American Alternative Insurance Corporation v. Metro Paramedic Services, Inc. et al

Filing 34

MEMORANDUM Opinion and Order Signed by the Honorable John J. Tharp, Jr on 12/12/2014. Mailed notice(air, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
AMERICAN ALTERNATIVE INSURANCE
CORPORATION,
Plaintiff,
v.
METRO PARAMEDIC SERVICES, INC.,
SHANNON VOLLING, JULIE BANSER, and
APRIL SOULAK,
Defendants.

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No. 14 C 01235
Judge John J. Tharp, Jr.

MEMORANDUM OPINION AND ORDER
In this insurance coverage dispute, the plaintiff, American Alternative Insurance
Corporation (“AAIC”) claims it owes no duty to defend or indemnify defendant Metro
Paramedic Services, Inc. (“Metro”) in connection with a now-settled lawsuit against Metro and
Antioch Rescue Squad (“ARS”) for sexual harassment and related torts. Metro argues that AAIC
is bound to cover Metro and is in breach of contract for failing to do so. AAIC and Metro each
move for judgment on the pleadings regarding AAIC’s duty to defend, and for the reasons
explained below, AAIC’s motion is denied and Metro’s cross-motion is granted.
FACTS
In the underlying lawsuit, plaintiffs Volling, Banser, and Soulak (the “claimants”) sued
Metro and ARS for sexual harassment and discrimination, negligent supervision and retention,
assault and battery, and retaliation they experienced while serving on the Antioch Rescue Squad
as joint employees of ARS and Metro. ARS had an insurance policy with AAIC that covered its
defense costs in the Volling suit, but AAIC refused to defend Metro, denying that Metro was

covered by ARS’s insurance policy with AAIC. Metro’s arguments for coverage depend on it
being either an “insured” or “additional insured” under the AAIC policy.
The Policy
The applicable liability insurance policy became effective December 31, 2007, for one
year and was renewed for each of the next three years. See Compl. Ex. A-D, Dkt. ## 1-1—1-4.
As relevant to this dispute, the policy consists of a Management Liability (ML) Coverage Form
and a General Liability (GL) Coverage Form. There is also a Commercial Umbrella Liability
Insurance policy that extends excess coverage, see Compl. Ex. F—I, Dkt. ## 1-5—1-8, but the
parties agree that claims for excess coverage are subject to the same terms, conditions,
definitions, and exclusions as the primary policy. Therefore, references in this opinion are to “the
policy.” Only the provisions relevant to the coverage arguments in this case are excerpted below.
A.

What is Covered

The ML Coverage Form provides coverage for monetary damages incurred by the
insured “arising out of an ‘employment practices’ offense . . . or other ‘wrongful act’ to which
this insurance applies.” ML Liability Coverage Form, Section I-A-1, Dkt. # 1-2 at 35.
Section VII of the ML Liability Coverage Form contains the following definitions:
“Employment practices” means an actual or alleged improper
employment related practice, policy, act or omission involving an actual,
prospective, or former volunteer or employee, including . . . (g) Failure to
adopt adequate workplace or employment-related policies and procedures;
(h) Harassment, including ‘sexual harassment.’
*****
“Wrongful act” means any actual or alleged error, act, omission,
misstatement, misleading statement, neglect or breaches or duty
committed by you or on behalf of you in the performance of your
operations, including misfeasance, malfeasance, or nonfeasance in the
discharge of duties, individually or collectively that results directly but
unexpectedly and unintentionally in damages to others.
2

Id. at Section VII-2, 7, 16, Dkt. # 1-2 at 46-47.
The GL Liability Coverage Form provides coverage for damages because of “bodily
injury” that is caused by an “occurrence.” An “occurrence” is “an accident, including continuous
or repeated exposure to substantially the same general harmful conditions.” GL Liabiliy
Coverage Form at Section V.16, Dkt. # 1-2 at 29. “Bodily injury” is defined as “bodily injury,
sickness, or disease sustained by a person, including death resulting from any of these at any
time.”
B.

Who is Covered

Section III.2.d of the ML Coverage Form is a Blanket Additional Insured provision
extending coverage to “[a]ny person or organization liable for [ARS’s] “’employment practices’
offenses, offenses arising out of the ‘administration’ of [ARS’s] ‘employee benefit plans,’ or
other ‘wrongful acts committed or alleged to have been committed by [ARS].”
Section II.2.f of the GL coverage form contains a Blanket Additional Insured provision
with respect to its coverage for “bodily injury” and “property damage”; an additional insured is
defined there as “any person or organization required to be an additional insured under an
‘insured contract’ if agreed to by [ARS] prior to the ‘bodily injury’ [or] ‘property damage’…but
only with respect to liability arising from [ARS’s] premises or operations.”
The ML Coverage Form, at Section III.I.b, also defines an insured to include the
members and partners in “a partnership or joint venture” with ARS. The GL Coverage Form
does the same at Section II.1.b. The policy does not define “partnership” or “joint venture.”
C.

