No. 2--99--1337

_________________________________________________________________ 

	IN THE

	APPELLATE COURT OF ILLINOIS

	SECOND DISTRICT

_________________________________________________________________

MICHAEL NICHOLAS, INC.,	)	Appeal from the Circuit Court

                 	)	of Lake County.

     Plaintiff-Appellant,       )

                                ) 

v.			)	No. 99--L--554

	)

ROYAL INSURANCE COMPANY OF      )

AMERICA,                        )  Honorable	 

	)	Charles F. Scott,

	Defendant-Appellee.	)	Judge, Presiding.

_________________________________________________________________

	JUSTICE O'MALLEY delivered the opinion of the court:

	Plaintiff, Michael Nicholas, Inc., appeals the circuit court's

order dismissing its complaint against defendant, Royal Insurance

Company of America (Royal).  Plaintiff contends that the court

erred in determining that Royal had no duty to defend or indemnify

it in an underlying action filed by Kimball Hill, Inc.

	BACKGROUND

	Plaintiff was a subcontractor at Willoughby Farms, a

subdivision Kimball Hill was developing.  On June 4, 1993, an

employee of plaintiff, Anthony Bauer, was injured while working at

Willoughby Farms.  Bauer sued Kimball Hill alleging violations of

the Structural Work Act (740 ILCS 150/0.01 et seq. (1994) (repealed by Pub. Act 89--2, §5, eff. February 14, 1995)) and negligence. 

Kimball Hill, in turn, sued plaintiff, alleging that plaintiff's

negligence or wilful and wanton conduct caused Bauer's injuries.  Kimball Hill sought either complete indemnification or contribution based on its contract with plaintiff.

	Plaintiff tendered defense of the action to Royal.  Royal

refused to provide a defense, citing the "employee exclusion" in

the policy.  Plaintiff requested Royal to reconsider, asserting

that the exception for insured contracts applied, but Royal again

rejected the tender of defense.

	Plaintiff then sued Royal, seeking a declaratory judgment that

the policy required Royal to defend and indemnify plaintiff in the

underlying suit.  Plaintiff alleged that it had incurred $18,000 in

attorney fees and costs defending the underlying action.  It

eventually settled the underlying action for $165,000.

	The trial court granted Royal's motion to dismiss the

complaint, finding that the exclusion for employee injuries

applied.  Relying on Hankins v. Pekin Insurance Co., 305 Ill. App. 3d 1088 (1999), the court concluded that plaintiff's contract with

Kimball Hill was not an "insured contract" so as to bring it within

the exception in the policy for such contracts.  Plaintiff filed a

timely notice of appeal.

	ANALYSIS

	Paragraph 13 of the contract between plaintiff and Kimball

Hill, which refers to plaintiff as "S-C," provides as follows:

		" 'S-C' shall indemnify and hold harmless the Owner

[Kimball Hill] and all of its agents and employees from and

against all claims, damages, losses and expenses ***

attributable to bodily injury, sickness, disease, death, or to

injury to or destruction of tangible property caused in whole or in part by any negligent act or omission or [sic] 'S-C' ***."

	Plaintiff purchased a general comprehensive liability policy

from Royal.  The issue in this case turns on the interplay between

two coverage exclusions and an exception that applies to both

exclusions.  Exclusion e provides:

		"e. 'Bodily injury' to:

		(1) An employee of the insured arising out and in the

course of employment by the insured; or

		(2) The spouse, child, parent, brother or sister of that

employee as a consequence of (1) above.

		This exclusion applies:

		(1) Whether the insured may be liable as an employer or

in any other capacity; and

		(2) To any obligation to share damages with or repay

someone else who must pay damages because of the injury."

		Exclusion b provides:

		"b. 'Bodily injury' or 'property damage' for which the

insured is obligated to pay damages by reason of the

assumption of liability in a contract or agreement."

	Both of the foregoing exclusions contain an exception that

provides that the exclusions do not apply to liability assumed by

the insured under an "insured contract," which is defined as:

		"That part of any other contract or agreement pertaining

to your business *** under which you assume the tort liability

of another party to pay for 'bodily injury' or 'property

damage' to a third person or organization.  Tort liability means a liability that would be imposed by law in the absence

of any contract or agreement."

	Initially, we hold that the language of the exception and the exclusions is ambiguous.  We find this ambiguity with regard to

both exclusions but note that the ambiguity is blatant with regard

to the interplay between exclusion b and the exception.  Read

together, exclusion b and the exception essentially state that

there is no coverage for obligations that arise by reason of the

assumption of liability in a contract or agreement unless the

policyholder assumes the tort liability of another party pursuant

to a contract or agreement.

	Royal argues that the exclusions apply because plaintiff's

agreement (quoted above) to indemnify and hold Kimball Hill harmless from plaintiff's negligence is not an insured contract. 

