Illinois Federal Court Holds Exclusions Preclude General Liability and E&O Coverage for Wrongful Death Suit

In Everest Indemnity Insurance Co. v. Kates Detective & Security Services Agency Inc., a federal court, applying Illinois law, held that an insurer had no duty to defend or indemnify its insured or an additional insured in a wrongful death lawsuit, finding a designated operations exclusion in the policy barred coverage for general liability, while a separate exclusion barred coverage for bodily injury claims under the policy’s errors and omissions (E&O) coverage part.

The case arose after the Chicago Housing Authority (CHA) entered into an agreement for Kates Detective & Security Services Agency to provide security services at government-owned housing. Under the agreement, Kates was required to maintain certain kinds of insurance with CHA as an additional insured.

Everest issued the subject commercial general liability policy to Kates, which provided two lines of coverage as relevant to the underlying suit. The first line provided general liability coverage for “bodily injury” caused by an “occurrence,” defined to mean “an accident.” The second line of coverage was added by an “errors and omissions liability endorsement” that covered “negligent act[s], error[s] or omission[s]” that result in a “loss.” Notably, the term “loss” did not include “bodily injury.”

Following a tragic incident at the CHA-owned Lincoln Perry Apartments that resulted in a tenant’s death, a wrongful death lawsuit was filed against both CHA and Kates, alleging they failed to provide adequate security that resulted in the death of the tenant. CHA tendered its defense of the lawsuit to Kates, who turned to its insurer, Everest Indemnity Insurance Co., seeking a defense and indemnity under its policy. In response, Everest disclaimed coverage and filed a declaratory judgment action against CHA and Kates, asking the court to confirm it had no obligation to defend or indemnify either party. Everest and CHA subsequently filed cross-motions for summary judgment.

Although the policy included both a general liability coverage part applicable to bodily injury claims and an E&O coverage part applicable to negligent acts, errors, and omissions, the court ultimately agreed with Everest that neither coverage part applied to the wrongful death suit. The general liability coverage was barred by the policy’s designated operations exclusion, which expressly barred coverage for bodily injury “arising out of” work involving government-owned housing. Because the underlying lawsuit stemmed from Kates’ security services at CHA-owned properties — government-owned housing — the court agreed with Everest that the exclusion applied squarely to the underlying action. CHA attempted to avoid the exclusion, first by arguing that the underlying lawsuit was not caused by or related to the fact that the Lincoln Perry Apartments were government-owned and therefore did not “arise out of” “work” or “operations.” The court rejected this contention, explaining that the phrase “arising out of” requires only a connection to the specified operations — that is, “[a]ny and all work involving … government owned … housing” — and is not dependent upon the particular theory of liability asserted in the underlying complaint.

CHA also contended that its decision to hire Kates for security services does not constitute “work,” such that the designated operations exclusion should not apply. However, the court rejected this argument also, noting that the exclusion does not require looking only to the conduct of the party seeking coverage (i.e., CHA). Rather, the exclusion applies “regardless of whether such operations are conducted by or on behalf of any insured.” Thus, the fact that the lawsuit arose from security services performed at government-owned housing was deemed sufficient to trigger the exclusion, regardless of CHA’s position that its liability stemmed from its hiring decision, rather than the security “operations” themselves.

The court declined to find the designated operations exclusion ambiguous based on alleged “conflicts” with other policy provisions, emphasizing that an exclusion does not create ambiguity merely because it limits coverage and that no conflict exists unless the exclusion would effectively swallow the policy’s coverage. Here, because the exclusion was narrower and left other coverage intact, the court enforced it according to its plain terms.

Kates’ reliance on the E&O endorsement fared no better. The court agreed with Everest that the underlying suit, as a claim seeking damages for “bodily injury,” fell outside the endorsement’s definition of covered “loss” and was independently barred by the endorsement’s exclusion for claims involving “bodily injury.” Kates contended that the various exclusions in the E&O endorsement, including the bodily injury exclusion, rendered the E&O coverage illusory, arguing that the exclusions individually or collectively precluded coverage for “bodily injury,” “property damage,” “contractual liability,” and several other types of claims. While the court acknowledged the narrow coverage provided by the E&O endorsement, it found that the coverage was not illusory because the E&O endorsement still provided coverage in other scenarios. CHA’s status as an additional insured did not alter that conclusion either, as the court found CHA’s rights as an additional insured could not exceed Kates’ rights as the named insured. Finally, the court found Everest had no duty to defend CHA or Kates, noting that even under Illinois’ broad duty to defend standard, the allegations in the complaint fell squarely within the policy’s exclusions.

For these reasons, the court granted summary judgment in favor of Everest, holding that it had no duty to defend or indemnify Kates or CHA in the underlying lawsuit.