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October 11, 1995


The opinion of the court was delivered by: MORAN

 Plaintiff Matsushita Electric Corporation of America (Matsushita) brought this diversity action against The Home Indemnity Company (Home) for a declaratory judgment. The four-count complaint alleges that Home breached its duty to defend Matsushita in a personal injury action (count I); is estopped from denying coverage (count II); has waived all applicable policy defenses (count III); and that Matsushita is entitled to attorneys' fees because of Home's unreasonable and vexatious refusal to defend (count IV). Before us now are two separate motions by Matsushita for partial summary judgment: one directed at counts I, II, and III, and another at count IV. Also before us is Home's cross-motion for summary judgment, and its motion to strike an affidavit submitted by Matsushita. For the reasons set forth below, Matsushita's motion for summary judgment is granted as to count I, denied as moot as to counts II and III, and denied as to count IV; Home's motion for summary judgment and its motion to strike the affidavit are denied.


 In 1990, Matsushita hired an architect, a developer and a general contractor, W.E. O'Neil (O'Neil), to build a new warehouse and office complex in Elgin, Illinois. O'Neil in turn hired several subcontractors, one of which, Price Brothers-Midwest (Price), was hired to manufacture and erect the pre-cast exterior walls. Although Price only manufactured the walls and hired a different subcontractor to erect the walls at the jobsite, it is undisputed that Price was primarily responsible for the construction of the pre-cast exterior walls. As part of its contract with Matsushita and O'Neil, Price was required to obtain an "owners and contractors protective policy of insurance" (OCP policy). Price obtained the required policy from Home, listing O'Neil and Matsushita as the insureds. The policy was primary; Home specifically disavowed any right of contribution from other insurers. The policy covered any property damage and bodily injury "arising out of" Price's operations at the Matsushita jobsite, including Matsushita's supervision of those operations, and required Home to defend any suit alleging such damages.

 On November 16, 1990, Donald Speer, an employee of a different subcontractor, was paralyzed when a corcrete wall collapsed at the jobsite. Soon thereafter, Donald and Linda Speer filed a lawsuit against Matsushita and several contractors (but not Price), claiming that they were responsible for Donald's injuries. Matsushita filed a third party complaint against Price, alleging that Price was responsible for the Speers' injuries because of its violations of the Structural Work Act. The Speer litigation was settled on February 4, 1993, for over $ 20 million.

 Matsushita filed this action seeking a declaratory judgment that Home breached its duty to defend under the OCP policy, is estopped from denying coverage, has waived all applicable policy defenses, and must pay attorneys' fees Matsushita incurred during this case. Home responded with a motion to dismiss, claiming that Matsushita has failed to state a claim upon which relief can be granted. We denied that motion on August 31, 1994. Since then, Matsushita has filed two separate motions for summary judgment. The first is directed at Counts I, II and III, and the second is directed at Count IV. Home has filed a cross-motion for summary judgment, claiming that it is entitled to set off the amounts paid by Matsushita's other insurers, which would reduce the amount in controversy in this diversity action below the $ 50,000 jurisdictional minimum. Home has also moved to strike the affidavit of Patrick McCarthy, which Matsushita submitted in response to Home's motion for summary judgment.


 A. Counts I, II, And III

1. Home's Duty to Defend

 It is well settled in Illinois that an insurer's duty to defend the insured is determined by the allegations made in the underlying complaint. United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 578 N.E.2d 926, 930, 161 Ill. Dec. 280 (Ill. 1991). The insurer is under such a duty if the complaint filed against the insured alleges any facts that are within, or potentially within, the coverage of the policy. Id. Indeed, "the insurer's duty to defend is broader than its duty to indemnify, and the insurer may be obligated to defend against actions which are not in fact covered under the policy." Tews Funeral Home, Inc. v. Ohio Casualty Ins. Co., 832 F.2d 1037, 1042 (7th Cir. 1987). In determining whether the complaint alleges facts covered under the policy, "the underlying complaint and the insurance policy must be liberally construed in favor of the insured." Attorneys' Title Guaranty Fund Inc. v. Maryland Casualty Co., 1991 U.S. Dist. LEXIS 11909, No. 90 C 3916, 1991 WL 171339, at *3 (N.D. Ill. Aug. 23, 1991). *fn2" Finally, "if several theories of recovery against the insured are alleged in the complaint, an insurer has the duty to defend even if only one such theory falls within potential coverage under the policy." Shell Oil Co. v. AC&S. Inc., 271 Ill. App. 3d 898, 649 N.E.2d 946, 950, 208 Ill. Dec. 586 (Ill.App.Ct. 1995).

