Starr Indem. & Liab. Co. v. Tech. Ins. Co.

STARR INDEMNITY & LIABILITY CO., Plaintiff, v. TECHNOLOGY INSURANCE CO., INC. et al., Defendants.

No. 16-cv-09553

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

September 30, 2017

Judge Andrea R. Wood

MEMORANDUM OPINION

This lawsuit stems from a construction accident that injured four workers. The injured workers were co-employed by Midwest Steel, Inc. ("Midwest") and Administrative Employer Services ("AES"). AES obtained workers' compensation insurance for its employees from Technology Insurance Company, Inc. ("TIC"), while Midwest obtained its insurance from Starr Liability & Indemnity Co. ("Starr"). After the accident, Starr accepted coverage for the injured workers and paid their benefits. Starr subsequently brought the present lawsuit against AES and TIC to recover the sums it has paid and will pay in the future to the injured workers. Both AES and TIC have filed motions to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. Nos. 15, 17.) For the reasons explained below, AES's motion to dismiss is granted and TIC's motion to dismiss is granted in part and denied in part.

BACKGROUND

For the purposes of AES's and TIC's motions to dismiss, this Court accepts as true all well-pleaded facts and views them in the light most favorable to Starr. See, e.g., Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009).

In 2014, Lend Lease (US) Construction, Inc. ("Lend Lease"), the construction manager of the River Point Tower Project, hired Cives Corporation ("Cives") to be a subcontractor on the project. (Compl. ¶¶ 10, 11, Dkt. No. 1-1.) Cives thereafter hired Midwest to be a sub-subcontractor. (Id. ¶ 16.) Midwest had, years before, entered into a subcontract with AES, which stated that AES would provide certain employment services including the provision of workers' compensation coverage for AES employees. (Id. ¶ 18.)

In order to provide workers' compensation insurance to all the workers on the River Point Tower Project, Lend Lease entered into a "contractor controlled insurance program" ("CCIP") with Starr, an insurance company. (Id. ¶¶ 7, 8, 12.) The Starr policy provided for a $500,000 deductible; that is, Lend Lease had to reimburse Starr for any amounts paid, up to $500,000. (Id. Ex. A.) Pursuant to the CCIP, Starr issued a Workers' Compensation and Employers Liability insurance policy to Midwest. (Id. ¶ 17.) Meanwhile, AES obtained workers' compensation insurance for its employees from Defendant TIC. (Id. ¶ 9.) However, the TIC policy did not specifically identify Midwest as a lessee or indicate that it provided coverage for the workers that would be working on the River Point Tower Project. (Id. ¶ 34.)

Later in 2014, four ironworkers were injured while working on the River Point Tower Project. (Id. ¶ 35.) The injured workers filed applications for benefits with the Illinois Workers' Compensation Commission, identifying both Midwest and AES as their employers. (Id. ¶ 37.) Starr accepted coverage but under a reservation of rights. (Id. ¶ 38.)

On January 14, 2015, 17 days after the four ironworkers were injured, Midwest and AES entered into a second subcontract that altered several terms of their original agreement. (Id.¶¶ 41, 42.) In particular, the second Midwest-AES subcontract removed AES's obligation to provide workers' compensation insurance. (Id. ¶ 43.)¹

In the present lawsuit, Starr now alleges that AES and TIC have failed to fulfill their obligations to provide coverage and pay benefits for the injured workers' claims. (Id. ¶ 39.) In particular, Starr has filed a three-count complaint, asking the Court for the following relief: (1) contribution from TIC as a co-insurer (Count I); (2) recovery from AES and TIC pursuant to the Illinois Workers' Compensation Act, 820 ILCS 305/1(a)(3) (Count II); and (3) a declaratory judgment declaring AES's and TIC's obligations with respect to the workers' compensation claims, including a declaration that AES and TIC have no rights and can claim no benefits pursuant to a deductible agreement between Lend Lease and Starr (Count III).

DISCUSSION

To survive a Rule 12(b)(6) motion, "a complaint must contain sufficient factual allegations, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This pleading standard does not necessarily require a complaint to contain detailed factual allegations. Twombly, 550 U.S. at 555. Rather, "[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Adams v. City of Indianapolis, 742 F.3d 720, 728 (7th Cir. 2014) (quoting Iqbal, 556 U.S. at 678).

