, and not in an action for declaratory judgment, because it is a factual question.”). The Court agrees and finds that addressing these facts here as well would encroach on state jurisdiction. While the state court claims are premised on a wrongful death action, inevitably the state court case will open up an investigation into certain facts relating to the reasons behind GNB’s decision to hire out another motor carrier to transport the load of goods in its place, and that findings will be made based on the investigation of that issue.

 

*6 Because the state court case will be addressing these matters, the state court provides a forum that is at least equivalent to that offered by allowing the action to proceed in federal court. Moreover, this Court considers the state court forum to be efficient at this point since discovery is already underway there. The state court action (particularly with joinder of Spirit pursuant New Mexico’s Declaratory Judgment Act) would decide the rights of all interested parties and would therefore be more comprehensive and efficient. See Ortiz v. Biscanin, 190 F. Supp. 2d 1237, 1247 (D. Kan. 2002) (noting that the state declaratory judgment act empowers courts to determine the rights and liabilities of the parties in litigation at bar). Plaintiff provides no reason for this Court to find that the New Mexico state court would provide “less complete relief than that which is available in federal court.” Id. at 1247 (concluding that proceeding with federal declaratory action would be improper under Tenth Circuit standards).

 

Plaintiff offers no specific response as to these last two factors. Instead, Spirit points out that the federal action will be governed by different substantive law than the underlying lawsuit: the claims in the underlying tort suit between the Heins and GNB will be controlled by New Mexico substantive law (location of the accident) but the coverage issues in the federal action will be governed by contract law. See Doc. 8 at 3-4.2 However, this argument is not a valid reason to proceed with the federal action. As the Heins observe, a New Mexico state court has the authority to interpret a contract by applying another state’s law—just as a New Mexico federal court does. See Nez v. Forney, 1989-NMSC-074, 109 N.M. 161, 783 P.2d 471 (court may apply forum state’s statute of limitations even if another state’s substantive law is to be applied); Burge v. Mid-Continent Cas. Co., 1997-NMSC-009, 123 N.M. 1, 933 P.2d 210 (choice of law provision in an automobile policy called for application for Oklahoma law by New Mexico state court with respect to substantive issues).

 

The final Mhoon factors favor abstention. Resolution of fact-dependent issues in state court will also determine the coverage issues that are before the court here. Comity and efficiency both require that the federal court not get in the way of the New Mexico state court in examining those issues and resolving those facts.

 

 

1. Whether Dismissal or a Stay is Appropriate

The last question is whether dismissal or a stay of the federal action is appropriate in these circumstances. As mentioned previously, while pendency of an action in state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction, neither is the federal court obliged to proceed with a case where the controversy may be resolved more expeditiously in the state court. State Farm Mut. Auto. Ins. Co. v. Scholes, 601 F.2d 1151, 1154 (10th Cir. 1979) (citing Brillhart v. Excess Ins. Co., 316 U.S. 491, 494 (1942)). The United States Supreme Court has also voiced strong support for a district court’s discretion to defer proceedings because of concurrent state litigation:

No one can seriously contend that a busy federal trial judge, confronted both with competing demands on his time from matters properly within his jurisdiction and with inevitable scheduling difficulties because of the unavailability of lawyers, parties, and witnesses, is not entrusted with a wide latitude in setting his own calendar.

Will v. Calvert Fire Ins. Co., 437 U.S. 655, 665 (1978) (Opinion of Rehnquist, J.) (citing Scholes, 601 F.2d at 1155. In Scholes, the Tenth Circuit found the opinion by the Utah district court to be instructive:

Wise judicial administration militates against State Farm’s contention that both this action and the state court action should proceed simultaneously. Simultaneous prosecution of both causes would result in wasteful duplication of efforts of counsel, courts, litigants, and witnesses. Moreover, the state court obtained jurisdiction long before this court. No issue of federal law or policy is involved. A final judgment in state court will necessarily resolve all issues before this court and the other issues arising out of the same transactions thus allowing comprehensive disposition of litigation.

*7 Scholes, 601 F.2d at 1155 (denying a writ of mandamus where insurer’s federal declaratory action was dismissed and finding that insurer’s right to have its action heard because of the pendency of a state court proceeding was not clear and indisputable. State Farm Mut. Auto. Ins. Co. v. Scholes, 601 F.2d 1151 (10th Cir. 1979). In Scholes, the Tenth Circuit also considered other factors such as:

… comity, the extent of disputed factual (as opposed to legal) issues involved, adequacy of relief available in statute court, avoidance of maneuvers designed to throw sand into judicial machinery, the order in which the courts obtained jurisdiction, the need for comprehensive disposition of litigation, and the desirability of avoiding piecemeal litigation.

Scholes, 601 F.2d at 1155. All of these considerations are pertinent here as well, and there would be no good reason to stay the case instead of dismissing it. All of the factual issues relating to coverage can be addressed and resolved in the state court proceeding.

 

In sum, the Court agrees with the Heins that there can be no resolution of the current action until the factual question of why GNB hired Barkandhi has been answered, and that this and other factual resolutions being addressed in state court are relevant to the issue of coverage. There is no reason for this Court to take over an inquiry into factual issues that is already underway in the pending state court proceeding and thus, no reason for this federal action to continue.

 

THEREFORE, IT IS ORDERED that the Heins’ Motion to Dismiss Complaint for Declaratory Judgment Pursuant to the Brillhart Abstention Doctrine or, Alternatively to Stay While Underlying State Action is Proceeding (Doc. 4), is hereby GRANTED and that this case is DISMISSED WITHOUT PREJUDICE for the reasons stated in this Memorandum Opinion and Order.

 

A Rule 58 Judgment shall issue separately.

