Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-03084/USCOURTS-ca7-14-03084-0/pdf.json

Parties Involved:
JRJ Ada, LLC
Appellee
Renee Michelon
Appellee
Nautilus Insurance Company
Appellant
Joe Panfil
Appellee

Document Text:

In the 

United States Court of Appeals 

For the Seventh Circuit ____________________ 

No. 14-3084 

JOE PANFIL, et al.,

Plaintiffs-Appellees, 

v.

NAUTILUS INSURANCE COMPANY, 

Defendant-Appellant. 

____________________ 

Appeal from the United States District Court for the 

Northern District of Illinois, Eastern Division. 

No. 1:12-CV-06481 — James B. Zagel, Judge. 

____________________ 

ARGUED FEBRUARY 11, 2015 — DECIDED AUGUST 20, 2015 

____________________ 

Before FLAUM, WILLIAMS, and HAMILTON, Circuit Judges. 

WILLIAMS, Circuit Judge. Pedro Castro-Cortes was working for Astro Insulation, Inc., a subcontractor of JRJ Ada, 

LLC (“JRJ”), when he fell through a hole on the property of 

JRJ. He sued JRJ for personal injury in Illinois state court (the 

“underlying lawsuit”), claiming that he suffered severe and 

permanent injury, both externally and internally, as a result 

of the fall. JRJ is an Illinois limited liability company with 

two members, Joe Panfil and Renee Michelon. After being 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
2 No. 14-3084

served in the underlying lawsuit, Panfil, Michelon, and JRJ 

filed a report with Nautilus Insurance Company, seeking 

coverage under a general commercial liability policy. Nautilus refused to defend, so the plaintiffs brought this action for 

breach of contract. On summary judgment, the district court 

determined that Nautilus breached its duty to defend because there was at least the potential for coverage of the underlying lawsuit. We agree and affirm. 

I. BACKGROUND 

JRJ sought insurance from Nautilus for a Chicago property that it was remodeling. Nautilus issued a Nautilus Commercial General Liability policy (“the Policy”) that listed 

JRJ’s property as the premises to which the insurance applied, but only named Panfil and Michelon (JRJ’s two members) as the insureds. 

Castro-Cortes worked for Astro Insulation, a subcontractor of JRJ. He was performing insulation work at JRJ’s property when he fell through a hole. He sued JRJ, and JRJ requested defense from Nautilus. Nautilus denied coverage on 

the ground that the underlying lawsuit was against JRJ, but 

the named insureds in the Policy were Panfil and Michelon. 

Nautilus also premised its denial on a provision in the Policy 

called the “Contractor-Subcontracted Work Endorsement.” 

When JRJ requested Nautilus reconsider its denial of coverage, Nautilus identified an additional basis for denial, the 

“Employee Exclusion.” 

Because Nautilus did not defend in the underlying lawsuit, JRJ, Panfil, and Michelon brought this action for breach 

of contract in Illinois state court. Nautilus removed the case 

to the United States District Court for the Northern District 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
No. 14-3084 3

of Illinois. Both parties filed cross-motions for summary 

judgment on the question of whether Nautilus had a duty to 

defend JRJ, and Nautilus also sought summary judgment on 

the question of whether it had a duty to indemnify. The district court granted the plaintiffs’ motion and denied Nautilus’s motion. First, the court found that the Policy should be 

reformed to include JRJ as an insured. (Nautilus does not 

appeal this finding.) Second, the court found that Nautilus 

breached its duty to defend and, consequently, was estopped from asserting policy defenses to coverage. Nautilus 

filed a motion to reconsider the summary judgment order on 

the ground that it had no duty to defend because the underlying lawsuit was not covered by the Policy. The district 

court granted the motion insofar as it reconsidered its order, 

but confirmed its earlier holding that Nautilus had a duty to 

defend. Nautilus appeals. 

II. ANALYSIS 

We review both the district court’s grant of summary 

judgment and its construction of the insurance policy de novo. Lyerla v. AMCO Ins. Co., 536 F.3d 684, 687 (7th Cir. 2008). 

