State Auto Prop. & Cas. Ins. Co. v. Shores Builders, Inc.

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY, Plaintiff, v. SHORES BUILDERS, INC., and ROCK BRANCH IRONWORKS, INC., Defendants.

Case No. 3:19-CV-773-NJR

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF ILLINOIS

October 5, 2020

MEMORANDUM AND ORDER

ROSENSTENGEL, Chief Judge:

This matter is before the Court on Motions for Judgment on the Pleadings filed by Plaintiff State Auto Property & Casualty Insurance Company ("State Auto") against Defendants Shores Builders, Inc. ("Shores") (Doc. 45) and Rock Branch Ironworks, Inc. ("Rock Branch") (Doc. 46). Rock Branch also filed a Motion to Dismiss as Moot, or in the Alternative for Summary Judgment (Doc. 64). For the reasons set forth below, State Auto's motions are denied, and Rock Branch's motion is denied.

FACTUAL & PROCEDURAL BACKGROUND

This is an action for declaratory judgment filed by State Auto to determine whether it has a duty to defend Shores and Rock Branch in an underlying state court action (Doc. 23).¹ State Auto issued a policy of insurance to Rock Branch as the namedinsured for the effective policy period of April 17, 2018 to April 17, 2019 (Id. at p. 3). Rock Branch entered a Subcontract Agreement ("Agreement") with Shores on or about April 25, 2018, for construction and other services (Id. at p. 6). As part of the Agreement, Rock Branch agreed to name Shores as an additional insured on its insurance policy with State Auto and to indemnify Shores in connection with Rock Branch's services (Id. at pp. 6-7).

On September 20, 2018, Matthew Smith, an employee of Rock Branch, was fatally electrocuted while on the job. Smith's survivors subsequently brought suit against Shores and others in the Circuit Court of the 20th Judicial Circuit, Randolph County, Illinois (Id. at p. 8). Originally, the state court lawsuit alleged Shores was negligent on several grounds, including failure to ensure Rock Branch, its subcontractor, was competent to perform its work and that Shores failed to inspect the equipment that Rock Branch used on the project (Id.).

After tendering its defense in the state court action to its own liability insurer, Shores tendered its defense to State Auto, which State Auto refused to accept (Id.). Shores then filed a third-party complaint against Rock Branch in the state court action, seekingdamages for contribution and breach of contract for failure to procure insurance (Id. at p. 9).

On July 17, 2019, State Auto filed its Complaint for Declaratory Judgment in this case seeking a declaration that it owes no duty to defend Shores in the state court case (Doc. 1). On November 25, 2019, State Auto amended its complaint adding Rock Branch and seeking a declaration that it owes no duty to defend Rock Branch in the state court case (Doc. 23). On March 3, 2020, State Auto filed its Motion for Judgment on the Pleadings against Shores arguing that the certificate of insurance issued to Shores confers no rights and the underlying complaint does not trigger coverage under the additional insured endorsement (Doc. 45). On that same day, State Auto filed a Motion for Judgment on the Pleadings against Rock Branch arguing that the indemnity provision within the Agreement does not qualify as an "insured contract" as defined by the insurance policy and, as a result, Exclusions e. and b. of the policy apply (Doc. 46).²

On or around April 6, 2020, Smith's survivors in the underlying action sought leave to file an amended complaint (Doc. 60-1). On April 13, 2020, Shores filed a supplement to its Memorandum in Opposition of State Auto's Motion for Judgment on the Pleadings notifying the Court that Smith's survivors sought leave to amend the underlying complaint (Doc. 60). State Auto responded explaining the following:

If the Randolph County court denies the underlying claimant's motion, then the motion will have no impact on either pending Motion for Judgment on the Pleadings (Docs. 45 & 46).

If the Randolph County court grants the underlying claimant's motion, State Auto's Motion for Judgment on the Pleadings as to Shores is still viable and relevant to determine whether State Auto has a duty to defend Shores which would include an obligation to reimburse Shores' reasonable and necessary defense costs incurred from the date of tender until the filing of the amended complaint in Randolph County.

(Doc. 61, p. 2).

