United States District Court, Northern District of Illinois, E.D
January 15, 1971
JOHN MOHR & SONS, AN ILLINOIS CORPORATION (AND SUCCESSOR TO MOHR BUILDING CORPORATION), AND GMR ASSOCIATES, INC., AN ILLINOIS CORPORATION, PLAINTIFFS,
HANOVER INSURANCE COMPANY, A CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Marovitz, District Judge.
CROSS-MOTIONS FOR SUMMARY JUDGMENT
This is an action by two Illinois corporations, John Mohr &
Sons (JM), and
GMR Associates, Inc. (GMR), against Hanover Insurance Company
(Hanover), a New York corporation, alleging that Hanover breached
its contract to defend and indemnify both plaintiffs. Defendant
has filed a motion to dismiss JM and another separate motion to
dismiss both plaintiffs. Plaintiffs have filed a joint
cross-motion for summary judgment.
The essential facts are undisputed. In February, 1962, Mohr
Building Company (MBC), a general contractor, contracted with
Freightways Terminal Company (Freightways) to construct a motor
carrier freight terminal building in Chicago, Illinois.
Subsequently, in October, 1962, MBC employed GMR to do paving
work, including excavation, grading and preparation of the soil,
and installation and laying of paving, in connection with the
terminal project. As part of its contract with MBC, GMR agreed to
indemnify MBC as follows:
"Subcontractor (GMR), by reason of this purchase
order, hereby assume the entire and full
responsibility and liability for any and all damages,
injury, loss and expense of any kind or nature
whatsoever to all persons, whether employees or
others, and to all property, arising out of or in any
manner resulting from the execution of the work
provided for in this contract and work incidental
threto, or occurring in connection therewith, whether
the same arises from negligence or otherwise, even
though such damages * * * are attributable to the
joint, concurrent or contributory negligence of Mohr
Building Corporation, its agents, servants and
employees and agrees to indemnify, save harmless and
defend Mohr Building Corporation, its agents,
servants, and employees from and against any and all
such damages, injury, loss and expenses, including
attorney's fees and expense of litigation arising out
of or in any manner resulting from or occurring in
connection with the execution of the work herein
provided for and work incidental thereto or occurring
in connection with or resulting from the use of
sub-contractor's subcontractors, agents or employees
or others, of any material, tools, implements,
appliances, scaffolding, ways, condition of premises,
works or machinery or other personal or real property
of Mohr Building Corporation, whether any claims
resulting in any such damages, injury, loss or
expense arise under the common law or under any
applicable Workmen's Compensation Law or other
statute or otherwise."
Pursuant to its agreement with MBC, GMR obtained general
comprehensive liability insurance from Hanover for the
contractual indemnity liability which GMR had assumed in its
contract with MBC. Ultimately, Hanover agreed to provide the
Coverage B — Property Damage Liability
"To pay on behalf of the insured all sums which the
insured shall become legally obligated to pay as
damages because of injury to or destruction of
property, including the loss of use thereof, caused
Coverage Z — Contractual Property Damage Liability
"To pay on behalf of the insured all sums which the
insured, by reason of the liability assumed by him
under any written contract designated in the schedule
below, shall become legally obligated to pay as
damages because of injury to or destruction of
property, including the loss of use thereof, caused
The pertinent schedule then listed the designated contract as
that subcontract between MBC and GMR for the Freightways Terminal
building, and recited GMR's obligations to indemnify MBC.
The policy also contained some exclusions from these, and
other, broad statements of coverage. Exclusion (j) to
Coverage B clearly indicated that the policy did not apply:
"to injury or destruction of any property arising out
of * * * (2) the collapse of or structural injury to
any building or structure due to (a) grading of land,
excavating, borrowing, filling [or]
back-filling * * * or removal or rebuilding of any
structural support thereof: provided, however, this
exclusion does not apply with respect to liability
assumed by the insured under any contract covered by
this policy * * * and provided further that part 2 of
this exclusion [Structural Injury Damage]" is
inapplicable if such operations are covered in the
Excluded from Coverage Z, by virtue of Exclusion (h), was:
"injury to or destruction of any goods, products or
containers thereof manufactured, sold, handled or
distributed or premises alienated by the named
insured, or work completed by or for the named
insured, out of which the accident arises."
Between October, 1962, and the Spring of 1963, GMR prepared and
laid asphalt paving for the Freightways project, but the paving
began to break down before GMR completed its work. Ultimately,
Freightways sued JM and MBC in the United States District Court,
N.D.Ill., Case No. 64 C 874, alleging that defendants breached
their contract by unskillfully and negligently performing the
paving work with improper materials. JM denied the alleged
negligence, counter-claimed against Freightways, and also filed a
third-party complaint against GMR, alleging negligences and
relying on GMR's agreement of indemnity to protect JM against any
judgment resulting from Freightways' suit.
