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Kmart Corp. v. Footstar, Inc.

United States Court of Appeals, Seventh Circuit

February 4, 2015

KMART CORPORATION, Plaintiff-Appellant/Cross-Appellee,
v.
FOOTSTAR, INC., Defendant-Cross-Appellant, and LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant

Argued September 19, 2014.

Page 924

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 09-cv-3607 -- Susan E. Cox, Magistrate Judge.

For KMART CORPORATION, a Michigan corporation, Plaintiff - Appellant (14-1242): James Matthew Davis, Michael D. Richman, Paul R. Walker-Bright, Attorney, Reed Smith Llp, Chicago, IL.

For FOOTSTAR, INCORPORATED, a New Jersey corporation, Defendant (14-1242): Joseph P. Postel, Attorney, Lindsay, Rappaport & Postel, Chicago, IL.

For LIBERTY MUTUAL FIRE INSURANCE COMPANY, a Wisconsin corporation, Defendant - Appellee (14-1242): Jay S. Judge, Attorney, Judge, James & Kujawa, LLC, Park Ridge, IL.

For KMART CORPORATION, a Michigan corporation, Plaintiff - Appellee (14-1356): James Matthew Davis, Attorney, REED SMITH LLP, Chicago, IL.

For LIBERTY MUTUAL FIRE INSURANCE COMPANY, a Wisconsin corporation, Defendant - Appellant (14-1356): Matthew O. Sitzer, Attorney, GRIPPO & ELDEN LLC, Chicago, IL.

For KMART CORPORATION, a Michigan corporation, Plaintiff - Appellee (14-1359): James Matthew Davis, Attorney, Reed Smith Llp, Chicago, IL.

For FOOTSTAR, INCORPORATED, a Delaware corporation, Defendant - Appellant (14-1359): David S. Osborne, Attorney, Lindsay, Rappaport & Postel, Chicago, IL.

Before BAUER, ROVNER, and WILLIAMS, Circuit Judges.

OPINION

Page 925

Williams, Circuit Judge.

Under an agreement between Footstar and Kmart, Footstar operated the footwear departments in various Kmart stores as though they were islands. Footstar employees could only work in those departments unless they had written permission from Kmart. On July 27, 2005, a Footstar employee tried to help a customer get an infant carrier off a shelf outside the footwear department and the customer was injured. She sued, and Kmart eventually sought indemnification for the settlement and defense costs from Footstar and its insurer, Liberty Mutual. We affirm the magistrate judge's finding that Footstar and Liberty Mutual both had a duty to defend beginning the day Kmart formally requested coverage since the injury was potentially coverable under the agreement and insurance policy. However, we reverse and hold neither Liberty Mutual nor Footstar had a duty to indemnify Kmart because the injury did not occur " pursuant to" or " under" the agreement between Kmart and Footstar. That agreement specifically precluded Footstar employees from working outside of the footwear department, where the injury occurred, and actions taken in contravention of the agreement were not " pursuant to" or " under" it. We also affirm the magistrate judge's decisions that Liberty Mutual did not deny coverage in bad faith and that Kmart did not breach the relevant notice provisions such that Liberty Mutual and Footstar could withhold defense costs. We also find any argument about prejudgment interest has been waived.

Page 926

I. BACKGROUND

Footstar and Kmart entered into an agreement authorizing Footstar to operate the footwear department in hundreds of Kmart stores throughout the country. In essence, the footwear department was a store within the larger Kmart store. As Section 3.3 of the Master Agreement between Kmart and Footstar noted, " [Footstar] shall have the right to sell only the Licensed Footwear specified in this Agreement in the Footwear Departments, and shall sell or furnish no other merchandise or services in the Stores without the prior written permission of [Kmart]."

Section 18.1 of the Master Agreement required Footstar to defend and indemnify Kmart under certain conditions:

[Footstar] shall reimburse, indemnify, defend and hold harmless [Kmart] ... from and against any and all damage ... arising out of [Footstar's] performance or failure to perform under this Agreement ....

That same section also required Footstar to obtain additional insurance coverage for Kmart:

[Footstar] agrees to obtain and keep in force ... appropriate insurance for claims against [Kmart] and [Footstar] for personal injury ... arising out of or relating to the goods and services provided pursuant to this Agreement ...

Footstar fulfilled its obligation to obtain additional insurance by contracting with Liberty Mutual. Pursuant to that Policy, Liberty Mutual would defend and indemnify Footstar as well as Kmart, as an additional insured, under certain conditions. For Kmart, ...


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