 

All Citations

Slip Copy, 2017 WL 5468670

 

 

Footnotes

1

Under New Mexico law, collateral actions for declaratory judgment on an insurer’s duty to defend are not allowed. A party wishing to exercise its rights under the state’s declaratory judgment statute, NMSA § 44-6-2, must file its action in the appropriate state proceeding that is already proceeding. See Lopez v. New Mexico Public Sch. Ins. Authority, 1994-NMSC-017, § 11, 870 P.2d 745.

2

Defendant GNB Trucking is a California corporation with its principal place of business in California, and Plaintiffs suggest that California law will apply rather than New Mexico law. Doc. 8 at 4.

United States District Court,

N.D. Illinois, Eastern Division.

OLD REPUBLIC INSURANCE CO., Plaintiff/Counter-Defendant,

v.

KENNY CONSTRUCTION CO., Defendant/Counter-Plaintiff.

No. 15-CV-03524

|

10/31/2017

 

United States District Judge

 

MEMORANDUM OPINION AND ORDER

*1 This is an insurance dispute arising from Chicago’s Deep Tunnel flood control project.1Kenny Construction Company was the general contractor on a portion of the project for the United States Army Corps of Engineers. Kenny hired Meccon Industries, Inc. as a subcontractor and executed a subcontract requiring Meccon to furnish Commercial General Liability insurance certificates listing Kenny as an additional insured. Meccon procured insurance from Old Republic. Years after the relevant portion of the project was completed, a leak was discovered and the Army Corps of Engineers issued a decision holding Kenny and the project’s designer jointly and severally liable for damage attributed to Meccon’s use of an alternative part (a clamp) in completing its work. Old Republic then filed suit, seeking a declaratory judgment that it had no duty to defend or indemnify Kenny under the Meccon-Old Republic insurance policies. Kenny filed a counterclaim seeking a declaration that Old Republic does in fact have a duty to defend and indemnify it. Both parties have moved for summary judgment. After due consideration, the Court concludes that although Old Republic has no duty to defend Kenny, Old Republic is nonetheless obligated to indemnify Kenny.

 

 

BACKGROUND

The United States Army Corps of Engineers (USACE) was responsible for the design and construction of the Chicago Underflow Plan McCook Distribution Tunnel System Project in Chicago. USACE hired MWH Global to design a flood control system for the McCook Project and hired Kenny Construction Corporation as the project’s general contractor. Kenny subsequently entered into a subcontract with Meccon Industries, Inc. to perform mechanical work and furnish materials for the project.

 

The subcontract between Kenny and Meccon contains two provisions discussing Meccon’s insurance obligations. Paragraph 1.H states:

Submittal of the subcontractor’s evidence of insurances shall include the contractor, the owner and any other additional insureds as required per the Insurance Requirement Sheet attached hereto. Subcontractor expressly understands and agrees that its insurance shall serve as primary and non-contributory and the additional insured’s insurance will only apply in excess of any and all coverage provided by the subcontractor, notwithstanding any policy language or endorsement(s) to the contrary.

Subcontract, ECF No. 1-1. Notwithstanding the reference to it in the subcontract, neither Kenny nor Meccon has been able to locate the Insurance Requirement Sheet, although Kenny has submitted a sample Insurance Requirement Sheet. The sample Insurance Requirement Sheet instructs a generic subcontractor to “state all information below on your certificate.” Sample Ins. Requirements Sheet, ECF No. 54-3. One piece of the information required by the sample form reads: “Additional Insureds: Kenny Construction Company.” Id.

 

*2 The second subcontract provision detailing Meccon’s insurance obligations is Article 11, which reads:

The Subcontractor will obtain and submit to the General Contractor, before any work is performed under this contract, certificates from the subcontractor’s insurance carriers indicating coverage for the following:… Commercial General Liability to cover the indemnity agreement in Article 10a through 10c above, although the existence of insurance shall not be construed as limiting the liability of the Subcontractor under this contract….The certificates and the insurance companies shall be subject to the approval of the General Contractor and shall contain provisions for 30 days prior notice of any important change in or cancellation of the insurance. Should the Sub-contractor fail to submit the certificates required, the General Contractor may take such steps as deemed necessary to provide proper protection and charge all costs incurred to Subcontractor.

Subcontract, ECF No. 1-1.

 

Meccon procured Commercial General Liability insurance policies (“CGL policies”) from Old Republic Insurance Co. from 2002 to 2010, and provided corresponding insurance certificates to Kenny between 2002 and 2007. The certificates each list Kenny as an additional insured under the policies. Nonetheless, the certificates also note, in capital letters, that they were “issued as a matter of information only and confer[ ] no rights upon the certificate holder.” Ins. Certificates, ECF No. 54-4. Each certificate further notes that it “does not amend, extend or alter the coverage afforded by the policies below.” Id. The reverse side of the certificates include further disclaimers to the effect that the certificates do not control the coverage provided by the applicable policies and that the designation of the certificate holder (Kenny) “does not confer rights to the certificate holder in lieu of” an additional insured endorsement on the policy. Id.

 

The relevant Old Republic policies do not expressly identify Kenny as an additional insured. They list Meccon as a named insured and contain endorsements defining “[a]ll persons or organizations as required by written contract or agreement” to be additional insureds. Old Republic-Meccon Policies, ECF Nos. 25-29. Although the policies contain separate endorsements for ongoing operations and completed operations coverage, the definition of additional insureds is identical in each endorsement.

 

As for coverage, under the policies, Old Republic agreed to pay “those sums that the insured becomes legally obligated to pay as damages because of…‘ property damage’ to which this insurance applies.” Id. Old Republic also had “the right and duty to defend the insured against any ‘suit’ seeking those damages.” Id. The policies contain an exclusion for damages that arise “by reason of the assumption of liability in a contract or agreement,” although Old Republic would still be required to pay those damages that would have arisen “in the absence of the contract or agreement.” Id.

