The Chicago Housing Authority tendered its defense to Kates, who in turn tendered the defense to its insurer, Everest. Everest denied coverage and filed a declaratory judgment action, arguing it had no obligation to defend or indemnify the parties.

The Insurance Contract

The Everest policy provided general liability coverage for "bodily injury" and "property damage" caused by an "occurrence," which was defined to mean "an accident."

There was also an errors and omissions liability endorsement, providing coverage for "negligent acts, errors, or omissions" that result in a "loss." "Loss" was defined as "injury or damage other than bodily injury, property damage, or personal and advertising injury."

The policy also contained a Designated Operations endorsement, stating the policy "does not apply to bodily injury or property damage arising out of [designated] operations," including "any and all work involving low-income housing, government owned and/or subsidized housing, HUD housing, and Section 8 housing."

Designated Operations Endorsement

Everest filed a declaratory judgment action with the United States District Court for the Northern District of Illinois. Everest argued that since the wrongful death lawsuit was a claim that involved bodily injury and the Lincoln Perry Apartments were government owned housing, the Designated Operations exclusion applied.

CHA countered that the terms "work," "operations," and "arising out of" found in the endorsement were ambiguous. CHA argued that "work" and "operations" do not apply to its decision to hire Kates, and the occurrence did not occur because the apartment complex was government owned.

The court found neither argument persuasive. The court stated that "arising out of work involving government owned housing does not mean the same thing as arising out of the fact that housing is government owned." CHA misinterpreted the meaning; the wrongful death lawsuit clearly arose out of conduct involving government owned housing.

The policy stated "any and all work involving low income housing, government owned and/or subsidized housing, HUD housing, and Section 8 housing" was excluded. CHA argued that the decision to hire Kates is not "work" under the policy and thus should not be subject to the exclusion.

However, the court noted that the exclusion applies "regardless of whether such operations are conducted by or on behalf of any insured." Kate's security services were conducted on behalf of the insured, and their service unambiguously constitutes work, so the exclusion applied.

Errors and Omissions Coverage

The errors and omissions liability endorsement provided coverage for "negligent acts, errors, or omissions" that result in a "loss," which was defined as "injury or damage other than bodily injury, property damage, or personal and advertising injury."

The coverage clearly excludes bodily injury, but Kates argued that the number of exclusions found in the endorsement, including bodily injury, property damage, contractual liability, theft, ERISA claims, and others, rendered the coverage illusory.

In Nat'l Fire Ins. Co. of Hartford v. Visual Pak Co, the court found that "the fact that an exclusion has a 'broad sweep' is not, in and of itself, a reason to deem the coverage 'illusory'... it is only when the exclusion has the effect of 'swallowing' the coverage entirely that the exclusion can be deemed illusory."

The court noted that while the E&O exclusion precluded a wide variety of claims, there was still some coverage available, such as a claim for a negligent security guard that causes a client to suffer business interruption and economic losses. Because some coverage remained intact, the endorsement was not illusory, and the bodily injury exclusion applied. The court granted Everest's motion for summary judgment.

Editor's Note

This case highlights the strict enforceability of policy exclusions, even when those exclusions severely limit the scope of the coverage. As long as an exclusion does not entirely "swallow" the coverage, it cannot be deemed illusory, and courts will generally uphold the policy. Even though the E&O endorsement was broad in its exclusions, because there was some possibility of coverage, it was not illusory.

The duty to defend is broad; it is owed if a complaint potentially falls within the scope of the policy. However, the court found that the lawsuit was unambiguously not within the scope of the policy. The lawsuit unambiguously alleged bodily injury, which barred E&O coverage, and unambiguously alleged that injury arose from Kates security services at a government-owned building, triggering the Designated Operations exclusion. Thus, the insurer had neither a duty to indemnify nor a duty to defend.