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Empress Casino Joliet Corporation v. W. E. O'Neil Construction Co.

Court of Appeals of Illinois, First District

November 16, 2016

EMPRESS CASINO JOLIET CORPORATION, Plaintiff-Appellant,
v.
W. E. O'NEIL CONSTRUCTION CO., an Illinois corporation, LINDEN GROUP, INC., an Illinois corporation, R.L. MILLIES & ASSOCIATES, INC., an Indiana corporation, GLOBAL FIRE PROTECTION COMPANY, an Illinois corporation, JAMESON SHEET METAL, INC., an Illinois corporation, and AVERUS, INC., f/k/a FACILITEC CENTRAL, INC., a Wisconsin corporation, Defendants-Appellees. NATIONAL FIRE AND MARINE INSURANCE COMPANY, a Nebraska corporation, LLOYD'S SYNDICATE 1414 (Ascot), a British underwriting syndicate, and AXIS INSURANCE COMPANY, an Illinois corporation, as subrogees of Empress Casino Joliet Corporation, an Illinois corporation, Plaintiffs-Appellants,
v.
W. E. O'NEIL CONSTRUCTION CO., an Illinois corporation, LINDEN GROUP, INC., an Illinois corporation, R.L. MILLIES & ASSOCIATES, INC., an Indiana corporation, GLOBAL FIRE PROTECTION COMPANY, an Illinois corporation, JAMESON SHEET METAL, INC., an Illinois corporation, and AVERUS, INC., f/k/a FACILITEC CENTRAL, INC., a Wisconsin corporation, Defendants-Appellees.

         Appeal from the Circuit Court of Cook County, Illinois, Cook County, Illinois, County Department, Law Division. Nos. 2012 L 012077 and 2014 L 003223 The Honorable John P. Callahan, Jr., Judge Presiding.

          PRESIDING JUSTICE FITZGERALD SMITH delivered the judgment of the court, with opinion. Justices Lavin and Cobbs concurred in the judgment and opinion.

          OPINION

          FITZGERALD SMITH, PRESIDING JUSTICE

         ¶ 1 This cause of action arises from a fire that occurred during an extensive renovation project, at Empress Casino Joliet (hereinafter the casino) on March 20, 2009. As a result of the fire, the casino, which is owned by the insured plaintiff, Empress Casino Joliet Corporation (hereinafter Empress), sustained extensive damages. Empress received $81, 150, 000 in insurance payments from three separate insurers-Axis Insurance Company (hereinafter Axis), National Fire and Marine Insurance Company (hereinafter National Fire), and Lloyd's Syndicate 1414 (Ascot) (hereinafter Lloyd's)-under three separate insurance policies. The Axis policy was a "builder's risk" policy specific to the renovation project, while the National Fire and Lloyd's policies provided general property coverage for the casino. At issue in this appeal are the subrogation rights of the three insurers.

         ¶ 2 Specifically, in this appeal Empress and the three insurers appeal the trial court's grant of summary judgment against them in two underlying consolidated actions against numerous defendants that they claim were responsible for the fire. The first cause of action (case No. 2012 L 012077) was filed by Empress against W.E. O'Neil Construction Co. (hereinafter W.E. O'Neil), Global Fire Protection Company (hereinafter Global), Jameson Sheet Metal Inc. (hereinafter Jameson), the Linden Group, Inc. (hereinafter Linden), R. L. Millies & Associates, Inc. (hereinafter Millies) and Averus, Inc. (hereinafter Averus) and asserted claims for $83, 700, 00 in damages to cover: (1) the $2, 550, 000 deductibles that Empress incurred as a result of the fire; and (2) the $81, 150, 000 in payments that the three insurers made for Empress's covered losses and for which they should have been subrogated. The second action (case No. 2014 L 003223) was filed by the three insurers (Axis, National Fire and Lloyd's) against the same defendants and asserted their subrogation claims. Both actions alleged claims of negligence and willful and wanton misconduct against all of the defendants, and claims for breach of contract against all of the defendants, except for Averus.

         ¶ 3 After the two cases were consolidated, the circuit court granted summary judgment in favor of all the defendants, on all claims, holding that a waiver of subrogation clause contained in the construction contract for the casino renovation project prevented all the plaintiffs from asserting their respective subrogation claims. The plaintiffs now appeal.

         ¶ 4 On appeal, all of the plaintiffs (Empress, Axis, National Fire and Lloyd's) argue that the trial court erred when it found that the waiver of subrogation clause in the renovation construction contract applied to the defendant, Averus, since Averus operated under a separate pre-existing oral contract and was not involved in the renovation project. All of the plaintiffs also assert that the trial court erred when it found that the waiver of subrogation clause prevented them from proceeding with their willful and wanton misconduct claims because public policy should bar enforcement of such exculpatory clauses where heighted misconduct is alleged.