 

During the course of Meccon’s work on the McCook Project, it twice submitted a variation request to Kenny to substitute an alternative part known as a Smith-Blair clamp for parts called for by the project’s original plans. On both occasions, Kenny sent the request to USACE and MWH Global, both of which approved the changes. Meccon subsequently installed the Smith-Blair clamps after each approval. The project moved forward without incident for some time, and Kenny substantially finished its work on the project in April 2009. In August 2010, USACE issued a final inspection and acceptance letter to Kenny indicating that all construction work had been completed in accordance with contractual requirements and that “no deficiencies remained.”

 

*3 Notwithstanding issuance of the final inspection and acceptance letter to Kenny, USACE had discovered in October 2008 leaks in the concrete monolith allowing Combined Sewer Overflows (“CSO’s”) to escape and corrode various mechanical and electrical equipment within the Tunnel complex. Over the course of the next two years, USACE and various contractors investigated the cause of the leaks and concluded that the use of the Smith-Blair clamp in lieu of welded joints had caused the problem because the clamps were not rated to withstand the operating fluid pressures within the Tunnel; original specifications called for minimum pressure ratings for couplings, flanges, and valves of 300 psi, but the Smith-Blair clamps were rated for a maximum pressure of 40 psi. After taking remedial action to solve the problem, USACE issued a contracting officer’s “Final Decision” in September 2014 concluding that MWH Global and Kenny were jointly and severally liable for damages caused by “negligent submittal and approval of the variation request to use the Smith Blair clamp in the McCook Distribution Tunnel System.” Final Decision 1, ECF No. 54-5. The Final Decision awarded $11,317,141.76 in property damages to the USACE. Kenny appealed the Final Decision to the Board of Contract Appeals. Before the appeal was resolved, Kenny and USACE settled, with Kenny agreeing to pay USACE $100,000. Settlement Agreement, ECF No. 84-1.2

 

After being notified of the Final Decision, Old Republic filed this action seeking a declaratory judgment that it had no duty to defend or indemnify Kenny with regard to the Final Decision. Kenny filed a counterclaim seeking a declaratory judgment that Old Republic has a duty to defend and indemnify Kenny under the policies. Old Republic and Kenny now each move for summary judgment.

 

 

DISCUSSION

Under Illinois law, the court’s “primary duty in construing an insurance contract is to ascertain and give effect to the intentions of the parties as expressed in the agreement.” Westfield Ins. Co v. FCL Builders, Inc., 407 Ill. App. 3d 730, 733, 948 N.E.2d 115, 118 (Ill. App. Ct. 2011). “If insurance policy terms are clear and unambiguous, they must be enforced as written.” Id. A mere disagreement over the meaning of a policy term does not render it invalid; “[r]ather, an ambiguity will be found where the policy language is susceptible to more than one interpretation.” Id. In essence, “the principles involved in the interpretation and construction of insurance contracts are the same as those involved in construing other contracts.” Carey v. Am. Family Brokerage, Inc., 391 Ill. App. 3d 273, 278, 909 N.E.2d 255, 260 (Ill. App. Ct. 2009). See also Schuchman v. State Auto Property and Cas. Ins. Co., 733 F.3d 231, 235 (7th Cir. 2013) (“[I]n construing the policy, our primary objective is to ascertain and give effect to the parties’ intentions as expressed by the words of the policy. Like any contract under Illinois law, an insurance policy is construed according to the plain and ordinary meaning of its unambiguous terms.”) (internal citations and quotation marks omitted).

 

Old Republic argues that under the terms of its insurance policies with Meccon, Kenny is not an additional insured, relieving Old Republic of the obligation to defend and indemnify Kenny. It maintains that Kenny is not a “person[ ] or organization[ ] [ ] required by written contract or agreement” to be an additional insured because the Kenny-Meccon subcontract did not require Meccon to make Kenny an additional insured on its CGL policy but required only that Meccon provide Kenny with certificates of insurance listing Kenny as an additional insured. And pointing to the certificates it provided, Old Republic maintains that they were informational only and “confer[ ] no rights upon the certificate holder.” ECF 54-4. Old Republic also maintains that even if Kenny is an additional insured under the policy, it owes no duty to defend or indemnify Kenny in the present case due to a variety of other provisions and exclusions in the Meccon-Old Republic insurance policy. The court addresses each of these arguments in turn.

 

 

1. Is Kenny An Additional Insured?

*4 In arguing that Kenny is not an additional insured under the Meccon-Old Republic CGL policy, Old Republic principally relies on West Bend Mut. Ins. Co. v. Athens Const. Co., Inc., 2015 IL App (1st) 140006, 29 N.E.3d 636, 645 (Ill. App. Ct. 2015), where the court considered a subcontractor’s insurance policy that similarly defined an additional insured as “any person or organization whom you are required to add as an additional insured on this policy under a written contract or written agreement.” Id. at 644. The court concluded that the subcontract between the general contractor and the subcontractor did not require the general contractor to be an additional insured on the subcontractor’s policy because it merely required the subcontractor to provide a certificate of insurance listing the general contractor as an additional insured. Id. at 645. Requiring the provision of a certificate of insurance, according to the West Bend court, is distinct from requiring a subcontractor to purchase an actual insurance policy listing the general contractor as an additional insured. Because the subcontract in West Bend required only the former, the court determined that the general contractor was not required by written contract to be an additional insured on the subcontractor’s insurance policy, and therefore was in fact not an additional insured.

 

Meccon’s insurance policies contain a materially identical provision defining additional insureds as those entities “required by written contract or agreement” to be additional insureds. The written subcontract between Kenny and Meccon, in turn, features two relevant provisions outlining Meccon’s insurance obligations. Article 11 of the subcontract—like the subcontract at issue in West Bend—explicitly requires the subcontractor to provide only certificates—and not policies—of insurance to the general contractor, in this case Kenny: “The Subcontractor will obtain and submit to the General Contractor, before any work is performed under this contract, certificates from the subcontractor’s insurance carriers indicating coverage for…Commercial General Liability.” That Article 11 requires Meccon to certify that it had CGL insurance can only be reasonably understood as requiring that Meccon actually have such coverage. By its plain language, then, Article 11 requires that Meccon carry CGL insurance and provide the corresponding certificates of insurance to Kenny.

