Coverage “Arising Out of” Policyholder’s Operations Triggered Even if Not Named in Complaint

The Seventh Circuit Court of Appeals, applying Illinois law, affirmed the district court’s judgment on the pleadings holding that Columbia Insurance Group, Inc. (“Columbia”) owed a duty to defend a property owner and property manager as additional insureds in an underlying suit involving a construction injury.  In an opinion by Justice Mannion, the Seventh Circuit found that the underlying complaint, as well as associated third-party complaints, alleged at least part of the injury arose out of the actions of Columbia’s insured, TDH Mechanical (“TDH”), even though the underlying complaint did not explicitly name TDH as a defendant.  These allegations were sufficient to trigger Columbia’s duty to defend the property owner and property manager as additional insureds.

Columbia insured TDH, an HVAC contractor working at a property owned by Rockwell Properties (“Rockwell”) and managed by Prairie Management & Development (“Prairie”).  While working at the Rockwell / Prairie property, one of TDH’s employees fell and was seriously injured. The employee sued Rockwell, Prairie, and others (but not TDH) for negligence.  Several defendants in the underlying suit (besides Prairie and Rockwell) filed third-party complaints against TDH for contribution.  Rockwell’s and Prairie’s insurer, Scottsdale Insurance Company (“Scottsdale”), defended Rockwell and Prairie in the underlying action, but demanded that Columbia take over the defense pursuant to Rockwell and Prairie’s status as additional insureds.  Columbia refused, and Scottsdale filed for declaratory judgement.

TDH’s insurance policy included Rockwell and Prairie as additional insureds, but only “with respect to liability arising out of TDH’s ongoing operations performed” for Rockwell and Prairie.  At trial and on appeal, Columbia argued that the underlying complaint did not allege facts that could even potentially give rise to coverage because the complaint did not name TDH (Columbia’s insured) as a defendant.  Neither court was convinced.  The complaint did not name TDH, but it did allege that Rockwell and Prairie negligently failed to supervise its subcontractors, allowing the subcontractors (including TDH) to engage in unsafe practices.  “[The ‘arising out of’] limitation does not keep Columbia off the hook to defend because Prairie’s and Rockwell’s liability for the fall potentially (and that is enough) arises in part (and that is enough) out of TDH’s then-ongoing operations performed for Prairie and Rockwell[.]”  In an aside, the Seventh Circuit mentioned that workplace injury suits like this one often do not name the employer due to workers’ compensation exclusivity.  Therefore, the district court’s close reading of the underlying complaint to find a trigger of additional-insured coverage under an “arising out of” clause is not uncommon.

The Seventh Circuit found that it was also appropriate to analyze the third-party complaints brought against TDH because at least two of the three third-party complaints at issue were made by parties unrelated to Rockwell or Prairie.  Since those complaints alleged that TDH was at least partially liable for the underlying injury, coverage was triggered for Rockwell and Prairie.

Therefore, because the underlying complaint and third-party complaints alleged that Prairie’s and Rockwell’s liability in the underlying suit might at least partially arise out of TDH’s operations performed for Prairie and Rockwell, Columbia has a duty to defend Rockwell and Prairie as additional insureds. “It is not clear or free from doubt that the policy’s exclusion prevents coverage. Therefore, Columbia owes a duty to defend Prairie and Rockwell.”  Thus, the district court’s judgement was upheld, along with its order that Columbia reimburse prior defense costs.  Scottsdale Ins. Co. v. Columbia Ins. Grp., Inc. No. 19-3315, 2020 U.S. App. LEXIS 27211 (7th Cir. Aug. 26, 2020).