For the reasons that follow, we find that the policy language is

not only ambiguous but that upon careful analysis the construction

which favors plaintiff is more logical irrespective of the

principle that ambiguous language is construed in favor of the

policy holder.

	Plaintiff argues that, although Bauer was its employee and it

had assumed liability by contract, its contract with Kimball Hill

was an "insured contract" so that the exception to the exclusions

applies.  Plaintiff maintains that, at the very least, Kimball

Hill's complaint potentially fell within the exception.  Because

Royal did not defend under a reservation of rights or seek a

declaratory judgment that coverage did not apply, it is now

estopped to deny coverage.  Finally, plaintiff argues that Hankins does not govern this case because insured contracts of the type

contemplated by that decision are illegal in the construction

industry and, therefore, the coverage allegedly provided by Royal's

policy is illusory.

	Royal responds that the policy unambiguously defines "insured

contract" as one in which the insured is obligated to indemnify

another party for that party's own negligence.  Royal also argues

that the fact that an exception does not apply here does not render

the coverage illusory.  Moreover, because the policy clearly

excludes this claim, Royal is not estopped from denying coverage.

	A complaint should be dismissed under section 2--615 of the Code of Civil Procedure (735 ILCS 5/2–615 (West 1998)) only when it clearly appears that no set of facts could be proved under the

pleadings that would entitle plaintiff to relief.  Ogle v. Fuiten, 102 Ill. 2d 356, 360-61 (1984).  Because the question presented by

a section 2--615 motion is one of law, this court's review is de novo.  Lukwinski v. Stone Container Corp., 312 Ill. App. 3d 385, 388 (2000).

	The construction of an insurance policy is a question of law. 

Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 108 (1992).  In construing a policy, the court must ascertain the intent of the parties to the contract.  The court must construe

the policy as a whole, with due regard to the risk undertaken, the

subject matter that is insured and the purposes of the entire

contract.   If the words are unambiguous, a court must afford them

their plain, ordinary, and popular meaning.  However, if they are

susceptible to more than one reasonable interpretation, they are ambiguous and will be construed in favor of the insured and against

the insurer who drafted the policy.  Outboard Marine, 154 Ill. 2d at 108-09.

	In Hankins, the Fifth District adopted the definition of an insured contract that Royal urges here.  In interpreting an

essentially identical provision, the court held that an "insured

contract" is one that provides for one of the contracting parties

to assume someone else's tort liability.  The court equated "tort

liability" with "negligence liability."  In other words, an insured

contract is one where one of the parties agrees to indemnify the

other against that party's own negligence.  Hankins, 305 Ill. App. 3d at 1093.

	The Hankins court observed that a contract will not be construed as indemnifying one against its own negligence unless the

contract clearly expresses that intention.  The contract in that

case plainly provided that Hankins was indemnifying the other party

only against Hankins' own negligence.  Thus, the exception in the

policy for "insured contracts" did not provide coverage.  Hankins, 305 Ill. App. 3d at 1093.

	Plaintiff argues that under the policy's definition of

"insured contract," tort liability is not limited to negligence or

fault-based liability and that liability may be imposed on a party

in a tort action without regard to that party's fault or

negligence.  For example, if two defendants are jointly and

severally liable for an injury and one becomes judgment-proof, the

solvent defendant will have to pay the entire judgment regardless

of its degree of fault.

	Plaintiff further contends that under Kotecki v. Cyclops Welding Corp., 146 Ill. 2d 155 (1991), its "tort liability" for Bauer's injuries would be limited to the amount of its worker's

compensation liability.  However, because it waived the "Kotecki cap" (see Liccardi v. Stolt Terminals, Inc., 178 Ill. 2d 540, 550 (1997), it was potentially liable for the entire amount Kimball

Hill was required to pay Bauer, in other words, for Kimball Hill's

"tort liability."

	We agree with plaintiff.  Although Royal insists that "tort

liability" must be equated with "negligence liability," nothing in

the policy's definitions so states.  If Royal had wanted to limit

the definition of an insured contract to a situation where one

party agrees to assume liability for another party's own

negligence, it could have plainly said so, but it did not.  By

defining "insured contract" in terms of assuming another party's

"tort liability," Royal left open the possibility that its insured

could agree to be responsible for another party's liability in a

tort action even if that liability was not based on that party's

own negligence.  That portion of Kimball Hill's liability to Bauer

(which was assumed by plaintiff pursuant to its Kotecki waiver) that is attributable to plaintiff's negligence is in fact imposed

on Kimball Hill by law, i.e., joint and several liability.  See Burke v. 12 Rothchild's Liquor Mart, Inc., 148 Ill. 2d 429, 452 (1992).