On June 2, 2020, the Randolph County Circuit Judge entered an order granting leave and allowing Smith's survivors to amend the underlying complaint (Doc. 64-2). Shores then filed an amended third-party complaint against Rock Branch in the state court action, adding an implied indemnity count (Doc. 64-3). On August 10, 2020, Rock Branch filed its Motion to Dismiss as Moot, or in the Alternative for Summary Judgment, arguing that "State Auto's Complaint for Declaratory Judgment in the instant case was filed and based on allegations of the underlying lawsuit's initial complaint" and "[t]he amended complaint filed in Randolph County makes State Auto's Complaint for Declaratory Judgment moot and its Motion for Judgment on the Pleadings moot" (Doc. 64). State Auto responded that its "Motion for Judgment on the Pleadings (Doc. 46) is still relevant to determine whether State Auto had any duty to defend prior to the filing of the amended third-party complaint" (Doc. 65, p. 3). State Auto also noted that it is preparing a motion for leave to file its Second Amended Complaint and "asks this Court to grant its motion for leave to file its Second Amended Complaint within 30 days and deny Rock Branch's motion" (Id.). The Court has not received State Auto's motion for leave to amend.

LEGAL STANDARDS

A motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) is subject to the same standard as a Rule 12(b)(6) motion to dismiss. Thomason v. Nachtrieb, 888 F.2d 1202, 1204 (7th Cir. 1989). The Court must view all of the facts in a light most favorable to the non-moving party. National Fidelity Life Ins. Co. v. Karaganis, 811 F.2d 357, 358 (7th Cir. 1987). The Court may only grant the motion "if it appears beyond doubt that the [nonmovant] cannot prove any facts that would support his claim for relief." Buchanan-Moore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009).

ANALYSIS

I. State Auto's Motion for Judgment on the Pleadings as to Shores

A. The Rights of Shores Under the Certificate of Insurance

Shores did not oppose State Auto's Motion for Judgment on the Pleadings as to whether the certificate of insurance issued to Shores confers any rights (Doc. 54). Pursuant to Local Rule 7.1(c), a party's "[f]ailure to timely file a response to a motion may, in the Court's discretion, be considered an admission of the merits of the motion." The Court deems Shores's failure to respond and oppose these arguments as an admission of the merits of State Auto's argument regarding the certificate of insurance. See Smith v. Lamz, 321 F.3d 680, 683 (7th Cir. 2003). The certificate of insurance, however, is not determinative of whether State Auto has a duty to defend Shores because the underlying complaint may trigger coverage under the additional insured endorsement.

B. The Underlying Complaint Triggering Coverage Under the Additional Insured Endorsement

In a diversity case, the Court applies state law to substantive issues. RLI Ins. Co. v. Conseco, Inc., 543 F.3d 384, 390 (7th Cir. 2008). When neither party raises a conflict of law issue in a diversity case, the applicable law is that of the state in which the federal court sits. See Koransky, Bouwer & Poracky, P.C. v. Bar Plan Mut. Ins. Co., 712 F.3d 336, 341 (7th Cir. 2013). Here, the parties have not raised a conflict of law issue and have instead briefed the issues on the merits under Illinois law. The Court, as a result, will apply the law of Illinois.

"In a declaratory judgment action . . . where the issue is whether the insurer has a duty to defend, a court ordinarily looks first to the allegations in the underlying complaint and compares those allegations to the relevant provisions of the insurance policy." Pekin Ins. Co. v. Wilson, 930 N.E. 1011, 1016-17 (Ill. 2010). "If the underlying complaint alleges facts within or potentially within policy coverage, an insurer is obligated to defend its insured even if the allegations are groundless, false or fraudulent." Gen. Agents Ins. Co. of Am. v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1098 (Ill. 2005). "Under Illinois law, courts liberally construe both the terms of an insurance policy and the allegations in the underlying complaint in favor of the insured." Natl. Am. Ins. Co. v. Artisan and Truckers Cas. Co., 796 F.3d 717, 723 (7th Cir. 2015).

In its Motion for Judgment on the Pleadings as to Shores, State Auto argues that "Shores only qualifies as an additional insured under the State Auto policy if it may be vicariously liable for Rock Branch's acts or omissions" (Doc. 45, p. 6). To find that aninsurer owes a duty to defend an additional insured based on the additional insured's potential vicarious liability, two requirements must be met. Pekin Ins. Co. v. Centex Homes, 72 N.E.3d 831, 840 (Ill. App. Ct. 2017).

"First, there must be a potential for finding that the named insured was negligent and, second, there must be a potential for holding the additional insured vicariously liable for [ ] [the named insured's] negligence." Id. "[I]n order to meet the first requirement, the underlying complaint need not expressly allege that the named insured was negligent." Id. "Instead of requiring explicit allegations of negligence by the named insured, [Illinois] [courts] [have] found it sufficient that the underlying complaint contained facts to support a theory of recovery for the underlying plaintiff based on the negligence of the named insured." Id. (citing Pekin Ins. Co. v. CSR Roofing Contractors, Inc., 41 N.E.3d 559, 572-73 (Ill. App. Ct. 2015)). The second requirement is satisfied "where the complaint alleges that the additional insured had...