The Journal of The DuPage County Bar Association

Back Issues > Vol. 25 (2012-13)

A Severability Clause in an Insurance Policy Can Save Insurance Coverage for an Additional Insured
By Brian J. Armstrong

1.         Introduction

Your client enters into a contract and, as part of the contract, the other party must add your client as an additional insured on its liability insurance policy.   It's a common occurrence among contracting parties, especially in the construction industry.  These same contracts often require one party to pay for the defense and indemnification of the other party in the instance of litigation.[1]  If someone is injured or property is damaged during the project and suit is filed, your client could be stuck paying the other party's attorney's fees, costs and any settlement or judgment in the underlying case--significant exposure to your client.  No problem, you think--your client has insurance and added the other party to the policy as an additional insured.  But what if your client is not entitled to coverage under the policy?  Is the additional insured precluded from insurance coverage, too?  A recent ruling by the Second District confirms that an additional insured may have coverage even if the named insured does not.

2.         Some Principles of Insurance Law

Insurance coverage is one of the most frequently litigated issues in Illinois and has produced a wealth of case law.  A number of major tenets of insurance coverage law have emerged from these cases.  While certainly not exhaustive, a few of the most basic tenets include that an insurance policy is a contract and, in the event of a dispute regarding coverage, the parties' intent is to gleaned from the language of the policy taking into consideration the type of insurance for which the parties have contracted, the risks undertaken and purchased, the subject matter that is insured and the purposes of the entire contract.[2]  Thus, because the language of each policy differs, each policy must be examined closely. Where the language of a policy is capable of more than one interpretation, it will be considered ambiguous,[3] and ambiguities will be construed against the insurer and in favor of the insured.[4]

A liability policy imposes at least two major duties on the insurer where there is coverage: the duty to defend and the duty to indemnify.  The duty to defend is broad and is triggered merely by allegations of fact in a pleading which fall within or potentially within the coverage afforded by the policy.[5]  The pleadings and provisions of the policy are to be construed in favor of the insured and any doubts regarding coverage are to be resolved in favor of the insured.[6]  The duty to indemnify, on the other hand, typically is narrower than the duty to defend and generally is triggered only if the facts actually fall within the coverage afforded by the policy.[7]  Exclusions from coverage must be construed liberally in favor of the insured and may be applied to preclude coverage only where it is clear and free from doubt that the exclusion applies.[8]

3.         Separation of Insureds Clause.

Many insurance policies contain a "separation of insureds" or "severability" clause.  Generally speaking, these clauses mean each insured, whether named insured or additional insured, must be treated as if it had its own, distinct insurance policy.  Such a clause is particularly important for additional insureds because it can entitle an additional insured to a defense for a claim even where the named insured is not entitled to a defense for the same claim.  Such a clause might read:

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:

a. as if each Named Insured were the only Named Insured; and Separately to each insured against whom claim is made or suit is brought.

While the language of each policy can differ, a separation of insureds clause generally will have some variant of the above language that the insurance applies separately to each insured. 

The Illinois Supreme Court first considered the meaning and effect of a separation of insureds clause on an insurer's duty to defend an additional insured in United States Fidelity & Guaranty Co. v. Globe Indemnity Co.[9]   In Globe Indemnity, Hawthorn, the named insured, entered into an agreement with Sealy and named Sealy as an additional insured on its automobile insurance policy, which was issued by Globe Indemnity.[10]  Sealy also had its own insurance (provided by USF&G).  An employee of Hawthorn was providing service to Sealy pursuant to a service agreement between the parties and was injured during the course of his work.[11]  The employee sued Sealy, who tendered the claim to its own insurer, USF&G.[12]  USF&G, in turn, tendered the claim to Globe because Sealy was an additional insured on the policy issued by Globe.[13]  Globe refused the tender because its policy excluded injuries sustained to Hawthorn's own employees.[14]  In response, USF&G argued that the policy's separation of insureds clause required Globe to treat Sealy as if it had its own policy and, because the injured employee was not Sealy's employee, the employee exclusion did not apply to preclude Sealy a defense for the claim.[15] 

The Illinois Supreme Court agreed with USF&G.  The court concluded that the separation of insureds clause "provides each insured with separate coverage, as if each were separately insured with a distinct policy, subject to the liability limits of the policy.  The employee exclusion, therefore, does not exclude protection for an additional insured against an injury suffered by an employee of another insured."[16]  The court added "each insured is to be treated as if each were separately insured.  The language shows that the insurer recognizes an obligation to additional insureds distinct from its obligation to the named insured."[17]  The employee exclusion did not preclude coverage for Sealy because the claim was not brought by an employee of the additional insured, Sealy. Accordingly, the court found that Globe was obligated to defend the claim against Sealy.[18]

Several appellate court decisions subsequent to Globe Indemnity confirm this application of a separation of insureds clause.[19]  Moreover, separation of insureds clauses have been similarly interpreted and applied in different types of insurance policies and to different exclusions.  Gobe Indemnity involved an automobile policy.[20]  In State Farm Fire & Cas. Co. v. Hooks, the court applied a separation of insureds clause in a homeowners policy and expressly declined to distinguish between a separation of insureds clause in a homeowner's policy and one in a commercial general liability policy or automobile policy.[21]  Regarding the different types of policies and different exclusions at issue, the court stated  "[w]hile these are distinguishing factors, these distinctions do not alter the plain meaning of the severability clause and its apparent impact on the exclusion in this case."[22] 