JM and GMR notified Hanover of this action, demanding that
Hanover assume the defense of the cause. Hanover refused.
Subsequently JM settled its dispute with Freightways, sustaining
damages, trial expenses and attorneys' fees. GMR sustained
similar losses. Finally, JM and GMR settled their dispute.
Plaintiffs bring the instant action in order to recover their
losses allegedly due to Hanover's refusal to defend the
Freightways' suit. Hanover's motions to dismiss are based on its
contention that the claim filed against JM was not a claim within
the coverage of the policy issued to GMR and that as to JM, the
asserted cause of action is barred by a statute of limitations,
Ill.Rev.Stat. Ch. 32, § 157.94 (1969). Matter in addition to the
pleading has been filed and there are not material factual issues
in dispute. Since the only substantive question to be resolved is
which side is entitled to prevail as a matter of law, summary
judgment is appropriate. Chicago Joint Board, etc. v. Chicago
Tribune, 307 F. Supp. 422, 424 (N.D.Ill. 1969).
Initially, we find that JM is not barred by statute from
bringing this action. Both JM and MBC, a wholly owned subsidiary
of JM, were sued by Freightways and tendered their defense to
Hanover, which refused both. In May, 1963, MBC was dissolved with
its assets and liabilities transferred to JM, which corporation
completed work on the Freightways' site. The situation is quite
distinct from that where a corporation dissolves leaving no
successor to carry on its work or assume its responsibilities,
for here there was a successor corporation with a unity of
interest and ownership in the dissolved corporation. Edwards v.
Chicago and Northwestern Ry. Co., 79 Ill. App. 48, 52-53,
223 N.E.2d 163 (1967). We find that JM may bring this cause of action
against Hanover in its own right and, by operation of law, as
subrogee of its subsidiary MBC.
Now all parties have filed lengthy briefs dealing with the
scope of Hanover's liability coverage. What has been less
emphasized, though it is of primary importance, is the extent of
Hanover's duty to defend the Freightways litigation, i.e.,
Freightways' suit against
MBC, and JM's third party action against GMR.
The obligation of the insurer to defend the insured is not the
same as its obligation to indemnify the insured. Palmer v.
Sunberg, 71 Ill. App.2d 22, 30, 217 N.E.2d 463 (1966). Under
Illinois law, applicable here, the former obligation is broader.
Stern, Walter & Simmons, Inc. v. Seaboard Sur. Co., 308 F. Supp. 252,
254-255 (N.D.Ill. 1970); see Country Mut. Ins. Co. v.
Murray, 97 Ill. App.2d 61, 70, 239 N.E.2d 498 (1968).
Essentially, a liability insurer is bound to defend an action
stating a claim within the coverage of its policy. Shaw v. Aetna
Cas. and Sur. Co., 407 F.2d 813, 814 (7th Cir. 1969). However,
"The insurer's duty to defend is predicated not upon
information in its possession which indicates or even
proves non-coverage. Rather, it is predicated upon
the allegations in the complaint in an action brought
against the insured and when such allegations state
facts which bring the case within, or potentially
within, the coverage of the policy, the insurer is
from this time on unjustified in not defending the
insured." McFadyen v. North River Ins. Co.,
62 Ill. App.2d 164, 170-171, 209 N.E.2d 833, 836 (1965).
Any doubt concerning coverage must be resolved in favor of the
insured. Stern, Walter & Simmons v. Seaboard Sur. Co.,
308 F. Supp. 252, 255 (N.D.Ill. 1970); Gulf Ins. Co. v. Dooley,
286 F. Supp. 16, 17 (N.D.Ill. 1968). Consequently, for the insurer to
be relieved of its obligation to defend, the complaint against
the insured must "show, on its face, that it clearly falls
outside the provisions of the insurance policy." Id.; see 7A
Appleman Ins. Law & Practice § 4683 (1962). Thus, the obligation
to defend is determinable and arises, if at all, when the suit is
filed. Cf. Fisher v. Hartford Acc. & Indem. Co., 329 F.2d 352,
353 (7th Cir. 1964).
It is sufficient under these rules to find that defendant has
not demonstrated that the relevant claims were clearly beyond the
coverage of the GMR policy when it refused to defend. As noted,
Freightways originally sued JM and MBC alleging defendants
breached their contract by negligently performing certain paving
work. Besides ¶ 10, which was based on negligence and/or contract
theories, the Complaint, ¶ 7 alleged the existence of certain
warranties about workmanship and materials. Also, as noted, JM's
third party complaint against GMR alleged unskillful and
negligent work and the use of improper and inadequate materials.