The parties agree that Illinois law governs the interpretation 

of the insurance policy here. Under Illinois law, 

An insurer taking the position that a complaint potentially alleging coverage is not covered by a policy which 

provides that the insurer has the right and duty to defend any claims brought against the insured cannot 

simply refuse to defend the insured. It must defend the 

suit under a reservation of rights or seek a declaratory 

judgment that there is no coverage. If the insurer fails to 

do this, it is estopped from later raising policy defenses 

to coverage ... because the duty to defend is broader 

than the duty to pay.

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
4 No. 14-3084

Murphy v. Urso, 430 N.E.2d 1079, 1082 (Ill. 1981). This estoppel doctrine applies only where an insurer has breached its 

duty to defend. Emp’rs Ins. of Wausau v. Ehlco Liquidating 

Trust, 708 N.E.2d 1122, 1135 (Ill. 1999). So, a court first inquires whether the insurer had a duty to defend. Id. Relevant 

here, an insurer has no duty to defend where “there clearly 

was no coverage or potential for coverage.” Id. But “[a]n insurer is obligated to defend its insured if the underlying 

complaint contains allegations that potentially fall within the 

scope of coverage.” Lyerla, 536 F.3d at 688 (citing Gen. Agents 

Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 

1092, 1098 (Ill. 2005)). “An insurer may not justifiably refuse 

to defend an action against its insured unless it is clear from 

the face of the underlying complaint that the allegations fail 

to state facts which bring the case” even potentially within 

the policy’s coverage. Id. (emphasis in original) (internal citations omitted). 

The underlying complaint and insurance policy must be 

liberally construed in favor of the insured. U.S. Fid. & Guar. 

Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930 (Ill. 1991). 

When an insurer denies a duty to defend based on an exclusionary clause, its application must be “clear and free from 

doubt.” Hurst-Rosche Eng’rs, Inc. v. Commercial Union Ins. Co., 

51 F.3d 1336, 1342 (7th Cir. 1995) (quoting Transamerica Ins. 

Co. v. South, 975 F.2d 321, 327 (7th Cir. 1992)). A provision is 

ambiguous if it is subject to more than one reasonable interpretation and all doubts and ambiguities must be resolved in 

favor of the insured. U.S. Fid. & Guar. Co., 578 N.E.2d at 930. 

Here, it is clear that if Nautilus had a duty to defend, it 

breached that duty. Nautilus did not seek a declaratory 

judgment as to coverage and refused to defend the underlyCase: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
No. 14-3084 5

ing lawsuit on behalf of JRJ. Nautilus argues that it had no 

duty to defend. We disagree. We cannot say that there clearly was not at least the potential for coverage based upon the 

allegations in the underlying complaint, so Nautilus was obligated to defend. See Travelers Ins. Cos. v. Penda Corp., 974 

F.2d 823, 827 (7th Cir. 1992). 

To reach this conclusion, we must look at the language of 

the contract. The Policy states that Nautilus “will pay those 

sums that the insured becomes legally obligated to pay as 

damages because of ‘bodily injury’ or ‘property damage’ to 

which this insurance applies” and it “will have the right and 

duty to defend the insured against any ‘suit’ seeking those 

damages.” This comprehensive general liability insuring 

provision is followed by a series of exclusions, two of which 

are relevant to this appeal. First, the ContractorSubcontracted Work Endorsement exclusion states: “This 

insurance does not apply to ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ arising out of work 

performed by any contractors or subcontractors unless such 

work is being performed specifically and solely for you.” 

Second, the Employee Exclusion provides: 

This insurance does not apply to: 

e. Employer’s Liability 

“Bodily injury” to: 

(1) An “employee” of any insured arising out of and in 

the course of: 

a. Employment by any insured; or 

b. Performing duties related to the conduct of 

any insured’s business; 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
6 No. 14-3084

... 

The definition of “employee” in the Definitions section 

is replaced by the following: 

“Employee” is any person or persons who provide services directly or indirectly to any insured, regardless of 

where the services are performed or where the “bodily 

injury” occurs including, but not limited to ... a contractor, a subcontractor, an independent contractor, and any 

person or persons hired by, loaned to, employed by, or 

contracted by any insured or any insured’s contractor, 

subcontractor, or independent contractor. 

