Court Finds No Insured Contract Exception To Contract Exclusion Where Indemnification Is For Policyholder’s Breach Of Warranty

The Second District Appellate Court of Illinois, applying Illinois law, held that an indemnification agreement in a bill of lading was not an insured contract because the policyholder was only liable for its own breach of warranty under the agreement, not the shipper or railroad’s negligence. As such, the court found that there was no coverage under the policy because there was no applicable exception to the exclusion for the assumption of liability in a contractual agreement.

The policyholder, Plano Molding Co. (“Plano”), ordered two steel injection molds. A bill of lading was issued in arranging the shipment of the molds from China to Illinois, which included a clause stating that Plano “warrants that the stowage and seals of the containers are safe and proper and suitable for handling and carriage and indemnifies Carrier for any injury, loss or damage caused by breach of this warranty.” After being shipped in a container from China, the container holding the molds was loaded onto a train. While in transit on the railway, the train derailed, allegedly because the molds broke through the floor of their container and fell onto the tracks. Various cargo owners whose goods were damaged in the derailment sued the shipper and railroad, who in turn sued Plano for reimbursement of the settlements with the cargo owners and for compensation for damage to shipping containers and railroad equipment.

Plano tendered the claim to its insurer, Bituminous Casualty Corp. (“Bituminous”), which defended pursuant to a reservation of rights until the Seventh Circuit Court of Appeals determined that the only remaining claims stemmed from Plano’s contractual obligations under the bill of lading. Bituminous filed a declaratory action seeking an order that the insurance did not cover the claim because an exclusion provided that the policy did not apply to property damage “for which the insured is obligated to pay damages by reason of the assumption of liability in a contract agreement.” Plano countered that the policy provided an exception to the exclusion for insured contracts and that the bill of lading was an insured contract because the shipper and railroad sought indemnification for tort losses they sustained.

The appellate court agreed with the insurer’s position that the bill of lading was not an insured contract because Plano was only liable for its own breach of warranty under the agreement and had not assumed liability for the shipper or railroad’s negligence. In so holding, the court relied on Virginia Sur. Co. v. N. Ins. Co. of N.Y., 224 Ill. 2d 550 (2007), which “made it clear that courts are to look at the language of the agreement, and where it unambiguously provides that the indemnifying party is required to indemnify only for its own negligence, the agreement is not an insured contract.” Bituminous Cas. Corp. v. Plano Molding Co., No. 2-14-0292 (Ill. App. Ct. Mar. 26, 2015).