Under its agreement with MBC, GMR had to defend and indemnify
MBC for property damage which arose from, was incident to,
connected with or grew out of GMR's paving operations even if GMR
was not negligent or at fault. Since Freightways' complaint
clearly concerned the paving operations, once it was filed, GMR
was obligated at least to defend the action, as well as
potentially liable for damages.
By virtue of Coverage Z, dealing with contractual property
damage liability, Hanover was obligated to pay for property
damages for which GMR had assumed responsibility in the latter's
agreement with MBC. Consequently, unless subject to an exclusion,
Freightways' claim against JM and MBC, which was contractually
indemnified by GMR, was within Hanover's Coverage Z.
Hanover's position is that damage to the property on which GMR
was working was not covered by virtue of Exclusion (h) to
Coverage Z, and that its liability extended not to damage to the
insured's property or the quality of its work, but only to
injuries to other property and persons.
At least one difficulty with defendant's position is that when,
on March 5, 1965, it first refused to assume the defenses to the
complaints, the extent of coverage under similar provisions had
not been considered by Illinois courts. It was not until December
31, 1969, that an Illinois court held that an exclusion clause
similar to (h) precluded coverage under a clause similar to Z.
Const. Co. v. American Motorists Ins. Co., 118 Ill. App.2d 441,
254 N.E.2d 265 (1969).
Since, at the time Hanover refused its defenses, the issue,
which it now asserts with hindsight, was untested and unclear in
this jurisdiction, we think that the asserted claims were not
clearly out of but still potentially within its coverage.
Even if one accepts the Consumers rationale and, in spite of
factual differences, finds it applicable to the instant case, at
the time of Hanover's refusal, it was certainly arguable that an
exclusion as broad as Exclusion (h) rendered the entire policy
ambiguous in view of the broad indemnity premise of the
contractual liability provision and the operation of Exclusion
(j) to Coverage B, which apparently provides coverage for all
grading and excavating damage as long as contractual liability
coverage was carried (as it was) or paving was specified in the
declaration of operations (as it was). In addition, it was at
least arguable, and not without some merit, that Exclusion (h)
applied only to products liability insurance which GMR
specifically excluded in endorsement form G158a; that Exclusion
(h), even if applicable, did not exclude all damages initially
sought by Freightways, e.g., for interference with business; and
that the Exclusion (h) may not have precluded liability for
certain kinds of negligence, e.g., failure to discover a
defective soil support condition.
It is not sufficient for defendant to state that it would have
prevailed on all of these issues. Rather, since the issues are,
jointly and individually, at least legally reasonable and
supportable, their mere presence belies the notion that
Freightways' claims were clearly not covered by the GMR-Hanover
policy. We find that the issue of doubt should have been resolved
in favor of the insured. If, at that time, Hanover was convinced
of the propriety of its position on coverage, for the reasons now
asserted or any others, it could have and should have sought a
declaratory judgment as to its obligations and rights or defended
under a reservation of rights. Palmer v. Sunberg, 71 Ill. App.2d 22,
33, 217 N.E.2d 463 (1966); Sims v. Illinois National Cas. Co.
of Springfield, 43 Ill. App.2d 184, 199, 193 N.E.2d 123 (1963).
In addition, both sides have referred to the intent of the
parties with respect to various aspects of coverage under this
policy. The intent of the parties is not apparent. To the extent
that the intent of the parties becomes relevant in construing the
policy, we think it at least establishes another element of doubt
further precluding defendant from contending that Freightways'
claim was definitely outside of the scope of the policy. Cf. De
Tienne v. S.N. Nielsen Co., 45 Ill. App.2d 231, 233,
195 N.E.2d 240 (1963).
GMR's liability to JM for the reasons alleged in the third
party action was, similarly, not clearly uncovered by Hanover.
Indeed, this action alleged damages arising out of GMR's paving
work thereby also pleading a claim potentially within Coverage B
and Z of Hanover's policy.
In sum, the Freightways' claims against JM and MBC and the JM
third party action against GMR were at least potentially within
the coverage of the Hanover policy at the time Hanover declined
to defend the insured and the third-party beneficiaries. Whether
or not the asserted claims would have been disproved, if tried,
and whether or not the policy actually would have been found to
cover the claims, had a declaration been sought, is not for us to
decide now. We merely find that when Hanover refused to defend a
claim potentially within its coverage, it breached its obligation
to defend. Partial summary judgment on the issue of liability is
granted to plaintiffs and against defendant.
© 1992-2003 VersusLaw Inc.