COURT DECISIONS

Rough Notes, Apr 2006

Allstate Insurance Company vs. Burns-No. 88A01-0502-CV-58-Court of Appeals of Indiana-November 29, 2005-837 North Eastern Reporter 2d 645.

Indemnification vs. contribution debated

Capital Construction Company, as general contractor at a construction site, hired De Graf Concrete Construction, Inc., to perform work at the site. The contract between the parties contained an indemnification provision. In that provision, De Graf waived its right to "contribution" (distribution of a loss among responsible parties) against Capital, and agreed to indemnify Capital in the event of a claim against it arising out of the performance of the work De Graf was hired to do.

As required by Capital Construction, De Graf purchased a commercial liability insurance policy from Northern Insurance Company as well as a workers compensation and employers liability policy from Virginia Surety Company, Inc. The Northern Insurance policy contained an employers liability exclusion that excluded coverage for bodily injury to "(1) An 'employee' of the insured arising out of and in the course of: (a) Employment of the insured; or (b) Performing duties related to the conduct of the insured's business." The policy further provided that this exclusion did not apply "to liability as assumed by the insured under an 'insured contract.'" "Insured contract" was defined as "That part of any other contract pertaining to your business ... under which you assume the tort liability of another party to pay for 'bodily injury,' 'property damage' or 'personal liability' to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement."

James Smith, a De Graf employee, was injured while working at the construction site. He sued Capital to recover expenses associated with his injuries. Capital filed a complaint against De Graf seeking contribution. De Graf tendered defense of Capital's complaint to Northern Insurance and Virginia Surety. Virginia Surety accepted the tender, but Northern Insurance refused to defend or indemnify De Graf, citing the employers liability exclusion in its policy. Virginia Surety then filed an action seeking a declaration that Northern Insurance had a duty to defend and indemnify De Graf in the contribution action. The trial court found in favor of Northern Insurance; Virginia Surety appealed.

On appeal, the Appellate Court of Illinois, Third District, agreed with the trial court and affirmed its decision. In reaching its decision, it emphasized the fact that Capital did not file a claim for indemnification against De Graf; its claim was for contribution. Contribution distributes the loss among responsible parties, while indemnification shifts the entire loss from one party to another. For the "insured contract" exception to the exclusion to apply, Capital needed to seek indemnification, not contribution. Capital's complaint alleged only that De Graf should pay for its own negligence. It did not request that De Graf indemnify Capital for Capital's negligence. Therefore the "insured contract" exception to the exclusion in the Northern Insurance policy did not apply.