 

That by means of Article 11 Kenny required Meccon to carry CGL coverage, however, does not necessarily establish that Meccon was required to name Kenny as an additional insured on its CGL policies. Article 11 says nothing about Meccon’s obligations with regard to additional insureds. The only reference to additional insureds contained in the subcontract is included in Paragraph 1.H: “Submittal of the subcontractor’s evidence of insurances shall include the contractor, the owner and any other additional insureds as required per the Insurance Requirement Sheet attached hereto.” Subcontract, ECF No. 1-1. Relying on West Bend, Old Republic contends that 1.H does not require that Meccon name the contractor (i.e., Kenny) as an additional insured on its CGL policy, but only that Meccon indicate Kenny’s status on the “evidence of its insurances” that it was required to submit to Kenny. West Bend supports this argument because it held that the requirement to identify an entity as an additional insured on a certificate of insurance “does not serve as evidence of the parties’ intent to name [that entity] as an additional insured, given that the actual, plain language of the subcontract does not contain such a requirement.” West Bend, 29 N.E.3d at 645. And here, the only proof of insurance Meccon was required to provide to Kenny was an insurance certificate.

 

But that is not the end of the inquiry. The operative issue here is not the form of the showing Meccon was required to make to Kenny to prove that it had sufficient insurance; it is whether the text of the subcontract required Meccon to make Kenny an additional insured on Meccon’s CGL policy. And as to that question, Paragraph 1.H’s “plain meaning” is somewhat elusive. The provision certainly can be read as imposing that requirement. Specifically, Paragraph 1.H notes that submittal of Meccon’s “evidence of insurances shall include the contractor, the owner and any other additional insureds as required per the Insurance Requirement Sheet” (emphasis added). The phrase “other additional insureds” implies that the preceding entities—the contractor and the owner—are also additional insureds under Meccon’s CGL policy. Indeed, concluding that Kenny—“the contractor”—is not a required additional insured would suggest that the court should read the word “other” out of the contract, a disfavored practice.

 

*5 Two factors, however, pull in the other direction and suggest that the intent of this provision is not to require Meccon to make Kenny an additional insured. First, to conclude solely from the phrase “other additional insureds” that Kenny is a required additional insured is a bit like trying to squeeze an elephant into a mousehole3 —that is, to conclude that a substantial contractual obligation was intended on the basis of an indirect and cryptic term tucked away in a portion of the text (the “General Conditions” section) that sets forth a variety of unrelated obligations rather than being stated plainly in a provision, like Article 11, that expressly addresses insurance requirements. It seems somewhat implausible to infer that, if status as an additional insured on Meccon’s CGL policy was important to Kenny, it would rely on subtle implications teased from context rather than a straightforward statement. If Kenny wanted to be an additional insured, why didn’t it just say so?

 

It is also unclear whether the phrase “as required per the Insurance Requirement Sheet” modifies each of “the contractor, the owner and any other additional insureds” or only “any other additional insureds.” If the former, then the contractor’s status as an additional insured would be determined by the contents of the Insurance Requirement Sheet (which, again, neither party can find). If the latter, the implication is that the contractor is an additional insured, and “other additional insureds” are listed on the Insurance Requirement Sheet. The language of Paragraph 1H therefore permits competing inferences about whether Kenny is a required additional insured, rendering the subcontract ambiguous.

 

Because Paragraph 1.H is ambiguous as to whether Kenny is a required additional insured, the court may look to parol evidence to determine the intent of the parties. Quake Const., Inc. v. Am. Airlines, Inc., 141 Ill. 2d 281, 289, 565 N.E.2d 990, 994 (Ill. 1990). The sample Requirements form Kenny produced in lieu of the actual form provides some evidence suggesting that Kenny likely was listed on the actual form as an additional insured, but more telling are the certificates of insurance provided by Meccon which represent, year after year, that Kenny was, in fact, an additional insured. Although insurance certificates containing a disclaimer indicating that they do not affect the terms of the underlying insurance policy have no binding force, insurance certificates may serve as evidence of the intent of the parties to a subcontract where the terms of the subcontract are ambiguous. See West Bend Mut. Ins. Co. v. DJW-Ridgeway Bldg. Consultants, Inc., 2015 IL App. (2d) 140441, ¶ 30, 40 N.E.3d 194, 204 (Ill. App. Ct. 2015). Here, the insurance certificates repeatedly provided by Meccon and accepted by Kenny—each of which indicated that Kenny was an additional insured under the Meccon-Old Republic CGL policy—demonstrate the intent of Meccon and Kenny that the subcontract required Kenny to be an additional insured on Meccon’s CGL policy. The court can conceive of no reason why Kenny would be listed as an additional insured on each insurance certificate unless the parties intended a contractual requirement to that effect; the additional insured representation has no value to Kenny if not true. Indeed, Old Republic puts forth no evidence suggesting otherwise and offers no rationale for why Kenny would have wanted a certificate of insurance that was meaningless. It relies exclusively instead on what it incorrectly perceives to be the unambiguous text of the subcontract to support its position.4

 

*6 Consequently, the court concludes that the contract must be construed to require that Meccon name Kenny to be an additional insured under the subcontract. And since Kenny is therefore an “organization[ ]…required by written contract or agreement” to be an additional insured, it qualifies as an additional insured under the Meccon-Old Republic CGL policy.

