When Insurer Let’s Insured Unilaterally Choose Additional Insureds it has no Standing to Complain

Insurer Must Defend Entities Chosen by Insured

Aug 29, 2022

FACTS

Westfield Insurance Company (Westfield) filed a declaratory judgment action seeking a determination that it owed no duty to defend or indemnify defendants in an underlying personal injury lawsuit that occurred at a construction site at which Walsh and K-Five were operating a joint venture. In the underlying lawsuit, Royce Brown (Brown), an employee of VMR Contractors, Inc. (VMR), a subcontractor at the construction site, injured himself carrying rebar.

The trial court found Westfield owed a duty to defend each and denied Westfield’s motion to avoid its defense duty.

Walsh entered into two line-item joint venture agreements with K-Five to bid on two separate contracts from the Illinois State Toll Highway Authority, which involved pavement widening and bridge reconstruction work on the Jane Addams Memorial Tollway. Further, the Joint Venture, Walsh (if K-Five was the named insured on the policy) and K-Five (if Walsh was the named insured on the policy) were required to be named as additional insureds in the commercial general liability insurance policy “for claims arising out of the performance of the named insured Party’s Work.

The Westfield Policy

In light of the VMR’s obligations under the subcontracts, it obtained a policy from Westfield that contained commercial general liability insurance with a one-year term. In the general liability declarations, VMR was listed as the named insured. Section II of the Commercial General Liability Coverage Form was titled “Who Is An Insured” provided that: “Any organization you newly acquire or form, other than a partnership, joint venture or limited liability company, and over which you maintain ownership or majority interest, will qualify as a Named Insured if there is no other similar insurance available to that organization” subject to three listed conditions.

The Underlying Personal Injury Lawsuit

After VMR obtained its commercial general liability insurance policy, it began work on the Jane Addams Memorial Tollway construction project. In September 2015, Brown was working as an ironworker on the construction project for VMR. While Brown was manually carrying rebar from a designated shakeout area, he injured himself. In August 2017, Brown filed a three-count complaint sounding in negligence against Walsh, K-Five and the Joint Venture for the injuries he sustained while carrying the rebar.

ANALYSIS

Westfield contended that K-Five and the Joint Venture could not be considered additional insureds under VMR’s policy with Westfield because there was no contract in writing that required VMR to add either K-Five or the Joint Venture to the policy as additional insureds. Additionally, Westfield contended that, even if K-Five or the Joint Venture could be considered additional insureds, the joint venture exclusion in the policy negated that coverage. Finally, Westfield argued that the joint venture exclusion also applied to Walsh and negated its potential coverage. As such, Westfield posited that it had no duty to defend Walsh, K-Five or the Joint Venture, and the circuit court’s various rulings must be reversed.

Coverage under the Policy

The prescient words the Illinois Court of Appeal pronounced in LaGrange Memorial Hospital v. St. Paul Insurance Co., 317 Ill.App.3d 863, 870 (2000), when discussing the position insurers place themselves in when obligating themselves to defend unknown third parties with which named insureds have written agreements to add as additional insureds:

By drafting this language, [the insurer] acknowledged and accepted that its insured would be entering into contracts under which [the insurer] would be obligated to provide a defense ***. [The insurer] did not require that its insured get [the insurer’s] approval of the contracts or require its insured to disclose the identities of the third parties or require that [named insured] name those parties as additional insureds. [The insurer] thus assumed the responsibility of providing defenses for certain unknown and unnamed third-party beneficiaries.

That’s what occurred in this case. Because the plain language of the Contractors Endorsement mandates that the endorsement does not apply to “any person or organization covered as an additional insured on any other endorsement now or hereafter attached,” the joint venture exclusion therein did not negate coverage for Walsh, K-Five or the Joint Venture, as additional insureds under the Additional Insured Endorsement.

The Court of Appeal affirmed the circuit court’s rulings that granted defendant Walsh Construction Company II, LLC’s motion for a partial judgment on the pleadings, granted defendants Walsh/K-Five JV (I-14-4208), Walsh/K-Five JV (I-14-4209), Walsh Construction Company II, LLC/K-Five Construction Company JV and K-Five Construction Corporation’s motions for partial summary judgment and denied plaintiff Westfield Insurance Company’s motions for summary judgment where plaintiff had a duty to defend defendants.

ZALMA OPINION

Insurers who give away their underwriting pen to others have learned its decision was expensive. In this case the insurer gave the insured the right to make anyone with whom it contracted additional insureds. By so doing Westfield gave away its right to underwrite its obligation to insure and found it was insuring multiple people it had no idea, when it issued the policy, it insured. Cases like this one should cause insurers to reconsider whether it has sufficient premium to cover the risk it is letting its named insured to impose on it by entering into a contract with others.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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