 In arguing that Matsushita's defense costs are not covered under the OCP policy, Home rehashes an argument that we rejected in denying its motion to dismiss: it claims that the Speer lawsuit could not "arise out of" Price's operations if Price was not named as a principal defendant. We again reject that argument. The OCP policy requires only that the damage arise out of Price's "operations." Thus, Home's duty to defend is not premised on Price's negligence. Moreover, the issue is whether the underlying complaint alleges facts that are potentially within the policy coverage. United States Fidelity & Guaranty Co., 578 N.E.2d at 930. Thus we must examine the specific allegations of the Speer complaint, not just who was named as principal defendants. See, Casualty Ins. Co. v. Northbrook Property & Casualty Ins. Co., 150 Ill. App. 3d 472, 501 N.E.2d 812, 816, 103 Ill. Dec. 495 (Ill.App.Ct. 1986) (even though subcontractor was not named as a defendant in the underlying action, subcontractor's named insured was allowed to maintain a declaratory action for a breach of the duty to defend).

 The complaint filed by Donald and Linda Speer alleged that the defendants (including Matsushita) violated the Illinois Structural Work Act and were negligent in allowing an interior block wall to collapse. Specifically, the Speer's second amended complaint states in part that "defendants ... were then and there guilty of willful violations of the Structural Work Act in one or more of the following ways: (a) failed to brace the block wall until the exterior walls were complete." The complaint also expressly challenged the defendants' supervision of the project, their scheduling of the construction work, and their inspection of the jobsite. Matsushita claims that these allegations are potentially within the policy coverage because they arise out of Price's operations in constructing the exterior walls and its failure in supervising Price's work to ensure that the exterior work was completed in a timely fashion to protect the interior block wall from the high winds that eventually caused it to collapse. Home responds that the Speer complaint does not arise out of Price's operations because the complaint's reference to the exterior walls only described a condition of the jobsite at the time of the accident and did not implicate the exterior walls as a cause of the accident.

 Home clearly had a duty to defend Matsushita in the Speer litigation. Matsushita need only demonstrate that the Speer complaint alleges facts that potentially arose out of Price's operations and Matsushita's supervision of those operations. An Illinois appellate court has determined that the phrase, "arise out of," is ambiguous, thus requiring a liberal construction in favor of the insured. Casualty Ins. Co., 501 N.E.2d at 814. Casualty further held that "arise out of" means "'originating from,' 'having originated in,' 'growing out of,' and 'flowing from."' Id.; accord Shell Oil Co., 649 N.E.2d at 952. The allegation that the defendants should have braced the interior walls until the exterior walls were complete "flows from" Price's construction of the exterior walls. Moreover, the Speer complaint explicitly alleged that Matsushita failed to adequately supervise and inspect the jobsite, which included scheduling the completion of the exterior walls. This allegation potentially arises out of Matsushita's "acts or omissions in connection with the general supervision of such projects." There can be no doubt that Home was aware or should have been aware that the Speer lawsuit arose out of Price's operations. Matsushita first tendered its defense to Home on January 18, 1991. The second amended complaint, which contained the allegations referred to above, was filed on January 30, 1991. There is little doubt that once the second amended complaint was filed, Home was under a duty to defend Matsushita. *fn3" Finally, Matsushita has submitted transcripts of depositions taken during the summer of 1991 which demonstrate that the Speers were contending that the interior wall collapsed because the exterior walls had not yet been erected, and, indeed, some testimony indicated that the exterior walls were ...

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