 

 

1. Is the Final Decision Proceeding a “Suit”?

Next, Old Republic argues that it neither has the duty to defend nor the duty to indemnify Kenny because the USACE Final Decision and subsequent appeal are not “suits” as contemplated by the CGL policies. The policies note:

We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

Old Republic-Meccon Policies, ECF Nos. 25-29. “Suit,” in turn, is defined as:

A civil proceeding in which damages because of “bodily injury,” property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

1. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
2. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

Id.

 

The court agrees with Old Republic that the Final Decision and appeal therefrom are not “suits” under the CGL policy. As a backdrop, both parties recognize that under Illinois law, absent a definition, the word “suit” in an insurance policy refers to a formal proceeding in a court of law. Lapham-Hickey Steel Corp. v Protection Mut. Ins. Co., 166 Ill. 2d 520, 532, 655 N.E.2d 842, 847-48 (Ill. 1995). One of the Lapham-Hickey court’s justifications for interpreting the policy at issue in such a fashion was that the policy separately used the terms “suit” and “claim,” and concluded that those words must have different meanings. Id. A “suit,” according to the Lapham-Hickey court, necessarily refers to a formal proceeding in a court of law, lest it merge with the broader term “claim,” which refers to a wider array of proceedings. Id. Here too, the CGL policy refers to both “suits” and “claims,” and indicates that Old Republic only has a duty to defend against certain “suits.” Illinois law, therefore, favors Old Republic’s narrower interpretation of the word “suit.”

 

Notwithstanding Kenny’s argument to the contrary, the policies’ definition of “suit” does not upset this conclusion. Were “suit” defined merely as a “civil proceeding,” then perhaps the court would conclude that a “suit” is broad enough to encompass USACE’s Final Decision process. But here, the CGL policies include clear limitations on the kinds of alternative dispute resolution mechanisms that qualify as “suits”: it notes that a suit “includes…[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.” Old Republic-Meccon Policies, ECF Nos. 25-29. Although the word “include” in a contractual definition typically signifies that the examples that follow expand upon the preceding general definition, two factors here counsel against such an interpretation in this case. First, if the court concluded that a “suit” is broad enough to include all civil proceedings in which the relevant damages are claimed, it would have to read the phrase “and to which the insured submits with our consent” out of the contract, or otherwise render it meaningless. There is no reason a drafter would identify explicit limitations on what alternative dispute resolution mechanisms constitute a “suit” if those limitations were overridden by the definition’s general description of a “suit.” Second, the “alternative dispute resolution” clause itself functions as a residual or catch-all provision designed to capture the outer limits of what constitutes a “suit.” This suggests that the ADR provision builds on—and does not merely describe—the general definition of “suit.” Consequently, the court concludes that under the CGL policy, a “suit” includes a formal proceeding in a court of law, as well as those “alternative dispute resolution proceedings…to which the insured submits with [Old Republic’s] consent.” Old Republic-Meccon Policies, ECF Nos. 25-29. Kenny does not suggest that the Final Decision process constitutes a formal proceeding in a court of law, and the record is devoid of evidence that Old Republic consented to the Final Decision process. The court therefore concludes that the Final Decision process is not a “suit” under the CGL policy. It follows as well that the appeal proceeding is also excluded from the definition of “suit” in the CGL policy.

 

*7 Under the CGL policy, Old Republic has “the duty to defend the insured against any ‘suit’ seeking [covered] damages.” Old Republic’s duty to defend is therefore contingent on the existence of a “suit.” Because the Final Decision process is not a “suit,” Old Republic had no duty to defend Kenny with respect to the issuance of the USACE Final Decision, and has no such duty with respect to the appeal of that decision. But Old Republic goes further, arguing that the absence of a suit means that Old Republic has no duty to indemnify Kenny. In so doing, Old Republic fails to point to any contractual language similarly hinging its indemnity obligation on the existence of a “suit.” Instead, Old Republic cites the Illinois Supreme Court’s decision in Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384, 398 620 N.E.2d 1073, 1081 (Ill. 1993), for the broad proposition that “where there is no duty to defend, there will be no duty to indemnify.” Although this maxim is facially friendly to Old Republic’s position, the Seventh Circuit has squarely rejected its application in circumstances like those present here, where no formal lawsuit has been filed in a court of law and separate contractual provisions trigger the duties to defend and indemnify. See Keystone Consolidated Industries, Inc. v. Employers Ins. Co. of Wausau, 456 F.3d 758, 761-62 (7th Cir. 2006); Sokol & Co. v. Atlantic Mut. Ins. Co., 430 F.3d 417, 421 (7th Cir. 2005).5 Crum & Forster concerned an insurer’s extra-contractual duty to defend an insured in a lawsuit; because under Illinois law such a duty arises where the underlying claims potentially fall within the scope of the policy, and the duty to indemnify arises only where the underlying claims actually fall within the scope of the policy, the Illinois Supreme Court concluded in Crum & Forster that there could be no duty to indemnify where the claims at issue are not even potentially within the policy’s coverage. But that is not the case here, where Old Republic avoids a duty to defend not because the claims are not potentially within the scope of its policies’ coverage but because the policies limit its duty to defend to particular types of proceedings (i.e., “suits”). And indeed, in Keystone and Sokol, the Seventh Circuit recognized that the duty to indemnify is not so neatly nested within the duty to defend where the latter is contractually defined. Keystone, 456 F.3d at 761-62; Sokol, 430 F.3d at 421. In Sokol, the Seventh Circuit concluded that an insurer still had a duty to indemnify the insured although it had no duty to defend because there was no “suit” for damages, only a demand letter followed by a voluntary payment on part of the insured. The court concluded as much simply because the duty to defend and duty to indemnify were triggered by different events under the relevant policy’s terms. Sokol, 430 F.3d at 421 (“This is a claim for indemnification coverage, and the coverage grant pertaining to indemnification does not contain the same limiting language requiring the existence of a ‘suit.’ ”). Old Republic attempts to distinguish Sokol by noting that Sokol, unlike this case, featured a voluntary payment and not an alternative dispute resolution process. But that is a distinction without a difference—as evidenced by Old Republic’s failure to explain the legal significance of this purported distinction. Moreover, the administrative process in this case ended in a settlement—essentially, a voluntary payment akin to the one at issue in Sokol. Confronted with an insurance policy with language nearly identical to the policies at issue here, the Sokol court concluded that the absence of a duty to defend does not preclude a duty to indemnify. The court reaches the same conclusion here.