         ¶ 5 In addition, Empress, National Fire, and Lloyd's argue that the waiver of subrogation clause is limited to Axis's builders risk policy and does not apply to Empress's general property insurance policies with National Fire and Lloyd's. In the alternative, Empress, National Fire, and Lloyd's argue that to the extent that waiver of subrogation might apply, it is limited to those losses related to the work (i.e., the renovation project), as it is defined in the construction contract. In addition, Empress, National Fire and Lloyd's argue that the defendants' material breaches of the construction contract should bar enforcement of the waiver of subrogation clause. Finally, Empress asserts that it never waived its right to recover its deductibles under its general property insurance policies with National Fire and Lloyd's. For the reasons that follow, we affirm in part and reverse in part.

         ¶ 6 I. BACKGROUND

         ¶ 7 The record below us is voluminous. For purposes of clarity, we will set forth only those facts and procedural history relevant for this appeal.

         ¶ 8 A. The Parties

         ¶ 9 In 2008, Empress, which owned and operated the casino complex located in Joliet, Illinois, began performing extensive renovations to its property. For this purpose, Empress entered into a construction contract with O'Neil as the general contractor. O'Neil then hired, inter alia, subcontractors Jameson (for HVAC and sheet metal work) and Global (for sprinkler installment). Linden was the architect and Millies the mechanical, electrical, and plumbing engineer (responsible for inter alia, the fire sprinkler and mechanical systems) for the renovation project. The parties do not dispute that prior to the renovation project, Empress had entered into a separate contract with Averus, for Averus periodically to perform cleaning and maintenance services at the casino, including the cleaning and removal of cooking grease and other combustible residue from ductwork in and above the kitchen. Averus continued to perform these services for Empress during the renovation project.

         ¶ 10 B. The Renovation Project Construction Contract

         ¶ 11 The parties agree that on September 15, 2008, Empress entered into a construction contract with O'Neil for the renovation project. That contract was comprised of, inter alia: (1) the American Institute of Architects (AIA) Standard Form of Agreement Between Owner and Contractor (AIA Document A111-1997), and (2) the General Conditions of the Contract for Construction (AIA A21-1997) (hereinafter the construction contract). Relevant to the issues in this appeal, as to insurance coverage, the construction contract required Empress as the "Owner" to maintain both liability (section 11.2) and property (section 11.4) insurance. With respect to property insurance section 11.4 provides in pertinent part:

"§ 11.4.1 Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder's risk "all-risk" or equivalent policy form in the amount of the initial GMP, plus value of subsequent Contract modifications and cost of material supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.4 to be covered, whichever is later. This insurance shall include interest of the Owner, the Contractor, Subcontractors, and Sub-subcontractors in the Project."

         ¶ 12 Section 11.4.1.1 further provides that the property insurance shall be on "an 'all risk' or equivalent policy form, and must include, "without limitation, insurance against the perils of fire (with extended coverage) and physical loss or damage, including *** [inter alia], theft, vandalism, malicious mischief, collapse, earthquake, flood, windstorm, falsework, testing and startup." The property insurance also must cover "reasonable compensation" for services and expenses incurred by the architect and contractor "as a result of such insured loss."

         ¶ 13 Section 11.4.1.2 further explicitly provides that if the owner chooses not to purchase property insurance, the owner must inform the contractor in writing of such a decision before the work begins, so that the contractor may obtain such insurance and protect its interest (as well as the interests of the subcontractors and sub-subcontractors) in the work, as well as increase the price tag on the renovation project, to cover the cost of having to obtaining such insurance itself.

         ¶ 14 The contract also allocates who will be responsible for payment of deductibles after the property insurance is obtained. Section 11.4.1.3 explicitly states that "If the property insurance requires deductibles, the Owner shall pay costs not covered because of such deductibles."

         ¶ 15 In addition, the contract contains an explicit waiver of subrogation clause. Specifically, sections 11.4.5 and 11.4.7 state in pertinent part:

"§ 11.4.5 If during the Project construction period the Owner insures properties, real or personal or both, at or adjacent to the site by property insurance under policies separate from those insuring the Project, or if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, Owner shall waive all rights in accordance with the terms of Section 11.4.7 for damages caused by fire or other causes of loss covered by this separate property insurance. All separate policies shall provide this waiver of subrogation by endorsement or otherwise.
* * * § 11.4.7 Waiver of Subrogation. The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect's consultants, separate contractors described in Article 6, if any and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.4 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect's consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-contractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damage."

         ¶ 16 Article 6 referenced above is titled "Construction By Owner or by Separate Contractors." Section 6.1 of that article, states in pertinent part:

"[T]he Owner reserves the right to perform construction or operations related to the Project with the Owner's own forces, and award separate contracts in connection with other portions of the Project or other construction or operations on the site under Conditions of the Contract identical or substantially similar to these including those portions related to insurance and waiver of subrogation."

         In addition, section 6.1.2 of that article provides that "[w]hen separate contracts are awarded for different portions of the Project or other construction or operations on the site, the term ' Contractor' in the Contract Documents in each case shall mean the Contractor who executes each separate Owner-Contractor Agreement." Finally, section 6.1.4 states that:

"when the Owner performs *** operations related to the Project with the Owner's own forces, the Owner shall be deemed to be subject to the same obligations and to have the same rights which apply to the Contractor under the Conditions of the Contract, including without excluding others, those stated in [inter alia] Article[ ] *** 11 ***."

