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A minimal potential for coverage requires the insurer to defend



Insurance is a risk diversification agreement. Construction contracts that require subcontractors mean that the turnkey contractor and the owner are an additional insurance of the subcontractors' policy are also risk-spreading devices. When a person who is employed by an insured subcontractor and sues the general and the owner for his damages, the general and the owner, who are further insured, will always demand that the subcontractors' insurance companies defend and replace them as additional insured.

In Scottsdale Insurance Company v. Columbia Insurance Group, Inc., Nos. 19-3315, United States Court of Appeals for the Seventh Circuit (August 26, 2020) Columbia refused to defend the additional insured and their primary insurer, Scottsdale sued for a declaration that Columbia must defend and reimburse Scottsdale for the defense costs it has incurred to defend its insured. floors and suffer serious damage. Guzman sued Rockwell Properties (the owner), Prairie Management & Development (the manager) and others in the state court.

The Seventh Circuit was asked whether the Columbia Insurance Group (Guzman's employer insurer) is obliged to defend Rockwell and Prairie. The Scottsdale Insurance Company (Rockwell's insurer) wants Columbia to take over the defense. The district court granted Scottsdale's judgment on the pleadings and declared that Columbia has an obligation to defend Rockwell and Prairie and orders Columbia to reimburse previous defense costs.

TDH Mechanical provides services for heating, ventilation and air conditioning. It hired Eduardo Guzman.

TDH purchased insurance from Columbia Insurance Group to cover the period from April 1

2, 2016 to April 12, 2017. The insurance contract provides that Columbia "We pay the amounts that the insured is legally obligated to pay as damages due to" bodily injury ”… to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking these damages … "

The insurance also includes a recommendation that adds additional insured in special circumstances where an insured person or organization for which the the insured carries out activities if there is a written agreement in an agreement or agreement that such a person or organization is added as additional insured to the insurance.

TDH contract with Prairie and Rockwell

Rockwell Properties owned a property under construction in Chicago. Prairie Management & Development was the construction manager for it. In February 2017, Prairie and Rockwell agreed with TDH to own maintain plumbing services on this property. That agreement required that it be made into an additional insurance and that it took responsibility for any injuries or injuries to persons who grew out of work.

Several defendants in the underlying lawsuit (except Prairie and Rockwell) filed third-party complaints against TDH for subsidies, alleging that TDH negligently failed to train its employees on several issues, failed to enforce its own safety rules, and failed providing adequate safeguards to prevent damage.

Scottsdale insured Rockwell. Scottsdale has defended Rockwell and Prairie in the underlying suit. Columbia refuses to defend them. Scottsdale sued to force Columbia to take over the defense and reimburse Scottsdale for the defense costs. The district court declared that Columbia is obligated to defend Prairie and Rockwell and orders Columbia to pay Scottsdale more than $ 50,000 for defense costs until August 2019 and file the claim for another day.

DISCUSSION

An insurer's obligation to defend is broader than its obligation to make amends. In order to determine whether an insurance company has an obligation to defend, a court compares the allegations of the underlying complaint (interpreted in favor of the insured) with the language of the insurance. If the underlying complaint claims facts within or potentially within the insurance coverage, an insurance company is obliged to defend its insured even if the allegations are unfounded, false or fraudulent. An insurance company can only refuse to defend if the allegations if the underlying complaint excludes any possibility of coverage

TDH agreed in writing that it would have Prairie and Rockwell appointed as additional insurances on TDH's policy. Columbia policy had a limitation. It stated that the other organization would only be an additional insurance in respect of liability arising from TDH's ongoing activities performed for that other organization.

The "emerging from" limitation in Columbia policy does not eliminate Columbia's obligation to defend itself in the underlying suit. "Prairie and Rockwell's liability for the case potentially arises (and it suffices) in part (and it suffices) from TDH's ongoing operations performed for Prairie and Rockwell, TDH's work on the project."

When analyzing the obligation to defend it does not matter if TDH is in fact ultimately responsible. It does not matter that the underlying mood does not mention TDH as respondent or mentions it.

The underlying complaint specifically alleges that Prairie and Rockwell were negligent and liable for Guzman's damages. In addition, several defendants in the underlying lawsuit (in addition to Prairie and Rockwell) filed third-party complaints against TDH for subsidies.

At least two of the three third-party complaints that the district court considered were not filed by proposed additional insured or related entities. A court of appeal does not have to carry a judge and may consider that TDH may have made a mistake.

An insurance company must defend its insured in a measure that is potentially within the coverage. The underlying allegations do not rule out the possibility of coverage. It is not clear or free from doubt that the exclusion of the policy prevents coverage. Therefore, Columbia is obligated to defend Prairie and Rockwell. As the district court concluded correctly, the question of compensation can wait.

Additional insureds, such as Prairie and Rockwell, are entitled to defenses as additional insured if there is any potential for Guzman's suit to fit within the coverage provided. Since Prairie and Rockwell's responsibility for Guzman's fall potentially arose in part from TDH's ongoing operations for Prairie and Rockwell, TDH's work on the project was sufficient to require Columbia to defend Prairie and Rockwell.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, handling insurance claims, infidelity and insurance fraud almost equally for insurance policyholders. . He also acts as an arbitrator or mediator for insurance-related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims lawyer and more than 52 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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