"Sole negligence" of named insured not bar to AI coverage
Pekin v. Hallmark Homes, L.L.C. raises what I call a Chandler v. Doherty problem. In other words, must the insured show a potential for coverage, or must the insurer affirmatively show that there is no potential for coverage?
In Chandler, Doherty had one vehicle insured with American Fire Ins. Co. (which I represented on appeal) and one vehicle uninsured, was involved in an accident in the uninsured vehicle which injured Chandler, whose complaint alleged only that Doherty was operating "a motor vehicle." The court held that there was a potential for coverage because"motor vehicle" did not affirmatively exclude the covered vehicle.
In Pekin Ins. Co. v. Beu, and Pekin Ins. Co. v. United Parcel Service, Inc., the first district in effect took the oppisite view in interpreting the following additional insured endorsement in Pekin's policies:
Such person or organization is an additional insured only with respect to liability incurred solely as a result of some act or omission of the named insured and not for its own independent negligence or statutory violation.
The courts held that there would be no coverage for the AI where it is sued for its own negligence. In doing so they rejected the argument that the complaints raised the potential for vicarious liability to the AI, which would be covered under the endorsement, based on its control over the named insured.
However, in Hallmark the second district rejected those holdings, noting that the insurer owes a defense unless "'the insurance cannot possibly cover the liability arising from the facts alleged' and the terms of the policy clearly preclude coverage...."
The court found that the allegations of "control" against the AI could result in vicarious liability to the AI under section 414 of the Restatement (Second) of Torts. Although it was interpreting the same endorsement, it found the holdings in Beu and UPS "unduly restrictive."
In short, with the Pekin endorsement, the insured need not show that the allegations trigger coverage; the insurer must show that they do not. In cases such as Hallmark, then, where the AI is the general contractor, vicarious liability will always be at least possible. In cases where vicarious liability is not possible, however, there will be no coverage. Given the Hallmark court's finding of coverage, the argument that the coverage is illusory fails.
The Hallmark court also considered the standard of review in declaratory actions, finding the case law on the issue confusing. The court held that where factual determinations are not at issue review is de novo.
Pekin had filed a motion for summary judgment where a motion for judgment on the pleadings would have been appropriate as only the allegations of the complaint and policy provisions were at issue. This appears to have been the source of Hallmark's argument that the standard of review should have been abuse of discretion.