I. Starr's Motion to Strike

Following the briefing of AES's motion to dismiss, Starr filed a motion asking the Court to strike portions of AES's reply brief or, in the alternative, grant leave for it to file a surreply.According to Starr, such relief is necessary because AES's reply brief improperly raises new arguments and requests new relief that were not part of its original motion to dismiss. Specifically, Starr contends that AES argues for the first time in its reply brief that the indemnification and waiver of subrogation clauses in the Midwest-AES subcontract bar Starr's claims against AES.

Normally, arguments raised for the first time in a reply brief are waived. United States v. Adamson, 441 F.3d 513, 521 n.2 (7th Cir. 2006). AES's arguments regarding the indemnification and subrogation clauses should have been raised in the initial motion to dismiss brief. Instead of granting the motion to strike, however, the Court grants Starr's request to file a surreply and will consider the surreply in assessing AES's motion to dismiss. Providing Starr with the opportunity to respond to AES's new arguments in a surreply prevents any prejudice Starr might have suffered as a result of the Court's consideration of the new arguments.

II. AES's Motion to Dismiss

In the complaint, Starr alleges that it is the subrogee of Midwest and as the subrogee it seeks reimbursement for the past and future payments it has made to the injured workers on AES's behalf. Subrogation simply means that one person is allowed to stand in the shoes of another and assert that person's rights against a defendant. See Trogub v. Robinson, 853 N.E.2d 59, 63 (Ill. App. Ct. 2006). In Illinois, subrogation is an equitable principle applied when one person has involuntarily paid a claim of another, thereby allowing that person to succeed to the rights of the other with respect to the claim at issue. Dix Mut. Ins. Co. v. LaFramboise, 597 N.E.2d 622, 624 (Ill. 1992). Consequently, a party who asserts a right of subrogation acquires no greater or lesser rights than those possessed by the original party. See Cont'l Cas. Co. v. Polk Bros., 457 N.E.2d 1271, 1273 (Ill. App. Ct. 1983).

Here, Starr is asserting a right to step into the shoes of Midwest in order to bring a claim that Midwest could have brought against AES. The only substantive claim Starr, as subrogee, brings against Midwest is for recovery pursuant to the Illinois Workers' Compensation Act. Specifically, Starr points to Section 1(a)(3) of the Act, which states that if any person engages a contractor or subcontractor to do any work, he is "liable to pay compensation to the employees of any such contractor or sub-contractor unless such contractor or sub-contractor [is] insured." 820 ILCS 305/1. However, in the event that a person pays compensation pursuant to the mandates of Section 1(a)(3), "he may recover the amount thereof from the contractor or sub-contractor . . . ." Id. Starr alleges that, under this Act, it is entitled to recover from AES amounts it paid related to the injured workers.

But according to the Midwest-AES contract, Midwest waived its insurer's subrogation rights. The contract states, in relevant part:

WAIVER OF SUBROGATION. Each party releases and forever discharges the other party, and any officer, agent, employee or representative of such party, from any liability whatsoever arising from loss, damage or injury, for any reason, for which insurance is carried by the party providing the waiver at the time of such loss, damage or injury, to the extent of any recovery or payment under such policies of insurance. All parties to this Agreement will cause their respective insurance policies to be endorsed to allow for this waiver to the extent necessary to effectuate this paragraph.

(Compl. Ex. G.) Both the first and second versions of the Midwest-AES contract contain this same subrogation clause. (Id. Exs. G, J.)

The purpose of a subrogation clause such as the one in the Midwest-AES contract "is to permit parties to a construction contract to exculpate each other from personal liability in the event of property loss or damage to the work occurring during construction, relying instead on the insurance purchased by one of the parties to provide recovery for that loss." Empress Casino Joliet Corp. v. W.E. O'Neil Constr. Co., 68 N.E.3d 856, 871 (Ill. App. Ct. 2016). Suchsubrogation clauses "shift the risk of loss to the insurance company to facilitate timely completion of the project and avoid the prospect of time-consuming and expensive litigation, regardless of which party is at fault." Id. at 871-72. Subrogation waivers are common in construction contracts. See S. Turner, Insurance Coverage of Construction Disputes § 5:6 (2d ed. 2017). Additionally, Illinois courts have generally upheld subrogation waivers. See, e.g., Bastian v. Wausau Homes, Inc., 635 F. Supp. 201, 204 (N.D. Ill. 1986) (upholding waiver of subrogation clause in an adhesion contract and concluding that it was not "unconscionable" for an insured individual "to be asked to look first to insurance for compensation for its loss"); Allstate Indem. Co. v....