Employer's CGL Policy Does Not Cover Employer's Liability Above Kotecki Cap

The Illinois Supreme Court issued a ruling on Friday January 19, 2007 that impacts insurance coverage in construction cases.

In Virginia Surety Company, Inc. vs. Northern Insurance Company of New York, Docket No. 102036, the Supreme Court ruled that a commercial general liability policy of insurance (CGL) issued to a subcontractor does not provide coverage for damages above the Kotecki cap.

This case arose out of a June 4, 1997, injury to James Smith, an employee of DeGraf Concrete Construction, Inc. (DeGraf) which occurred while he was performing cement masonry work in Addison, Illinois. DeGraf was performing work on this jobsite pursuant to a construction subcontract it had entered into with Capital Construction Group, Inc. (Capital), the general contractor for the project. The contract between Capital and DeGraf contained language constituting a waiver of DeGraf's limited liability under the case of Kotecki vs. Cyclops Welding Corp., 146 Ill.2d 155, 164-65 (1991). (Kotecki held that employer's maximum liability in a third-party suit for contribution is limited to its liability to the employee under the Workers' Compensation Act. Subsequent cases, including Braye vs. Archer-Daniels-Midland Company, 175 Ill.2d 201 (1997), held that an employer could waive the limited liability protection provided by Kotecki.)

DeGraf tendered the third-party complaint to Virginia Surety Company, Inc. (Virginia Surety), from whom DeGraf had purchased a policy of insurance covering workers' compensation and employer liability. DeGraf also tendered the third-party complaint to Northern Insurance Company of New York (Northern) its CGL carrier. Virginia Surety accepted the tender and defended DeGraf against the third-party complaint. Northern refused to defend or indemnify DeGraf.

Virginia Surety filed a Declaratory Judgment Complaint against Northern, seeking a finding that Northern was obligated to defend and indemnify DeGraf under the CGL policy. Virginia Surety also sought an award of damages for amounts previously paid to defend and indemnify DeGraf. The Circuit Court granted summary judgment for Northern, finding that the CGL policy did not provide coverage for any damages that exceed the workers' compensation liability of the employer. This was affirmed by the appellate court.

The Illinois Supreme Court in its opinion issued last Friday agreed, finding that the CGL policy does not provide coverage for any damages that exceed the workers' compensation liability of the employer.

Prior to this Supreme Court decision, there had been a split in the districts on this issue. The disagreement was based upon whether the indemnification provision typically found in a construction contract constituted an insured contract, which is typically covered under a CGL policy. Two appellate courts had ruled that the indemnification language in a construction contract meant that an employer had assumed someone else's liability and therefore, constituted an insured contract for which the CGL policy would provide coverage for damages above the workers' compensation exposure of the employer. On the other hand, the Fifth District in Hankins v. Pekin Insurance Co., 305 Ill.App.3d 1088 (1999) had found that the indemnification language in a nonconstruction setting did not constitute an insured contract because the indemnity provision was simply the employer agreeing to accept its pro-rata share of liability without limitation for its own negligence and was not accepting the tort liability of another party. Thus, there was not an insured contract bringing the CGL policy into play.

The Supreme Court held that the indemnification clause in the typical construction contract was really a waiver of the Kotecki cap by the employer. The Court distinguished between contribution and indemnification:

There is an important distinction between contribution which distributes the loss among the tortfeasors by requiring each to pay his proportionate share, and indemnity, which shifts the entire loss from one tortfeasor who has been compelled to pay it to the shoulders of another who should bear it instead. 362 Ill.App3d at 574, quoting W. Prosser, Torts, Section 51, at 310 (4th ed. 1971).

As the employer through the construction contract was simply agreeing to accept the full share of its own negligence, it was not accepting the tort liability of another, and therefore the employer's CGL policy was not applicable.

With the Supreme Court's ruling, the next question is who will ultimately pay for damages which exceed the employer's workers' compensation liability? The answer will depend upon the specifics of the case. Some possibilities include:

1. The employer, through use of personal assets, or, if applicable through other insurance policies obtained by the employer such as an umbrella policy;
2. Parties found to be joint and severally liable at trial.

If the employer has no means of paying the verdict and no party is found to be jointly and severally liable, the Plaintiff may not be able to recover the damages attributable to the employer that exceed the employer's workers' compensation liability.

Should you wish to discuss this case or its impact on any of your pending claims, please feel free to contact any of our civil litigation attorneys:

Andrew R. Makauskas, 312-425-3140, amakauskas@bcm-law.com
Carrie A. Budzien, 312-334-9491, cbudzien@bcm-law.com