4.         Patrick Engineering Inc. v. Old Republic General Insurance Co.

Most recently, in Patrick Engineering Inc. v. Old Republic­­­ General Insurance Co.,[23] the Second District Appellate Court examined for the first time the interplay between a separation of insureds clause, and additional insured provision and a professional services exclusion in a commercial general liability policy.  In Patrick Engineering Inc., Patrick Engineering Inc. ("Patrick") was the named insured on a commercial general liability insurance policy issued by Old Republic General Insurance Co. ("Old Republic").  Pursuant to a contract between Patrick and Commonwealth Edison Company ("ComEd"), ComEd was named an additional insured on the policy.[24]  The policy contained the following professional services exclusion:

This insurance does not apply to “bodily injury”, “property damage” or personal and advertising injury” arising out of the rendering of or failure to render any professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in such capacity.[25] 

The policy also contained the following separation of insured clause:

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:

a.  as if each Named Insured were the only Named Insured; and Separately to each insured against whom claim is made or suit is brought.[26]

Pursuant to its contract with ComEd, Patrick designed the relocation of utility poles for ComEd, which ComEd relocated using its own personnel.[27]  It was undisputed that Patrick's services in designing the relocation of the utility poles were professional services.[28]  It was also undisputed that ComEd did not provide professional services in relocating the utility poles.[29]  During the course of the relocation work, ComEd damaged the municipality's underground sewer facilities.  The municipality sued ComEd for damages and alleged, inter alia, that ComEd negligently excavated holes for the poles and damaged the sewers.  Because it was an additional insured, ComEd tendered the claim to Old Republic and demanded that Old Republic defend it for the claim.[30]  Patrick also demanded that Old Republic defend ComEd for the claim.[31]  Old Republic refused to provide a defense to ComEd because Patrick performed professional services for ComEd.[32]  According to Old Republic, because the damage arose at least in part out of Patrick's professional services, the professional services exclusion precluded coverage for both Patrick and ComEd.[33]

Patrick and ComEd sought a declaratory judgment that ComEd was entitled to coverage under the policy for the municipality's claim.  In the trial court, Old Republic maintained its argument that the professional services exclusion applied to preclude coverage for ComEd, because the property damage was alleged to have arisen at least in part out of the professional services provided by Patrick.[34]  Patrick and ComEd argued that because the policy contained a separation of insureds clause, ComEd had to be treated as if it had its own policy and, therefore, the allegations regarding ComEd's actions rather than Patrick's dictated whether the professional services exclusion applied.  The trial court agreed with Old Republic and granted summary judgment in its favor.[35] 

The Second District Appellate Court reversed.  The court found that ComEd was entitled to coverage under the policy, notwithstanding that the professional services exclusion precluded coverage for Patrick, because the separation of insureds clause required the insurer to evaluate the coverage for ComEd separately from that afforded to Patrick.[36]  The court noted that Illinois case law examining the applicability of a professional services exclusion to an additional insured is limited, but that two cases from the Northern District of Illinois were persuasive.[37]  In both United States Fidelity & Guaranty Co. v. Shorenstein Realty Services, L.P.[38] and City of Chicago v. St. Paul Fire & Marine Ins. Co.,[39] the court considered the effect of a separation of insureds clause on the applicability of a professional services exclusion to an additional insured.  In both cases, the federal court found that the separation of insureds clause required the insurer to evaluate the additional insured's coverage independent of the named insured's coverage, and found that even where the professional services exclusion precluded coverage for the named insured, it did not preclude coverage for an additional insured who did not provide professional services.[40]  As the Second District quoted from Shorenstein: "the question is not whether [the named insured] performed professional services but whether [the additional insured] did so."[41] 

The Second District reasoned that once ComEd qualified as an additional insured, the separation of insureds clause provided ComEd with a distinct policy which required the insurer to evaluate coverage for ComEd independently from the coverage afforded to Patrick.[42]  Given that there was no dispute that ComEd did not provide professional services, the allegations at least fell potentially within the coverage afforded ComEd by the policy.[43]  The court rejected Old Republic's argument that ComEd was not an additional insured in the first place because Patrick provided professional services: "under a separation of insureds clause, an exclusion's applicability to each established insured is to be determined separately [citation omitted]--the exclusion does not, as under Old Republic's interpretation, establish the status of the additional insured in the first place."[44]  Accordingly, the court found that ComEd was entitled to coverage and reversed the decision of the trial court.[45]