 

 

III. Contractual Liability Exclusion

Old Republic next argues that it has no duty to indemnify Kenny because the Final Decision is based exclusively on Kenny’s breach of contract, which is excluded under the CGL policies. The contractual liability exclusion reads: “This insurance does not apply to . . . ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” Old Republic-Meccon Policies, ECF Nos. 25-29. There is, however, an exception to this policy for “damages…[t]hat the insured would have in the absence of the contract or agreement.” Id. It is Old Republic’s position is that the Final Decision exclusively contemplates contractual liability, rendering the exclusion applicable.

 

*8 The Final Decision is the only portion of the record that meaningfully discusses the basis for USACE’s claims against Kenny. This is problematic, because a “Final Decision” represents only the beginning of USACE’s administrative procedure. A Final Decision is merely a report drafted by a contracting officer providing reasons to justify the assertion of a claim against a contractor. 41 U.S.C. § 7103. Although the Final Decision at issue here makes certain factual findings, it is not clear that those findings are complete, as Final Decisions do not require “specific findings of fact.” 41 U.S.C. § 7103(e). Moreover, it is only the appeals process—not the drafting of the Final Decision—that is more akin to a formal proceeding, with provisions for pleadings from the involved parties, discovery, prehearing briefing, and the taking of evidence. 33 C.F.R. § 210.5. Because Kenny and USACE settled before the appeals process ran its course, however, the court is left with only the Final Decision to determine whether USACE’s claims would have existed absent a contract or agreement.

 

“The burden is on the insurer to prove a limitation of exclusion applies.” Country Mut. Ins. Co. v. Bible Pork, Inc., 2015 IL App. (5th) 140211, ¶ 38, 42 N.E.3d 958, 969 (Ill. App. Ct. 2015). “Where an exclusionary clause is relied upon to deny coverage, its applicability must be free and clear from doubt.” Id. Here, the Final Decision is less than clear about the legal bases for USACE’s claim against Kenny. After detailing Kenny’s submissions to USACE with regard to the Smith-Blair clamps, the Final Decision notes that Kenny “negligently certified that the clamp was in compliance with contract specifications except as specifically noted, and then failed to note that the psi rating for the clamp was not in compliance with contract specifications. Thus KCC’s negligent certification violated the requirements of [the USACE/Kenny contract].” Final Decision 8, ECF No. 54-5. The Final Decision concluded that “KCC is [ ] jointly and severally liable for the damages associated with the underrated clamp, because it failed to note that the proposed clamp had a psi rating that was a significant variation from the specification requirements.” Final Decision 9, ECF No. 54-5.

 

The Final Decision refers to Kenny’s negligence—which suggests that USACE’s claim sounds in tort—albeit in the context of certification of compliance with contractual standards. Regardless, the Final Decision’s reference to Kenny’s negligence suffices to render the Final Decision at least ambiguous as to the bases of USACE’s claims. Under Illinois law, typically, “[f]ault is irrelevant to breach of contract. Whether one intentionally, carelessly, or innocently breaches a contract, he is still considered to be in breach of that contract and the extent of his liability is generally the same.” Album Graphics, Inc. v. Beatrice Foods Co., 87 Ill. App. 3d 338, 350, 408 N.E.2d 1041, 1050 (Ill. App. Ct. 1980). A reference to Kenny’s negligence, then, would be gratuitous if the basis of USACE’s claims was wholly contractual. Moreover, Illinois has adopted Restatement (Second) of Torts § 311, governing negligent misrepresentation involving risk of physical harm. See Bd. of. Ed. of City of Chicago v. A, C & S, Inc., 131 Ill.2d 428, 455-56, 546 N.E.2d 580, 592-93 (Ill. 1989). Section 311 notes “[o]ne who negligently gives false information to another is subject to liability for physical harm caused by action taken by the other in reasonable reliance upon such information, where such harm results…to the other.” The Illinois Supreme Court has interpreted “physical harm” to include property damage. See A, C & S, 546 N.E.2d at 593. The Final Decision’s allegations that Kenny negligently told USACE that the Smith Blair clamps met the project’s specifications, resulting in property damage, appear to fall directly within § 311’s ambit, potentially subjecting Kenny to liability even if compliance with the specifications was not a contractual requirement.

 

Although the Final Decision unambiguously references Kenny’s violation of multiple contractual provisions, it contains no language suggesting that those violations constituted USACE’s only bases for relief. Consequently, Old Republic has failed to meet its burden to prove, beyond doubt, that the contractual liability exclusion applies.

 

 

1. Completed Operations Provision

*9 Next, Old Republic argues that Kenny is covered under neither the ongoing operations nor completed operations additional insured endorsements to the CGL policies. Old Republic maintains that Kenny cannot be covered under the ongoing operations endorsements because the record contains no evidence that any damage occurred while Meccon was still working on the McCook Project. But when the damage occurred is of no moment because Kenny is, contrary to Old Republic’s position, an additional insured under both the ongoing operations and completed operations endorsements.

 

Both the ongoing and completed operations endorsements note that additional insured contractors include “all persons or organizations as required by contract or agreement.” Old Republic-Meccon Policies, ECF Nos. 25-29. Old Republic argues that the completed operations endorsements—unlike the identical ongoing operations endorsements—condition coverage on the allegedly covered entity being named a required additional insured on the subcontract specifically for completed operations purposes. In Old Republic’s view, because the subcontract never mentions completed operations, Kenny is not covered for damage occurring after Meccon completed its work on the project even if Kenny is a required additional insured for damages occurring during ongoing operations.