Nautilus argues that the underlying lawsuit is clearly excluded from coverage by the Employee Exclusion. Castro 

was an employee of a subcontractor who was injured during 

the course of his employment. The plaintiffs do not dispute 

those facts or that the Employee Exclusion, alone, would 

preclude coverage. However, they contend that we cannot 

just look at the Employee Exclusion. The Employee Exclusion must be read alongside all the terms of the Policy, particularly the Contractor-Subcontracted Work Endorsement. 

In the plaintiffs’ view, under the ContractorSubcontracted Work Endorsement, coverage for subcontractors is excluded unless the “work is performed specifically 

and solely” for the insured. Since the injury arose out of 

work performed by a subcontractor who was working specifically and solely for JRJ, they argue that the Employee Exclusion seemingly precludes coverage completely, while the 

Contractor-Subcontracted Work Endorsement preserves 

coverage for specific occurrences like the one in the underlying lawsuit. They contend that ambiguity is created by the 

contradicting exclusions, and since ambiguities must be resolved in favor of the insured, there is coverage. 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
No. 14-3084 7

If the language in an insurance policy is subject to more 

than one reasonable interpretation, an ambiguity exists 

which must be resolved in favor of coverage. F.D.I.C. v. Am. 

Cas. Co. of Reading, Pa., 998 F.2d 404, 408 (7th Cir. 1993). In 

our view, reading the two exclusions together, the Policy is 

subject to more than one reasonable interpretation. Under 

the first interpretation, the Employee Exclusion contradicts 

the Contractor-Subcontracted Work Endorsement. “What 

the policy giveth in one exclusion, the policy then taketh 

away in the very next exclusion.” Cherrington v. Erie Ins. 

Prop. & Cas. Co., 745 S.E.2d 508, 526 (W. Va. 2013) (citing 

Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037, 

1045 (7th Cir. 1987)). That Nautilus cannot do. See id.; see also 

Purrelli v. State Farm Fire & Cas. Co., 698 So.2d 618, 619–20 

(Fla. App. Ct. 1997) (policy found to be ambiguous and resolved in favor of the insured where policy purported to insure for intentional torts but exclude acts “intended” by the 

insured). So under this interpretation, we would find coverage. 

Under the second interpretation, the ContractorSubcontracted Work Endorsement, in conjunction with the 

Employee Exclusion, just means to preserve coverage for injuries to non-“employees” arising out of the work of subcontractors working solely for the insured. The effect of the 

Contractors-Subcontracted Work Endorsement is to limit 

any coverage for injury at the construction site to injury arising out of work done by contractors or subcontractors working solely for the insured. And the Employee Exclusion places a second, separate limit on coverage, which further restricts bodily injury coverage to injuries sustained by non-

“employees.” Coverage still remains for bodily injury to 

non-“employees” arising out of the work of contractors or 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
8 No. 14-3084

subcontractors working solely for the insured. The cumulative restrictions on coverage provided under the Employee 

Exclusion and the Contractors-Subcontracted Work Endorsement take away some, but not all, coverage. 

The burden of proving that a claim falls within an exclusion rests on the insurer, because “(1) the insured’s intent in 

purchasing an insurance policy is to obtain coverage, therefore any ambiguity jeopardizing such coverage should be 

construed consistent with the insured’s intent, and (2) the 

insurer is the drafter of the policy and could have drafted 

the ambiguous provision to be clear and specific.” HurstRosche Eng’rs, Inc., 51 F.3d at 1342 (citations omitted). In determining coverage, we must construe the policy as a whole. 

Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 

1204, 1212 (Ill. 1992). As the drafter, Nautilus could have 

written the Policy to make clear that the ContractorSubcontracted Work Endorsement preserved coverage for 

bodily injury to non-“employees” only. It did not do so. Instead, we have an endorsement that most naturally reads to 

preserve coverage for bodily injury arising out of the work 

of subcontractors where the injury is to anyone; it is unlimited. And when read in this manner, it contradicts the Employee Exclusion. What the policy gives in one exclusion, it 

takes away in the next. The two provisions conflict, so there 

is an ambiguity which is resolved in favor of JRJ. See W. Cas. 