Also notable about the Patrick Engineering Inc. decision is the appellate court's conclusion regarding the duty to indemnify.  Both Patrick and ComEd sought a declaration that Old Republic had both the duty to defend and to indemnify ComEd for the claims.[46]  Hence, both duties were at issue in the court's decision.[47]  The court stated " an exclusion may bar coverage, i.e., may release an insurer from its duty to indemnify, only where the application of that exclusion is clear and free from doubt [citations] …when the question of indemnification turns upon an exclusion, the narrow duty to indemnify broadens: the question of whether the alleged facts 'actually fall' within coverage is answered in the affirmative if there is any doubt that the exclusion applies."[48]  The court found that Old Republic owed both the duty to defend and the duty to indemnify ComEd for the claim because the application of the professional services exclusion to ComEd was not clear and free from doubt.[49]

5.         Conclusion

The decision in Patrick Engineering Inc. confirms that a separation of insureds clause in an insurance policy requires an insurer to evaluate the availability of coverage for an additional insured independently of the coverage for any other insured and that, even where an exclusion precludes coverage for one insured, that exclusion does not necessarily preclude coverage for another insured.  As the Second District confirmed, where the policy contains a separation of insureds clause, the question is not whether the named insured's alleged conduct triggers coverage, but whether the additional insured's alleged conduct does so. 

This case also reiterates that a separation of insureds clause is to be applied similarly regardless of the type of insurance policy and exclusion at issue, including commercial general liability policies.  Given the frequency with which parties are named as additional insureds, the decision in Patrick Engineering Inc. benefits both named insureds and additional insureds.  When advising clients who are either named insureds or additional insureds, it is important to confirm whether the insurance policy contains a separation of insureds clause and to understand that if it does, the additional insured may be entitled to coverage for a claim even where the named insured is not.

[1] In the case of construction contracts, the Construction Contract Indemnification For Negligence Act (740 ILCS 35/0.01 et seq.) prevents such indemnification.  That Act and its applicability are beyond the scope of this article.

[2] Crum and Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 391, 620 N.E.2d 1073, 1077 (1993).

[3] American States Insurance Co. v. Koloms, 177 Ill.2d 473, 479, 687 N.E.2d 72, 75 (1997).

[4] Id.

[5] Patrick Engineering Inc. et al., v. Old Republic General Ins. Co., 2012 IL App (2d) 111111, ¶ 23; 973 N.E.2d 1036, 1042 (2012).

[6] Koloms, 177 Ill.2d at 479.

[7] Patrick Engineering Inc., 2012 IL App (2d) 111111 , ¶ 23.

[8] Id.

[9] United States Fidelity & Guaranty Co. v. Globe Indemnity Co., 60 Ill.2d 295, 299, 327 N.E.2d 321, 323 (1975).

[10] Id. at 296.

[11] Id.

[12] Id.

[13] Id. at 296-97.

[14] Id. at 297.

[15] Id.

[16] Id. 299.

[17] Id.

[18] Id.

[19] Atchison, Topeka & Santa Fe Ry. Co. v. St. Paul Surplus Lines Ins. Co., 328 Ill. App. 3d 711, 767 N.E.2d 827 (1st Dist. 2002); State Farm Fire & Cas. Co. v. Hooks, 366 Ill. App. 3d 819, 853 N.E.2d 1(1st Dist. 2006).

[20] United States Fidelity & Guaranty Co., 60 Ill.2d at 296.

[21] Hooks, 366 Ill. App. 3d at 820.

[22] Id. at 827.

[23] Patrick Engineering Inc. et al., v. Old Republic General Ins. Co., 2012 IL App (2d) 111111, 973 N.E.2d 1036 (2012).

[24] Id. at ¶ 4, 6.

[25] Id. at ¶ 19.

[26] Id. at ¶ 17.

[27] Id. at ¶ 5.

[28] Id. at ¶ 12.

[29] Id.

[30] Id. at ¶ 5.

[31] Id. at ¶ 7.

[32] Id. at ¶ 8.

[33] Id. at ¶ 12.

[34] Id.

[35] Id. at ¶ 13.

[36] Id. at ¶¶ 24-38.

[37] Id. at ¶ 24.

[38] United States Fidelity & Guaranty Co. v. Shorenstein Realty Services, L.P., 700 F. Supp. 2d 1003 (N.D. Ill. 2010).

[39] City of Chicago v. St. Paul Fire & Marine Ins. Co., 1998 WL 111564 (N.D. Ill. 1998).

[40] Shorenstein, 700 F. Supp. 2d at 1010, 1015; City of Chicago, 1998 WL 111564 at * 3.

[41] Patrick Engineering Inc., 2012 IL App (2d) 111111 at ¶ at 26, quoting Shorenstein, 700 F. Supp. 2d at 1010.

[42] Patrick Engineering Inc., 2012 IL App (2d) 111111 at ¶¶ 20, 28.

[43] Id. at ¶  28.

[44] Id. at ¶¶  33-34.

[45] Id. at ¶  39.

[46] Id. at ¶ 10.

[47] Id. at ¶ 23.

[48] Id. (emphasis original)

[49] Id. at ¶ 20, 28.

Brian J. Armstrong is a partner at Schirott, Luetkehans & Garner, LLC in Itasca.  Brian received his B.A. from the University of Wisconsin-Madison in 1991 and his J.D. from Chicago-Kent College of Law in 1996.

 
 
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