IL 3rd Dist. / Peppers Doctrine

Stay Was Abuse of Discretion

An Illinois appellate court, applying Illinois law, reversed the trial court’s order granting a motion to stay a coverage dispute pending the resolution of the underlying case and found that a determination of coverage could be made without determining issues of ultimate fact critical to the underlying dispute.

Johnson-Downs Construction, Inc.  (“Johnson-Downs), entered into a construction contract with Art’s Landscaping, Inc. (“Art’s”).  Per the contract, Art’s was to name Johnson-Downs as an additional insured to its liability insurance policy issued by Pekin Insurance Company (“Pekin”). An Art’s employee was injured at the construction site and sued Johnson-Downs for construction negligence and premises liability.  Pekin defended Johnson-Downs under a reservation of rights, until Johnson-Downs filed a third-party complaint against Art’s alleging that Art’s was negligent and, as a result, liable for the injuries.

Pekin then filed a declaratory judgment action claiming it did not have a duty to defend Johnson-Downs as an additional insured under Art’s insurance policy.  Under the Pekin policy, an additional insured is only covered for various liability claims.  Johnson-Downs filed a motion to stay the declaratory judgement pending the resolution of the underlying case. Shortly thereafter, an amended complaint was filed in the underlying case, which broke the construction negligence claim into two separate counts: direct construction negligence and vicarious construction negligence.  The trial court granted the motion to stay pending the resolution of the underlying case and Pekin appealed.

Under Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187 (1976), it is inappropriate for a court to make a determination on an issue of ultimate fact critical to the underlying case.  According to Johnson-Downs, ruling on the declaratory judgment action would violate the Peppers doctrine, because Pekin’s argument that it has no coverage obligations rests on the determination of whether the underlying complaint includes claims for vicarious liability.  The appellate court found that the trial court abused its discretion in granting the motion to stay and held that the trial court can make a determination of whether the complaint contains any allegations of vicarious liability by comparing the complaint to the language of the insurance policy.  The appellate court noted that this analysis can be done without determining whether Johnson-Downs was in fact vicariously liable.

The appellate court instructed the trial court not to consider Johnson-Downs’s third-party complaint in making its determination because, under Illinois law, “Johnson-Downs cannot present its own complaint to bolster its position that a claim of vicarious liability is present in the underlying case.” Pekin Ins. Co. v. Johnson-Downs Construction, Inc. 2017 IL App (3d) 160601 (July 6, 2017).