& Sur. Co. v. Brochu, 475 N.E.2d 872, 876 (Ill. 1985); U.S. Fid. 

& Guar. Co., 578 N.E.2d at 930.1 

 1 One other point. We seek to ascertain the intention of the parties to 

the contract, Outboard Marine Corp., 607 N.E.2d at 1212, but we are limited in our ability to do so by this record. We do not know if the $1,785 

paid for contractors-subcontracted work in the premium is a reasonable 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
No. 14-3084 9

This is a close case. Nautilus argues that because exceptions to exclusions do not create coverage, the exception in 

the Contractors-Subcontracted Work Endorsement does not 

provide an additional basis for coverage such that it could be 

considered repugnant to the Employee Exclusion. While true 

that an exception to an exclusion does not provide coverage, 

it does preserve coverage already granted in the insuring 

provision. Stoneridge Dev. Co. v. Essex Ins. Co., 888 N.E.2d 

633, 656 (Ill App. Ct. 2008). So, as the district court mentioned, it offers some indication as to what the Policy was 

meant to cover. And a reasonable interpretation of the Contractor-Subcontracted Work Endorsement is that it preserves 

coverage for injuries to workers at the construction site so 

long as those workers are working specifically and solely for 

JRJ. The endorsement does not limit the bodily injury to injuries for non-employees. When policy language is susceptible to more than one reasonable meaning, it is considered 

ambiguous and will be construed against the insurer. Gillen 

v. State Farm Mut. Auto. Ins. Co., 830 N.E.2d 575, 582 (Ill. 

2005). 

We also note that Nautilus argues it has no duty to defend because of a principle it draws from Brochu: “If any one 

of the exclusions applies there is no coverage” and an exception to an exclusion remains subject to and limited by all 

 

amount for coverage limited to non-employees. Neither party has presented any evidence regarding standard rates in the insurance industry 

for coverage for employee and subcontractor injuries at construction 

sites. And defense counsel could not answer at oral argument whether 

Nautilus sold separate coverage for employee and subcontractor injuries 

and how much such coverage usually costs. 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10
10 No. 14-3084

other related exclusions. 475 N.E.2d at 876–77. However, we 

find Brochu of little use in deciding this case. In Brochu, the 

insured relied on an exception to support its argument that 

coverage existed. However, that exception was not intended 

to apply to the underlying action. See Brochu, 475 N.E.2d at 

877. So, the exception did not conflict with any other exclusions by preserving coverage which another exclusion excluded. See id. But here, it is clear that the exception to the 

exclusion in the Contractors-Subcontracted Work Endorsement preserves coverage for the underlying lawsuit. And in 

our view, under one reasonable interpretation, it conflicts 

with the Employee Exclusion. 

We emphasize that the bar to finding a duty to defend is 

low. The complaint in the underlying lawsuit and the Policy 

must be liberally construed in favor of the insured. U.S. Fid. 

& Guar. Co., 578 N.E.2d at 930. Because we cannot say that 

Castro-Cortes’s complaint is not potentially within the coverage of the Policy, we hold that Nautilus had a duty to defend the plaintiffs in the underlying lawsuit.2 

III. CONCLUSION 

For the foregoing reasons, the judgment of the district 

court is AFFIRMED.

 2 At the time the district court decided the parties’ summary judgment motions, the underlying lawsuit was still ongoing. So, upon finding that Nautilus had a duty to defend, the issue of whether Nautilus 

had a duty to indemnify was not ripe. See Travelers Ins. Co., 974 F.2d at 

833 (duty to indemnify arises only after insured becomes legally obligated to pay damages in underlying action). While Nautilus raises the indemnification issue here, it is not properly before this court and remains 

for the district court to determine. 

Case: 14-3084 Document: 25 Filed: 08/20/2015 Pages: 10