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Man. Sup. Assoc. v. Union Indem. Ins.

OPINION FILED DECEMBER 20, 1984.

MANAGEMENT SUPPORT ASSOCIATES, PLAINTIFF-APPELLANT,

v.

UNION INDEMNITY INSURANCE COMPANY OF NEW YORK ET AL., DEFENDANTS-APPELLEES, (FRANK B. HALL & COMPANY OF ILLINOIS, DEFENDANT).



Appeal from the Circuit Court of Cook County; the Hon. Arthur L. Dunne, Judge, presiding.

JUSTICE JIGANTI DELIVERED THE OPINION OF THE COURT:

This is a declaratory judgment action to determine whether the insurer is obligated to defend and indemnify its insured. The trial court entered judgment in favor of the insurer. The plaintiff, Management Support Associates (MSA), was insured by the defendants, Union Indemnity Insurance Co. of New York and Union International Insurance Co., Ltd. (collectively "Union Insurance"), for liability arising out of "negligent acts, errors, or omissions" in MSA's performance of architectural and engineering services it was to provide under a contract MSA entered into with the United States Army Corps of Engineers. In addition, the policy also covered "life support" services provided by MSA (such as housing, food service, maintenance, recreational and other facilities) for personnel working in connection with the Corps' air base construction project in the Negev Desert in Israel.

The specific focus in this action is on whether Union Insurance's duty to defend and indemnify MSA for its performance of "life support" services arises for all claims filed, as is asserted by MSA, or whether this duty arises only for claims arising from MSA's "negligent acts, errors or omissions," as is asserted by Union Insurance. If the duty arises as a result of the latter, the next inquiry is whether the complaint sufficiently alleges potential acts within the policy's coverage.

Pursuant to its obligation under this contract, MSA leased the Palace Hotel in Tel Aviv, Israel, for three years from its owner, Etablissement Nahal (Nahal). Subsequent to the expiration of the lease, Nahal filed a complaint against MSA in the Israel District Court of Tel Aviv-Yaffo seeking damages in the amount of $3,857,763 for damage done to the hotel. MSA tendered the Nahal complaint to Union Insurance for defense and indemnity. Union Insurance refused to defend against the tendered complaint, asserting that in order to invoke a duty to defend, the instant insurance policy required that the claim be "caused by a negligent act, error or omission" attributable to MSA and that no such duty existed because the Nahal complaint alleged only a breach of lease which sounded solely in contract.

MSA then brought this action for a declaratory judgment that Union Insurance is obligated under the policy to defend and indemnify MSA against the Nahal suit. MSA presented alternative arguments, arguing first that the Nahal complaint was covered under the policy, notwithstanding the fact that the complaint only alleged a contract action and not a "negligent act, error or omission," because an endorsement to the policy served to delete the "negligent act, error or omission" requirement. Secondly, MSA argued that even with the endorsement construed as retaining the "negligent act, error or omission" requirement, the Nahal complaint was still covered because the complaint contained sufficient allegations of negligent conduct on the part of MSA to potentially bring the suit within the policy's coverage.

Both sides moved for summary judgment. The trial court ruled in favor of Union Insurance, finding that the "negligent act, error or omission" clause remained in effect and that the Nahal complaint failed to allege any negligent conduct on the part of MSA. This appeal followed.

The coverage in the original insuring agreement, an Architects/Engineers Professional Liability Policy, provided that:

"The Company will pay on behalf of the Insured all sums * * * which the Insured shall become legally obligated to pay as damages for claims * * * if such legal liability arises out of the performance of professional services for others in the Insured's capacity as an architect or an engineer or such other professional capacity as may be included within the schedule and if such legal liability is caused by a negligent act, error or omission of the Insured * * * in connection with the project defined in the schedule." (Emphasis added.)

This policy placed two requirements upon Union Insurance's legal liability; (1) such legal liability must arise out of the performance of certain defined services; and (2) such legal liability must be caused by a negligent act, error or omission of MSA.

The schedule, referred to in the "Coverage" section of the policy, defined professional capacity as:

"Professional, technical, management assistance and life support services to U.S. Army Corps of Engineers in conjunction with construction of airfield in the Negev in Israel."

However, under the heading of "Exclusions," the policy provided under exclusion 1(a) that:

"This insurance shall not apply to claims, or to claims expenses arising from such claims, alleging, arising out of or seeking the performance of services not customary for an architect or engineer."

As a result of an obvious conflict that existed between the scope of services covered in the original insuring agreement and schedule, which included services not customary for architects and engineers, such as management assistance and life support services, and exclusion 1(a), which excluded coverage for services "not customary" for architects ...


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