A federal court in Illinois ruled in favor of coverage for a general contractor that had received certificates of insurance demonstrating that it was an additional insured under the subcontractor’s policy for underlying damages that resulted from negligence. The opinion is instructive for three key rulings: First, certificates of insurance reflect the parties’ intent to add the general contractor as an additional insured, and are not merely for “informational purposes” only, as the insurer asserted. Second, an insurer may have a duty to indemnify a general contractor even in the absence of a duty to defend. Third, the contractual liability exclusion will not apply to bar coverage for an underlying claim when the claim includes both allegations of negligence as well as breach of contractual provisions. 

An Illinois federal court recently ruled in favor of coverage for a general contractor that had received additional insured certificates of insurance, but who the insurer insisted only received them for “informational purposes.” The dispute arose after substantial completion of Chicago's Deep Tunnel flood control project, which was undertaken pursuant to a contract awarded by the United States Army Corps of Engineers. Old Republic Insurance Co. v. Kenny Construction Co., No. 15-CV-03524, 2017 WL 4921970 (N.D. Ill. Oct. 31, 2017). 

The insurer, Old Republic, had asserted numerous defenses to coverage following an administrative proceeding in which both the subcontractor and the general contractor had been found negligent for making a design change in the tunnel’s construction. The court first upheld the general contractor’s expectation of coverage in instances where the subcontractor’s certificates of insurance list the general contractor as an additional insured. General contractors frequently and typically require subcontractors to obtain “additional insured” coverage certificates to protect themselves in instances where the subcontractor’s actions could result in liability to the general contractor. The general contractor in this case, Kenny Construction Company (Kenny), followed this practice; Kenny executed a subcontract requiring the subcontractor to furnish Commercial General Liability insurance certificates listing Kenny as an additional insured. The subcontractor provided, and Kenny accepted, such certificates for several years, a fact the court ultimately found significant once the nature of the certificates was found to have been ambiguous.

Nonetheless, Old Republic denied Kenny defense and indemnification for damages stemming from leaks Matthew Jacobs Sati Harutyunyan that corroded various mechanical and electrical equipment in the Deep Tunnel flood control project. A two year investigation and a final decision by the Army Corps of Engineers — the contracting agency — revealed that the leaks occurred after Kenny and the project designer approved the subcontractor’s decision to place clamps where the original plans called for welded joints. The insurer asserted that the certificates “were informational only and conferred no rights upon the certificate holder.” Old Republic argued that the certificates included disclaimers to the effect that the certificates did not control the coverage provided by the applicable policies. The subcontractor’s policies also did not expressly identify Kenny as an additional insured. 

The judge rejected Old Republic’s argument and found: “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 court construed the certificates as more than informational because “the additional insured representation has no value to Kenny if not true.” The court thus relied upon the certificates to identify the parties’ intent, which was to include Kenny as an additional insured year after year. 

The court also rejected Old Republic’s argument that it had no duty to indemnify Kenny because the contracting agency’s investigation and final decision were not “suits” as contemplated by the commercial general liability policies. The court agreed that the Army Corps of Engineers investigation and decision were not suits, as that term was defined in the policy. Nonetheless, the court found that the absence of a suit absolved the insurer only of its duty to defend, but not of its duty to indemnify. The court recognized that its holding is a departure from the broad proposition that “where there is no duty to defend, there will be no duty to indemnify.” However, the court also observed that there was guiding case law from the Seventh Circuit, which supported the court’s conclusion that the duty to indemnify is not always “nestled within” a broader duty to defend. The court found that the contractual terms relating to indemnification did not contain the same limiting language found in the terms pertaining to the duty to defend, which required the existence of a suit. The holding demonstrates that, when the two duties are the subjects of separate contractual provisions, the duty to indemnify may very well exist in the absence of a duty to defend. 

Finally, the court rejected the insurer’s contention that there was no duty to indemnify Kenny because the commercial general liability policies at issue contained standard-form, boilerplate “contractual liability” exclusions. The court found that the insurer failed to meet its burden of proving that the contractual liability exclusion applied in this case. Instead, the court ruled that the contracting agency’s repeated reference to Kenny's “negligence” in approving the design change that resulted in the leaks suggested that the claims were also based in tort. Thus, the contractual liability exclusion did not apply because the agency had asserted negligence-based claims for relief even if Kenny violated multiple contractual provisions. 

The court’s decision underscores three principles that general contractors should keep in mind during disputes similar to those in the instant case. First, if there is any question as to the parties’ intent, a subcontractor’s provision of certificates of insurance year after year listing the general contractor as an additional insured constitutes relevant extrinsic evidence of the parties’ intent to include the general contractor as an additional insured. Second, a general contractor may be indemnified even if the subcontractor’s insurer is found to have no duty to defend the general contractor because of the absence of a “suit,” as the term is defined in the specific policy in question. Last, the contractual liability exclusion does not apply when a contracting agency asserts negligence-based claims for relief against the general contractor, even if the agency also asserts claims for breach of various contractual provisions.

This article was first published in Law360.