Michael Nicholas, Inc. v. Royal Ins. Co.

• Decision Date: 03 May 2001
• Docket Number: No. 2-99-1337.,2-99-1337.
• Citation: 748 N.E.2d 786,321 Ill. App.3d 909,255 Ill.Dec. 82
• Parties: MICHAEL NICHOLAS, INC., Plaintiff-Appellant, v. ROYAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

748 N.E.2d 786

321 Ill. App.3d 909

255 Ill.Dec. 82

MICHAEL NICHOLAS, INC., Plaintiff-Appellant, v. ROYAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.

No. 2-99-1337.

Appellate Court of Illinois, Second District.

May 3, 2001.

Kurt G. Beranek, Paul A. Farahvar, Fraterrigo, Beranek, Feiereisel & Kasbohm, Chicago, for Michael Nicholas, Inc.

Robert L. Kiesler, Patti M. Deuel, Kiesler & Berman, Chicago, for Royal Insurance Company of America.

Justice O'MALLEY delivered the opinion of the court:

Plaintiff, Michael Nicholas, Inc., appeals the circuit court's order dismissing its complaint against defendant, Royal Insurance Company of America (Royal). Plaintiff contends that the court erred in determining that Royal had no duty to defend or indemnify it in an underlying action filed by Kimball Hill, Inc.

BACKGROUND

Plaintiff was a subcontractor at Willoughby Farms, a subdivision Kimball Hill was developing. On June 4, 1993, an employee of plaintiff, Anthony Bauer, was injured while working at Willoughby Farms. Bauer sued Kimball Hill alleging violations of the Structural Work Act (740 ILCS 150/0.01 et seq. (1994) (repealed by Pub. Act 89-2, § 5, eff. February 14, 1995)) and negligence. Kimball Hill, in turn, sued plaintiff, alleging that plaintiff's negligence or wilful and wanton conduct caused Bauer's injuries. Kimball Hill sought either complete indemnification or contribution based on its contract with plaintiff.

Plaintiff tendered defense of the action to Royal. Royal refused to provide a defense, citing the "employee exclusion" in the policy. Plaintiff requested Royal to reconsider, asserting that the exception for insured contracts applied, but Royal again rejected the tender of defense.

Plaintiff then sued Royal, seeking a declaratory judgment that the policy required Royal to defend and indemnify plaintiff in the underlying suit. Plaintiff alleged that it had incurred $18,000 in attorney fees and costs defending the underlying action. It eventually settled the underlying action for $165,000.

The trial court granted Royal's motion to dismiss the complaint, finding that the exclusion for employee injuries applied. Relying on Hankins v. Pekin Insurance Co., 305 Ill.App.3d 1088, 239 Ill.Dec. 394, 713 N.E.2d 1244 (1999), the court concluded that plaintiff's contract with Kimball Hill was not an "insured contract" so as to bring it within the exception in the policy for such contracts. Plaintiff filed a timely notice of appeal.

ANALYSIS

Paragraph 13 of the contract between plaintiff and Kimball Hill, which refers to plaintiff as "S-C," provides as follows:

"`S-C' shall indemnify and hold harmless the Owner [Kimball Hill] and all of its agents and employees from and against all claims, damages, losses and expenses * * * attributable to bodily injury, sickness, disease, death, or to injury to or destruction of tangible property caused in whole or in part by any negligent act or omission or [sic] `S-C' * * *."

Plaintiff purchased a general comprehensive liability policy from Royal. The issue in this case turns on the interplay between two coverage exclusions and an exception that applies to both exclusions. Exclusion e provides:

"e. `Bodily injury' to:

(1) An employee of the insured arising out and in the course of employment by the insured; or

(2) The spouse, child, parent, brother or sister of that employee as a consequence of (1) above.

This exclusion applies:

(1) Whether the insured may be liable as an employer or in any other capacity; and

(2) To any obligation to share damages with or repay someone else who must pay damages because of the injury."

Exclusion b provides:

"b. `Bodily injury' or `property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement."

Both of the foregoing exclusions contain an exception that provides that the exclusions do not apply to liability assumed by the insured under an "insured contract," which is defined as:

"That part of any other contract or agreement pertaining to your business * * * under which you assume the tort liability of another party to pay for `bodily injury' or `property damage' to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement."

Initially, we hold that the language of the exception and the exclusions is ambiguous. We find this ambiguity with regard to both exclusions but note that the ambiguity is blatant with regard to the interplay between exclusion b and the exception. Read together, exclusion b and the exception essentially state that there is no coverage for obligations that arise by reason of the assumption of liability in a contract or agreement unless the policyholder assumes the tort liability of another party pursuant to a contract or agreement.

