No Magic Words Needed To Trigger Application of the Construction Contract Anti-Indemnification Statute Says Illinois Appellate Court

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In Pekin Insurance Co. v. Designed Equipment Acquisition Corp., 2016 IL App (1st) 151689, the Illinois Appellate Court examined a common issue for insurance carriers in disputes involving construction site injuries. In particular, the Appellate Court provided helpful clarification with respect to the application of the Construction Contract Indemnification for Negligence Act (Act), also known as the anti-indemnification statute.

The circumstances at issue involved a rental agreement between Abel Building & Restoration and Designed Equipment Acquisition Corporation, whereby Designed leased from Abel scaffolding materials. The agreement stated that the scaffolding would be delivered to Abel’s jobsite. The lease contained an indemnification provision and an insurance provision, which attempted to shift the risk of all claims to Abel as lessee. As required by the insurance provision, Abel procured a CGL policy coverage from Pekin, which contained additional insured endorsements.

The coverage dispute arose when one of Abel’s employees was injured on two occasions at the worksite. Two separate lawsuits were filed, which were subsequently consolidated against Designed. The employee generally contended Designed’s negligence caused his injuries by failing to properly design, construct, maintain, and monitor the scaffolding. Design tendered its defense to its own insurance company and then to Pekin.

Pekin rejected Designed’s tender and argued that Designed was not an additional insured because, pursuant to the additional insured endorsement, Abel was not performing operations for Designed. Alternatively, Pekin argued Designed was not entitled to coverage because the policy specifically excluded coverage for an additional insured’s own negligence. Also, Pekin asserted it had no duty to defend Designed because the lease between Abel and Designed did not qualify as an “insured contract” and, even if it did, it would be void under the Act, which does not allow contracts in the construction realm to hold another entity harmless for its own negligence.

Pekin filed a declaratory judgment and reiterated its coverage position. On cross-motions for summary judgment, the circuit court ruled in Pekin’s favor for two reasons. First, the court determined that there was no additional insured coverage available to Designed because the rental agreement did not support the notion that Abel was performing operations for Designed. Second, the circuit court found the rental agreement’s indemnification provision to be void on public policy grounds.

On appeal, Designed contended, in pertinent part, that the lease agreement constituted an insured contract thereby allowing coverage and no precedent existed to hold the contract void under the Act. While the Appellate Court agreed the indemnity provision qualified as an insured contract, since the provision clearly and explicitly evidenced the parties’ intent that Abel indemnify Designed against Designed’s own negligence, the Act nonetheless applied rendering the insured contract void since it was used in a construction project. Although Designed claimed the agreement was merely a rental agreement that did not necessarily connote a connection with the construction project, the Appellate Court determined the Act did not require the magic word of “construction” to apply since it was evident that the lease agreement involved construction work. Accordingly, Appellate Court affirmed the circuit court’s decision.

This is a notable decision as it makes clear that Illinois courts are likely to take a broad approach in applying the anti-indemnification statute, even in the context of insurance coverage disputes.