 

The only authority Old Republic points to in support of its position is St. Katherine Insurance Co. Ltd. v. Insurance Co. of North America, Inc., 11 F.3d 707 (7th Cir. 1993). But St. Katherine merely made a factual observation that most CGL policies do not contain completed operations coverage. Here, of course, the court is confronted with actual CGL policies that contain completed operations coverage, and also contain language the court can interpret to determine if Kenny is covered. The terms of the actual CGL policies—not abstract observations about the nature of CGL policies generally—govern the extent of coverage in this case.

 

The language of the CGL policies provides no basis to distinguish between ongoing operations and completed operations coverage in determining whether Kenny is an additional insured. It is axiomatic that “[i]n the construction of insurance policies, it is a general rule that absent language to the contrary, a word or phrase in one part is presumed to have the same meaning when it is used in another part of the policy.” Hartford Acc. & Indem. Co. v. Case Found. Co., 10 Ill. App. 3d 115, 123, 294 N.E.2d 7, 13 (Ill. App. Ct. 1973). Here, the ongoing and completed operations endorsements use identical language to define additional insured contractors: “all persons or organizations as required by contract or agreement.” Old Republic-Meccon Policies, ECF Nos. 25-29. This language never indicates that the underlying contract must require that the general contractor be an additional insured for any particular purpose. Old Republic supplies no rationale for limiting the coverage of an additional insured to ongoing operations and to read such a requirement into the CGL policies’ ambiguous definition of additional insureds (see Section I, above) would be unfaithful to the court’s obligation to construe ambiguous insurance policies “in favor of the insured and against the insurer who drafted the policy.” Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill.2d 90, 107, 607 N.E.2d 1204, 1212 (Ill. 1992). The court therefore concludes that Kenny is an additional insured under both the ongoing and completed operations endorsements.

 

 

1. Whether Meccon’s Work Caused Kenny’s Liability

Finally, Old Republic argues that it has no duty to indemnify Kenny because Kenny’s liability does not arise from Meccon’s work on the McCook Project. Both the ongoing operations and completed operations endorsements on the CGL policies limit Old Republic’s liability to “ ‘property damage’ caused, in whole or in part, by ‘[Meccon’s] work.’ ” Old Republic points out that the Final Decision does not mention Meccon, and exclusively identifies Kenny’s improper certification of the Smith-Blair clamps as the basis for its decision. Old Republic consequently argues that the CGL policy does not cover Kenny’s liability here, which it believes is based exclusively on Kenny’s own negligence as opposed to Meccon’s work.

 

*10 Old Republic’s argument is unpersuasive. The undisputed fact that Meccon’s request to use the Smith-Blair clamps directly resulted in Kenny’s allegedly negligent submission to USACE is, as a matter of law, a sufficient causal connection to bring Kenny’s claim within the ambit of the endorsements. Analyzing similar insurance policy language, the Appellate Court of Illinois has noted that “any causal connection between [the subcontractor’s] work and the liability is sufficient to establish [the general contractor’s] status as an additional insured.” Patrick Eng’g, Inc. v. Old Republic Gen. Ins. Co., 2012 IL App. (2d) 111111, 973 N.E.2d 1036, 1045-46 (Ill. App. Ct. 2012). It is undisputed that, here, Meccon’s request to use Smith-Blair clamps was a but-for cause of Kenny’s liability.

 

Old Republic maintains that Patrick and the other cases cited by Kenny are distinguishable because the policies in those cases covered damages “arising out of” the subcontractor’s work, while the CGL policies cover damages “caused by” Meccon’s work. See Patrick, 973 N.E.2d at 1045-46; see also Cas. Ins. Co. v. Northbrook Prop. & Cas. Ins. Co., 150 Ill. App. 3d 472, 475, 501 N.E.2d 812, 814 (Ill. App. Ct. 1986). This, however, is a distinction without a difference. Like the “arising out of” language, the phrase “caused by” is “both broad and vague”—because causation can refer to either but-for or proximate causation—and “must be liberally construed in favor of the insured.” Northbrook, 501 N.E.2d at 814.6 Both the Patrick and Northbrook courts treated the “arising out of” language as though it required some level of causation; the question before these courts was the precise level of causation required and both concluded that, under Illinois law, “ ‘but for’ causation, not necessarily proximate causation, satisfies this language.” Northbrook, 501 N.E.2d at 814 (quoting Maryland Cas. Co. v. Chicago & N. W. Transp. Co., 126 Ill. App. 3d 150, 154, 466 N.E.2d 1091, 1094 (1984)). See also, e.g., Santa’s Best Craft, LLC v. St. Paul Fire and Marine Ins. Co., 611 F.3d 339, 348 (7th Cir. 2010) (under Illinois law, policy exclusion of conduct that “results from” specified conduct implicates “but for” causation); Transamerica Ins. Co. v. South, 975 F.2d 321, 329 n.6 (7th Cir. 1992) (recognizing that under Illinois law the term “arising out of” has been “construed frequently in workmen’s compensation claims and in insurance litigation to mean that a mere causal connection suffices to bring facts within the ambit of an insurance clause which is prefaced with that phrase.”); Elec. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 346 F. Supp. 2d 958, 966 (N.D. Ill. 2004) (“The phrase ‘arising out of’ is broad, vague, liberally construed in favor of the insured, and satisfied by ‘but for’ causation.”). Consequently, as in Patrick and Northbrook, the court concludes that “but for causation, not necessarily proximate causation,” satisfies the “caused by” language in the CGL policies. Id.

