American Family Mut. v. Fisher Development

• Decision Date: 18 May 2009
• Docket Number: No. 1-08-1214.,1-08-1214.
• Parties: AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. FISHER DEVELOPMENT, INC., Defendant-Appellant (The Gap, Inc., d/b/a Old Navy, Defendant).
• Court: United States Appellate Court of Illinois

909 N.E.2d 274

391 Ill. App. 3d 521

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. FISHER DEVELOPMENT, INC., Defendant-Appellant (The Gap, Inc., d/b/a Old Navy, Defendant).

No. 1-08-1214.

Appellate Court of Illinois, First District, First Division.

May 18, 2009.

Rehearing Denied June 17, 2009.

Kevin J. Kuhn, Michael J. Flynn, Vedder Price, P.C., Chicago, IL, for Defendant-Appellant.

Patti M. Deuel, Kiesler & Berman, Chicago, IL, For Plaintiff-Appellee.

Justice GARCIA delivered the opinion of the court.

This appeal arises from an insurance coverage dispute between the general contractor, Fisher Development, Inc. (FDI), as an additional insured, and American Family Mutual Insurance Company, the issuer of a commercial general liability policy to a subcontractor. Following cross-motions for summary judgment in a declaratory action, the circuit court granted summary judgment to American Family, finding it had no duty to defend FDI against two underlying actions brought by The Gap, Inc., the property owner of the construction sites. FDI contends that summary judgment should have been granted in its favor. Premised on its success on the duty-to-defend issue, FDI also contends American Family's refusal to defend FDI against the Gap actions was vexatious and unreasonable under section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2006)), entitling it to additional damages. We affirm the circuit court's grant of summary judgment in favor of American Family.

BACKGROUND

On January 1, 1992, FDI and the Gap entered into a construction contract in which FDI agreed to provide labor and materials for improvements at certain Gap stores. The Gap-FDI contract contained the following clauses.

"17. Insurance

A. FDI's Obligations. FDI agrees to maintain in effect at all times during the rendering of services all the insurance below * * *:

(i) Commercial general liability insurance with a combined single limit of at least Twenty Million Dollars ($20,000,000), including, but not limited to, the following coverages: * * * personal injury * * *. All commercial general liability insurance (a) shall include FDI's employees as additional insured, and (b) all endorsements to such policies shall apply to personal injury * * *.

(ii) Statutory workers' compensation and employer's liability insurance with limits of at least Five Million Dollars * * *.

18. Indemnification.

FDI agrees to indemnify and hold harmless The Gap, its officers, employees and agents, from and against any and all liability, loss and expense (including reasonable attorneys' fees) resulting from (i) personal injury, sickness or disease, including death at any time resulting therefrom (hereinafter `personal injury'), and (ii) damage to or destruction of property, including the loss of use thereof (hereinafter `damage to property'), arising in whole or in part by reason of, or in any way resulting from, the performance of the Work, whether by FDI or by any subcontractor, or anyone directly or indirectly employed by either of them (other than FDI, all hereinafter `FDI subcontractors')."

FDI subcontracted with Shanahan Drywall Service, Inc., to perform a portion of the improvements at the Gap stores. In connection with the subcontract, Shanahan purchased a commercial general liability (CGL) policy from American Family. The CGL policy covered the period of August 2, 2000, to August 21, 2001, and named FDI as an additional insured with respect to liability "arising out of [Shanahan's] ongoing operations provided for [FDI]." In the section entitled "COVERAGES," the CGL policy states: "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." The CGL policy also contains a clause excluding coverage for liability for bodily injury "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." The CGL policy set out an exception to this exclusion provision for "liability for damages[] [t]hat the insured would have in the absence of the contract or agreement."

During the coverage period, Suzanne Vanderhyden and Cynthia Cash, employees of the Gap, were injured at Gap stores where Shanahan was working. Vanderhyden and Cash filed workers' compensation claims against the Gap. Vanderhyden and Cash also filed negligence actions against FDI and Shanahan. Both alleged their injuries arose out of Shanahan's subcontracting work for FDI. American Family accepted FDI's tender and defended FDI in these actions brought by the Gap employees. In each action, FDI filed a third-party action against the Gap seeking contribution.