         ¶ 17 C. Empress's Insurance Policies

         ¶ 18 At the time of the fire, Empress had in place three insurance policies. Specifically, for purposes of the renovation project, Empress purchased a "builder's risk policy" from Axis. This policy was in effect from December 22, 2008, to December 22, 2009. The Axis policy provided coverage for "direct physical 'loss' to Covered Property caused by or resulting from any of the Covered Causes of Loss." Under the policy "Covered Property" was defined as, inter alia, "[b]uildings or structures (including foundations, underground flues, pipes or drains) while under construction, erection or fabrication at the project site shown in the Coverage Form Declarations." The Axis policy contained explicit language indicating that Axis (as the insurer) "may waive [its] rights against another party in writing" prior to a loss to covered property.

         ¶ 19 In addition, to the Axis policy, at the time of the incident, Empress also had in place two general "all-risk" property insurance policies for the casino with National Fire and Lloyd's. Both policies were in effect for the period between August 8, 2007 and December 31, 2010. National Fire was responsible for 90% of the property coverage, and Lloyd's for 10%. The parties do not dispute that Lloyd's policy incorporates by reference the wording of the National Fire policy, so that the language of the two policies is essentially the same. Specifically, the policies "insure[ ] against all risk of direct physical loss or damage to property insured by this policy occurring during the policy period except as hereinafter excluded." The policies define "property" as "real or personal property, " including, " inter alia, "improvements and betterments"; "property in the care, custody or control of the Insured or for which the Insured is legally liable to insure"; "property of the Insured in the care, custody or control of others"; "property while in the incidental course of construction, installation, erection or assembly"; "demolition and increased cost of construction"; and "debris removal."

         ¶ 20 The policies further provided that "[u]nder no circumstances shall insurer be liable for cover, nor drop down in the event of erosion of aggregate for the following, " inter alia, "Property in the Course of Construction (except for incidental Course of Construction) being property in due course of construction, renovation, erection, installation, or assembly." "Incidental Course of Constriction" is separately defined in National Fire's policy as "total contracted works costs of $10, 000, 000 or lower."

         ¶ 21 In addition, both National Fire and Lloyd's policies contain a "Subrogation" provision, which states in relevant part that they as "[t]he Insurer[s] will not acquire any rights of recovery that the Insured has expressly waived prior to loss, nor will such waiver affect the Insured's rights under the Policy."

         ¶ 22 D. The Fire and the Complaints

         ¶ 23 On March 20, 2009, during the first phase of the renovation project, large portions of the casino were destroyed by a fire. After Empress received $81, 150, 000 in insurance proceeds from Axis, National Fire and Lloyd's, [1] on October 23, 2012, it filed a complaint against the defendants to recoup damages for itself and for its insurers, resulting from the fire (case No. 2012 L 012077).

         ¶ 24 According to Empress's complaint, the fire was started when a Jameson employee, Mike Haberzetle (hereinafter Haberzetle), was welding ductwork in the kitchen area. Haberzetle was attaching new duct to the existing duct for the kitchen hood exhaust, and started welding the existing ductwork even though the duct was coated with grease and other residue from cooking. During the welding the existing duct ignited on the inside, causing extensive damage to the casino complex. In a written statement, which is part of the record on appeal, Haberzetle described the incident as follows:

"I was welding in the new kitchen area attaching new duct to the existing [duct] for the kitchen hood exhaust. The existing duct started on fire on the inside. I took the lift down to the ground, went for the fire extinguisher, [but] it was not on the pole for it. So I went to get another and tell Lance [the foreman] about it. When I got back to put it out, it was out of control and we called the fire department."

         ¶ 25 In its complaint, Empress further alleged that during the welding operations, O'Neil and Jameson both failed to provide the necessary fire watch required as protection during hot work. Specifically, Empress complained that O'Neil and Jameson did not have a fire extinguisher near Haberzetle, and permitted or participated in the decision to allow the welding to occur when fire sprinklers in other areas of the casino were out of operation. In addition, Empress alleged that O'Neil and Jameson failed to maintain the required clearance between the welding operations and combustibles.

         ¶ 26 Empress also alleged that the architect Linden and the mechanical engineer Millies failed to provide for sprinklers in the concealed attic/truss spaces above the kitchen as required by the building code. Similarly, Empress alleged that the sprinkler subcontractor, Global, had installed the non-complaint sprinkler system.

         ¶ 27 As to Averus, Empress alleged that four months prior to the incident, Averus purportedly spent five hours performing cleaning services at the casino and submitted a written report to Empress stating that it had spent this time cleaning the "kitchen hot line" and certifying that the "ductwork [was] clean." Nonetheless, according to the complaint, the ductwork in the kitchen was coated with grease.

         ¶ 28 Accordingly, Empress alleged that as a result of the defendants' negligence, and willful and wanton misconduct, the fire resulted in $83, 695, 000 in damages. Accordingly, Empress sought $81, 150, 000 for ...


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