	Ambiguous terms in an insurance policy generally are construed

strictly against the drafter and in favor of coverage.  Outboard Marine, 154 Ill. 2d at 119.  The reason for this rule is twofold:  (1) the intent of an insured in purchasing an insurance policy is

to obtain coverage, and 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 clearly and specifically.  See

Elson v. State Farm Fire & Casualty Co., 295 Ill. App. 3d 1, 11 (1998).  We find that the definition of "insured contract" is

ambiguous and should be construed liberally in favor of coverage.

	Hankins does not explain the rationale for its holding that "tort liability" must be equated with "negligence liability." 

Whatever the validity of that construction based on the facts of

that case, it cannot apply here.  Royal does not dispute that

plaintiff is in the construction industry and the contract in

question is a construction contract.  Under the Construction

Contract Indemnification for Negligence Act, "every covenant,

promise or agreement to indemnify or hold harmless another person

from that person's own negligence is void as against public policy

and wholly unenforceable."  740 ILCS 35/1 (West 1998).  If Royal's

construction of the "insured contract" exception applies, it is

difficult to envision any situation where the exception would apply

in plaintiff's line of work because if plaintiff ever agreed to

indemnify another party for its own negligence, the contract would

be unenforceable. 

	Generally, courts will not construe a policy in a way that

renders the coverage provided of no value to the insured. 

Glazewski v. Coronet Insurance Co., 108 Ill. 2d 243, 250 (1985); American Country Insurance  Co. v. Cline, 309 Ill. App. 3d 501, 511 (1999).  Of course, we are here dealing with an exception to an

exclusion, which need not be interpreted as providing coverage or

an additional basis for coverage in any given situation.  See JG Industries, Inc. v. National Union Fire Insurance Co., 218 Ill. App. 3d 1061, 1066 (1991); Qualls v. County Mutual Insurance Co., 123 Ill. App. 3d 831, 834 (1984).  Nevertheless, the general rule

of construction against the drafter and in favor of coverage where

a provision is ambiguous still applies.  See Outboard Marine, 154 Ill. 2d at 119.

	Moreover, the policy should not be construed in a factual

vacuum.  The status of the insured and all other pertinent factual

circumstances must be considered in connection with the

construction of an insurance policy.  Jensen v. New Amsterdam Insurance Co., 65 Ill. App. 2d 407, 415 (1965). "In determining if an ambiguity exists, the court should consider the subject matter

of the contract, the facts surrounding its execution, the situation

of the parties and predominate purpose of the contract which is to

indemnify the insured."  Illinois Central Gulf R.R. v. Continental Casualty Co., 132 Ill. App. 3d 310, 313 (1985), citing Dora Township v. Indiana Insurance Co., 78 Ill. 2d 376 (1980); State Farm Fire & Casualty Co. v. Moore, 103 Ill. App. 3d 250 (1981), appeal denied, 91 Ill. 2d 565 (1982).  "What at first blush might appear unambiguous in the insurance contract might not be such in

the particular factual setting in which the contract was issued." 

Glidden v. Farmers Automobile Insurance Ass'n., 57 Ill. 2d 330, 336 (1974) citing Jensen, 65 Ill. App. 2d at 415.  In light of the fact that plaintiff is in the construction business, the parties must

have reasonably anticipated that most of its contracts would involve construction, where indemnifying another party for that

party's negligence is forbidden by statute.  To interpret the

policy as Royal suggests would defeat the plaintiff's reasonable

expectations of coverage in those situations.  In addition, such a

construction would essentially render the exception meaningless, in

violation of accepted contract construction principles.  See USG Corp. v. Sterling Plumbing Group, Inc., 247 Ill. App. 3d 316, 320 (1993) (court will not interpret a contract in a manner that would

render any provision meaningless).  Although the trial court

understandably felt bound by Hankins, the court erred in holding that the policy provision in question unambiguously excluded

coverage.

	Because the facts alleged by Kimball Hill in the underlying

suit were at least potentially within the policy's coverage, Royal

was required to defend plaintiff in the suit filed by Kimball Hill. 

If the underlying complaint alleges facts even potentially within

the policy's coverage, the insurer has a duty to defend.  Tanns v. Ben A. Borenstein & Co., 293 Ill. App. 3d 582, 586 (1997).  Moreover, because Royal neither provided coverage under a

reservation of rights nor sought its own declaratory judgment that

coverage did not apply, it is now estopped to deny coverage.  See Employers Insurance v. Ehlco Liquidating Trust, 186 Ill. 2d 127, 150-51 (1999).

	The judgment of the circuit court of Lake County dismissing

plaintiff's complaint is reversed, and the cause is remanded for

further proceedings.

	Reversed and remanded.

	BOWMAN and RAPP, JJ., concur.