On May 25, 2006, the Gap filed an independent suit against FDI. In count I of its complaint, the Gap alleged FDI was obligated to indemnify it for the workers' compensation awards to Vanderhyden and Cash. The Gap claimed it paid $268,626.39 to Vanderhyden and $66,893.59 to Cash in worker's compensation. Count II alleged FDI breached its construction agreement by failing to obtain an insurance policy that would provide coverage to the Gap for the actions filed by Vanderhyden and Cash. The Gap alleged that because it had been joined as a third-party defendant in the Vanderhyden and Cash negligence actions against FDI and Shanahan, FDI must reimburse the Gap for its litigation expenses and any liability it might incur in the third-party actions.

FDI tendered its defense in the Gap suit to American Family. American Family refused the tender, answering that the CGL policy did not cover the Gap claims. FDI retained counsel at its own expense and successfully moved to dismiss the Gap suit as untimely based on the statute of limitations. The Gap did not appeal the dismissal of its suit; instead, it filed a counterclaim to the third-party contribution action alleging the same claims filed by FDI against the Gap in Vanderhyden's negligence action against FDI and Shanahan. FDI successfully moved to dismiss the Gap's counterclaim.

Thereafter, American Family filed an amended complaint for declaratory judgment that it had no duty to defend FDI in the actions brought by the Gap and, thus, no duty to reimburse FDI for its litigation expenses in defending against the Gap suits. FDI filed its own declaratory action to force American Family to reimburse it for its defense of the Gap actions. FDI also alleged breach of contract and a violation of section 155 of the Illinois Insurance Code. American Family and FDI filed cross-motions for summary judgment.

On April 4, 2008, the circuit court granted American Family's motion for summary judgment, finding American Family had no duty to defend FDI in the Gap suit and counterclaim.

FDI appeals, requesting five forms of relief: (1) reversal of the April 4, 2008, judgment of the trial court; (2) entry of judgment in its favor based on American Family's duty to defend against the underlying actions brought by the Gap; (3) entry of judgment in its favor for American Family's vexatious and unreasonable refusal to defend, which violated section 155 of the Insurance Code; (4) entry of judgment in its favor for attorney fees and costs incurred in the present action, plus a $60,000 statutory penalty under section 155 of the Insurance Code; and (5) a remand to the trial court to determine the defense costs incurred by FDI in the underlying claims and the attorney fees and costs incurred by FDI in the present action, with instructions to the trial court to enter judgment in favor of FDI in such amounts, plus the statutory penalty.

ANALYSIS

FDI makes a three-prong attack on the circuit court's judgment: (1) it contends that based on the damages sought by the Gap in its suit and counterclaim, the facts alleged in the complaints potentially fell within the coverage of the CGL policy; (2) the exclusion provision of the CGL policy for assumption of liability in a contract or agreement does not apply; and (3) if the exclusion provision applies, the first exception to the contractual liability exclusion applies as well.

American Family responds that the exclusion provision precludes coverage and, therefore, it had no duty to defend FDI in the Gap lawsuits.

Standard of Review

The same standard for the grant of summary judgment applies in a case involving a duty to defend claim: "Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Virginia Surety Co. v. Northern Insurance Co. of New York, 224 Ill.2d 550, 556, 310 Ill.Dec. 338, 866 N.E.2d 149 (2007). Where cross-motions for summary judgment are filed in an insurance coverage case, the parties acknowledge that no material questions of fact exist and only the issue of law regarding the construction of an insurance policy is present. Liberty Mutual Fire Insurance Co. v. St. Paul Fire & Marine Insurance Co., 363 Ill.App.3d 335, 338-39, 299 Ill.Dec. 431, 842 N.E.2d 170 (2005). Our review is de novo. Virginia Surety Co., 224 Ill.2d at 556, 310 Ill.Dec. 338, 866 N.E.2d 149.

In construing an insurance policy, a court looks to the policy as a whole, the risk undertaken, the subject matter and the purpose of the contract. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 108, 180 Ill. Dec. 691, 607 N.E.2d 1204 (1992). "If the words in the policy are unambiguous, a court must afford them their plain, ordinary, and popular meaning. [Citation.] However, if the words in the policy are susceptible to more than one reasonable interpretation, they are ambiguous [citation] and will be construed in favor of the insured and against the insurer who drafted the policy [citation]." (Emphasis in original.) Outboard Marine Corp., 154 Ill.2d at 108, 180 Ill.Dec. 691, 607 N.E.2d 1204.

To determine whether an insurer has a...