No Conflict Unless Two Mutually Exclusive Theories of Liability

The United State District Court for the Northern District of Illinois, in memorandum and order written by Judge Feinerman, applying Illinois law, granted Westfield National Insurance Company’s (“Westfield”) motion for summary judgment and declared that the insured, Builders Concrete Services, LLC (“Builders”), was not entitled to independent counsel in a case stemming from alleged faulty construction.  The district court found no conflict of interest despite Westfield’s reservation of rights and the policy’s business risk exclusions.

Focus Construction, Inc. (“Focus”), a general contractor, hired Builders as a subcontractor to perform concrete work on an apartment building in Evanston, Illinois. The work included pouring concrete for structural columns. In April 2019, one of those columns failed. Focus withheld its final payment to Builders, and Builders sued Focus for breach of contract. Focus counterclaimed for breach of contract and negligence, alleging that Builders’ faulty work caused the column to fail. Focus’ counterclaims allege that the column’s failure damaged not only Builder’s own work product, but also parts of the building that Builders did not work on. At the time the column failed, Builders was insured under a commercial general liability policy issued by Westfield.

Builders tendered Focus’ counterclaims to Westfield and asked for “full defense and indemnity pursuant to the terms of the Policy.” Westfield agreed to defend Builders, subject to a general reservation of rights: “[Westfield] reserves the right to deny any further duty to defend or indemnify Builders to the extent that the policy exclusions negate any potential or actual coverage.” Westfield subsequently retained an attorney to represent Builders in its defense of Focus’ counterclaims.

Builders, however, refused to accept Westfield’s assigned counsel and instead sought to “exercise its right to independent counsel of its own choosing.” Builders maintained that because the policy’s business risk exclusions could “affect coverage based on Westfield’s reservation of rights,” Westfield had a conflict of interest that entitled Builders to use its own counsel. Both parties moved for summary judgment.

A corollary to the broad duty to defend under Illinois law is the general rule that the insurer makes all strategic decisions concerning the defense, including choice of counsel. This general rule, however, is not without exception: An “insured may assume control of the defense, and obtain independent counsel at the insurer’s expense, if the insured’s interests conflict with the insurer’s interests.”

The district court relied on a Seventh Circuit’s holding that an “actual conflict” exists only “when the underlying complaint contains two mutually exclusive theories of liability, one which the policy covers and one which the policy excludes.” The district court affirmed that the mutually exclusive theories standard is exacting, requiring “the insured to show how the insurer, by making strategic choices in conducting the defense, could avoid any responsibility to pay the underlying judgment by shifting all losses to uncovered categories. An insured failing to meet that standard is not entitled to independent counsel.”

Builders failed to show that Westfield, via its counsel, could manipulate or otherwise affect the course of the underlying suit in a way that would “completely and irreparably” eliminate coverage for the judgment. Ultimately, the district court found there was no conflict, and refused to “predict, based only on a pleading, that a conflict will arise.” Accordingly, Builders was not entitled to independent counsel. Builders Concrete Services, LLC v. Westfield National Insurance Company, No. 1:2019cv07792 (N.D. Ill. Sept. 14, 2020).