Self-Serving Pleadings for Additional Insureds

In a recent decision, the Illinois Appellate Court, Third District, considered what should and should not be considered by a trial court when making a determination on a motion to stay a declaratory judgment action on insurance coverage pending resolution of the underlying litigation. Pekin Insurance Company v. Johnson-Downs Construction, Inc., 2017 IL App (3d) 160601. The underlying suit in Johnson-Downs concerned an injured employee of a subcontractor who sued the general contractor. Originally, the plaintiff employee alleged negligence and premises liability theories against the defendant contractor. The agreement between the contractor and the subcontractor provided that the contractor would be named as an additional insured on the subcontractor’s liability insurance policy, but only with respect to claims for vicarious liability.

The defendant contractor filed a third-party complaint against the subcontractor alleging negligence. The insurer for the subcontractor filed a declaratory judgment action, alleging that it did not have a duty to defend the contractor where there was no claim for vicarious liability. The employee plaintiff responded to the declaratory judgment by filing an amended complaint in the underlying action that alleged both negligence and vicarious liability against the defendant contractor.

The Third District addressed whether the trial court should have considered the contractor’s third-party complaint or the employee’s amended complaint from the underlying action, both of which could be seen as self-serving. The appellate court determined that the trial court could not consider the third party complaint of the contractor, holding that a putative additional insured cannot use its own third-party complaint to bolster its claim for coverage.

On the other hand, the appellate court held that the trial court could consider the amended complaint of the insured’s employee. The appellate court reasoned that the factual allegations in the amended complaint in the underlying action were not a transparent attempt to plead into coverage because the facts supported the cause of action. In this case, the amended complaint in the underlying action alleged that the subcontractor’s failure to maintain equipment and working conditions resulted in its employee’s injuries, and that the contractor exercised control over the subcontractor to the extent that the contractor was liable for the subcontractor’s negligent acts and omissions. The Third District found that these allegations were enough to state a vicarious liability claim against the contractor that fell within the coverage of the insurance policy.

It appears that not all potentially self-serving pleadings are treated equally. The Third District, in keeping with the liberality given to amending pleadings, allowed an underlying plaintiff to use amendments to plead into coverage, so long as there is some factual support, but did not allow consideration of the self-serving pleadings of a putative additional insured. Going forward, insurers should take care to evaluate any amended pleadings that may be filed against a putative insured, though those pleadings filed by the putative insured itself cannot be used to create coverage under Johnson-Downs.

In addition to this analysis, the court considered whether it is appropriate to stay an action for declaratory judgment when the same facts are critical in the underlying suit and to coverage in the declaratory judgment action. For more on the court’s discussion, see the article available here.

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Kerri Forsythe

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