Royal argues that the exclusions apply because plaintiff's agreement (quoted above) to indemnify and hold Kimball Hill harmless from plaintiff's negligence is not an insured contract. For the reasons that follow, we find that the policy language is not only ambiguous but that upon careful analysis the construction which favors plaintiff is more logical irrespective of the principle that ambiguous language is construed in favor of the policy holder.

Plaintiff argues that, although Bauer was its employee and it had assumed liability by contract, its contract with Kimball Hill was an "insured contract" so that the exception to the exclusions applies. Plaintiff maintains that, at the very least, Kimball Hill's complaint potentially fell within the exception. Because Royal did not defend under a reservation of rights or seek a declaratory judgment that coverage did not apply, it is now estopped to deny coverage. Finally, plaintiff argues that Hankins does not govern this case because insured contracts of the type contemplated by that decision are illegal in the construction industry and, therefore, the coverage allegedly provided by Royal's policy is illusory.

Royal responds that the policy unambiguously defines "insured contract" as one in which the insured is obligated to indemnify another party for that party's own negligence. Royal also argues that the fact that an exception does not apply here does not render the coverage illusory. Moreover, because the policy clearly excludes this claim, Royal is not estopped from denying coverage.

A complaint should be dismissed under section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1998)) only when it clearly appears that no set of facts could be proved under the pleadings that would entitle plaintiff to relief. Ogle v. Fuiten, 102 Ill.2d 356, 360-61, 80 Ill.Dec. 772, 466 N.E.2d 224 (1984). Because the question presented by a section 2-615 motion is one of law, this court's review is de novo. Lukwinski v. Stone Container Corp., 312 Ill.App.3d 385, 388, 244 Ill.Dec. 690, 726 N.E.2d 665 (2000)

.

The construction of an insurance policy is a question of law. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 108, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992). In construing a policy, the court must ascertain the intent of the parties to the contract. The court must construe the policy as a whole, with due regard to the risk undertaken, the subject matter that is insured and the purposes of the entire contract. If the words are unambiguous, a court must afford them their plain, ordinary, and popular meaning. However, if they are susceptible to more than one reasonable interpretation, they are ambiguous and will be construed in favor of the insured and against the insurer who drafted the policy. Outboard Marine, 154 Ill.2d at 108-09, 180 Ill.Dec. 691, 607 N.E.2d 1204.

In Hankins, the Fifth District adopted the definition of an insured contract that Royal urges here. In interpreting an essentially identical provision, the court held that an "insured contract" is one that provides for one of the contracting parties to assume someone else's tort liability. The court equated "tort liability" with "negligence liability." In other words, an insured contract is one where one of the parties agrees to indemnify the other against that party's own negligence. Hankins, 305 Ill.App.3d at 1093, 239 Ill. Dec. 394, 713 N.E.2d 1244.

The Hankins court observed that a contract will not be construed as indemnifying one against its own negligence unless the contract clearly expresses that intention. The contract in that case plainly provided that Hankins was indemnifying the other party only against Hankins' own negligence. Thus, the exception in the policy for "insured contracts" did not provide coverage. Hankins, 305 Ill.App.3d at 1093, 239 Ill.Dec. 394, 713 N.E.2d 1244.

Plaintiff argues that under the policy's definition of "insured contract," tort liability is not limited to negligence or fault-based liability and that liability may be imposed on a party in a tort action without regard to that party's fault or negligence. For example, if two defendants are jointly and severally liable for an injury and one becomes judgment-proof, the solvent defendant will have to pay the entire judgment regardless of its degree of fault.

Plaintiff further contends that under Kotecki v. Cyclops Welding Corp., 146 Ill.2d 155, 166 Ill.Dec. 1, 585 N.E.2d 1023 (1991), its "tort liability" for Bauer's injuries would be limited to the amount of its worker's compensation liability. However, because it waived the "Kotecki cap" (see Liccardi v. Stolt Terminals, Inc., 178 Ill.2d 540, 550, 227 Ill.Dec. 486, 687 N.E.2d 968 (1997)), it was potentially liable for the entire amount Kimball Hill was required to pay Bauer, in other words, for Kimball Hill's "tort liability."

We agree with plaintiff. Although Royal insists that "tort liability" must be equated with "negligence liability," nothing in the policy's definitions so states. If Royal had wanted to limit the definition of an insured contract to a...