 

Old Republic also supports its position with a citation to Lincoln Gen. Ins. Co v. Fed. Const., Inc., No. 09 C 6087, 2010 WL 4978852 (N.D. Ill. Dec. 2, 2010), where the court concluded that an additional insured provision stating that the insurer would be liable for damages “caused, in whole or in part, by” the named insured’s “acts or omissions” provided coverage only for the named insured’s negligent acts. But Lincoln General appears to rely on a misreading of the Illinois Supreme Court’s decision in Virginia Surety Co. v. Northern Insurance Co. of New York, 224 Ill.2d 550, 866 N.E.2d 149 (Ill. 2007). In Virginia Surety, the Court did not read a fault requirement into the relevant contract’s “caused by” language; it simply noted that the contract had a fault requirement because it explicitly required indemnity only where damages were “caused in whole or in part by negligent acts or omissions of the Subcontractor.” 866 N.E.2d at 159 (emphasis added). Old Republic’s reliance on Lincoln General is therefore misplaced. Because Meccon’s requests to use Smith-Blair clamps were a but-for cause of Kenny’s liability, Old Republic’s assertion that Kenny’s liability was not “caused by” Meccon’s work on the McCook Project must be rejected.

 

*11 * * *

 

Although the absence of a “suit” means that Old Republic has no duty to defend Kenny, Old Republic has not identified a limitation or exclusion that would preclude its duty to indemnify Kenny. Consequently, Old Republic’s motion for summary judgment is granted as to the duty to defend but denied as to the duty to indemnify. Kenny’s motion for summary judgment is granted as to the duty to indemnify, but denied as to the duty to defend.

 

 

Dated: October 31, 2017 John J. Tharp, Jr. United States District Judge

All Citations

Slip Copy, 2017 WL 4921970

 

 

Footnotes

1

“The Deep Tunnel is intended to ‘bottle a rainstorm’ by channeling storm water that overflows from sewers into the system’s tunnels, which are up to 33 feet in diameter. The tunnels will connect with massive reservoirs, which are to be finished in the early 21st Century. When complete, the system will have a capacity of 41 billion gallons.” Casey Bukro, Deep Tunnel Opens, CHICAGO TRIBUNE (Jan. 3, 2008) http://www.chicagotribune.com/news/nationworld/ politics/chi-chicagodays-deeptunnel-story-story.html.

2

After briefing on the parties’ summary judgment motions was completed, the parties moved to supplement the record to include the settlement agreement between Kenny and USACE and accompanying stipulated facts. ECF No. 84. That motion is granted. The court includes the settlement agreement and additional stipulated facts in the summary judgment record.

3

Whitman v. Am. Trucking Associations, 531 U.S. 457, 468 (2001) (“Congress, we have held, does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.”). See also, e.g., Gallo v. Moen Inc., 813 F.3d 265, 269 (6th Cir.), cert. denied, 137 S. Ct. 375 (2016) (applying this canon to contractual interpretation).

4

Old Republic does assert that the parol evidence suggests that Meccon was merely required to provide Kenny with an insurance certificate listing Kenny as an additional insured, as opposed to requiring Kenny be an additional insured on Meccon’s CGL policy. But again, the question is not what kind of proof of insurance Meccon was required to provide; the question is whether the parol evidence suggests that the parties intended for Kenny to be a required additional insured under the subcontract. And the court can discern no reason why Kenny would require Meccon to provide such certificates—and why Meccon actually would provide the certificates—if there was no mutual intent that Kenny be named as an additional insured on an actual CGL policy.

5

In interpreting Crum & Forster to stand for this broad proposition, Old Republic repeats the “mistake”—which the Seventh Circuit identified in Sokol—of failing to read the Illinois Supreme Court’s ruling in context. Given the clear statement and explanation in Sokol, and its confirmation in Keystone, Old Republic should not have advanced the same erroneous argument here; neither Keystone nor Sokol are difficult to locate when one follows up on the “negative history” citations to the Crum & Forster case. Old Republic’s mistake, however, may be explained by the fact that several years after Keystone and Sokol, the Seventh Circuit repeated the broad language of Crum & Forster without qualification in Health Care Industry Liability Ins. Program v. Momence Meadows Nursing Center, Inc., 566 F.3d 689, 693 (7th Cir. 2009). There, the court of appeals cited Crum & Forster (but not its own prior decisions in Keystone and Sokol) for the broad proposition that “the duty to defend subsumes the duty to indemnify. Holding that an insurer has no duty to indemnify therefore follows inexorably from holding that an insurer has no duty to defend.” This statement was dicta, however, because it was not necessary to decide the issue before the court. Further, that case did not involve the situation presented here, where the duty to defend is subject to a contractual limitation that does not extend to the duty to indemnify. Indeed, the Momence panel distinguished another case, Premcor USA, Inc. v. American Home Assurance Co., 400 F.3d 523 (7th Cir.2005), acknowledging that it was “one of the rare cases where the duty to defend and the duty to indemnify are independent of each other.” There, the Momence court explained, the umbrella insurance policy at issue did not obligate the secondary insurer to defend the insured because the primary insurer’s policy provided unlimited defense costs. Nevertheless, the umbrella insurer was obligated to indemnify the insured for any liability past the primary insurer’s insurance limits. See id. at 525. In view of its acknowledgment that in some fact contexts the duties to defend and to indemnify are independent, its failure to acknowledge Keystone and Sokol, and its status as dicta, this court does not read Momence to overrule Keystone and Sokol sub-silentio by holding that there is never a duty to indemnify where there is no duty to defend.

6

Old Republic also argues that the Northbrook court distinguished the phrase “arising out of” from “caused by,” asserting that the latter inheres a fault requirement. Northbrook, however, made no such distinction. In Northbrook, the court explained that a policy that required indemnity only for “acts or omissions of the named insured” required fault on the named insured’s part. 501 N.E.2d at 814-15. The court never ruled that the phrase “caused by” requires or even implies a fault requirement. To the contrary, the court held that coverage applied “regardless of the role of any acts or omissions” of the named insured. Id. at 815 (emphasis added).