Limitations and Exclusions

Both the GL Coverage Form and the ML Coverage Form exclude coverage for “sexual
abuse.” “Sexual Abuse” is defined as: “any actual, attempted, or alleged sexual conduct by a
3

person, or by persons acting in concert, which causes injury. ‘Sexual abuse’ includes sexual
molestation, sexual assault, sexual exploitation, or sexual injury, but does not include ‘sexual
harassment.’” In turn, the policy defines “sexual harassment” as:
“any actual, attempted, or alleged unwelcome sexual advances, requests
for sexual favors, or other conduct of a sexual nature by a person, or
persons acting in concert, which causes injury,” including “(a) the above
conduct when submission to or rejection of such conduct is made either
explicity or implicitly a condition of a person’s employment, or a basis for
employment decisions affecting a person; or (b) the above conduct when
such conduct has the purpose or effect of unreasonably interfering with a
person’s work performance or creating an intimidating, hostile or
offensive work environment.”
GL Policy, Section V-22, V-23, Dkt. # 1-2 at 31.
Coverage for “wrongful acts” under the ML Form, by definition, is limited to acts that
“result directly but unexpectedly and unintentionally in damages to others,” thereby excluding
acts as to which the damage was expected or intentional.
Procedural History
The underlying litigation commenced on July 21, 2011. The third amended complaint
was filed on January 24, 2013. On December 6, 2013, Metro tendered its defense to AAIC for
the Volling lawsuit. AAIC refused to accept the tender, denying coverage and refusing to defend
or indemnify Metro. Metro litigated the underlying case to a settlement agreement with claimants
Volling and Soulak and stipulated to a dismissal with prejudice of claimant Banser’s claims
against it. In the process, Metro incurred legal fees and expenses.
As the Court has previously summarized the claims in the underlying case, Sharon
Volling, Julie Banser, and April Soulak (the “claimants”), while members of the Antioch Rescue
Squad, a private, non-profit provider of emergency medical and ambulance services in the
Village of Antioch, Illinois, were subjected to sexual harassment (including offensive, even

4

potentially criminal, physical contact), a hostile work environment, sex discrimination, and
retaliation at the hands of co-workers and supervisors. Assault and battery claims were added to
the list in the Third Amended Complaint, by which time the Court had ruled that the plaintiffs
could not proceed with constitutional claims against the named defendants.
The detailed Third Amended Complaint1 (“complaint” or “TAC”) in Volling contains 55
paragraphs of factual allegations (¶¶ 16-71) that are incorporated into every Count, although the
counts themselves are plaintiff- and defendant- specific. Also incorporated into every count of
the complaint are the allegations that “Defendant ARS jointly operates and staffs the Antioch
Rescue Squad with Defendant Metro Paramedic Services, Inc.” (¶ 9), and that “[a]t all relevant
times hereto, Defendant Metro acted as an agent of Defendant ARS and jointly operated the
Antioch Rescue Squad by, among other actions, staffing ARS with paid emergency service
technicians and personnel for day shifts, assisting with volunteer services provided on nights and
weekend shifts, and providing certain human resources functions for ARS” (¶ 11).
The TAC does not differentiate between Metro and ARS as the employers of the
individuals alleged to have committed the acts of assault, battery, and harassment against the
plaintiffs. For instance, two of the individuals responsible for many of the alleged acts, Kyle
Shouse and Chris McBrady, are alleged to be employed by “Defendants.” See TAC ¶ 20.
Likewise, both “Defendants” are alleged to be responsible for the acts of the members of the
ARS board of directors, which includes Chief Wayne Sobczak, Deputy Chief Brian DeKind,
President Stephen Smouse, and Treasurer John Edgell. See id. ¶¶ 22-23.
The TAC alleges, among other things, that Shouse and McBrady made offensive sexual
contact with the plaintiffs including groping, kissing, and publicly undressing them, in addition

1

Case No. 11 C 4920, Dkt. # 80 (N.D. Ill. Jan 24, 2013).
5

to making unwelcome sexual comments and comments about the plaintiffs’ bodies. See TAC
¶¶ 26-27. The Complaint alleges that Edgell and Smouse also engaged in inappropriate conduct
with respect to female paramedics other than the plaintiffs. According to the complaint,
plaintiffs’ complaints about this misconduct, as well as multiple instances of batteries on and
other mistreatment of patients in ambulances and working while intoxicated, went uninvestigated
and unremedied. Indeed, the plaintiffs allege that they were retaliated against for pursuing their
complaints.
After multiple rounds of pleadings and motions to dismiss, the Volling case was resolved
through offers of judgment and settlement. Metro incurred substantial costs and fees in defending
and settling the claims against it. Having denied Metro’s tender, AAIC brought the current action
for a declaration that it has no duty to defend Metro with respect the Volling case. Metro filed a
counterclaim asserting four counts of breach of contract for AAIC’s failure to defend or
indemnify Metro. The counterclaim attaches, and therefore makes part of the pleadings, the
contract for services between Metro and ARS. That contract states, among other things, that
Metro’s provision of personnel and equipment to ARS does not make it an agent or employee of
ARS or a joint venture with ARS. Counterclaim Ex. 1 at Article 11 (Dkt. # 21-1 at 5); Ex. 2 at
Article 11 (Dkt. # 21-2). Each party has now moved for judgment on the pleadings as to the duty
to defend; Metro does not request judgment as to the two counts of its counterclaim alleging
breach of the duty to indemnify.
DISCUSSION
Federal Rule of Civil Procedure 12(c) permits a judgment based on the pleadings, which
include the complaint, the answer, and any written instruments attached as exhibits. N. Ind. Gun
& Outdoor Shows Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir 1998); see Fed. R. Civ.

6

P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is a part of the pleading
for all purposes.”). A motion for judgment on the pleadings under Rule 12(c) is governed by the
same standards as a motion to dismiss for failure to state a claim under Rule 12(b)(6). Hayes v.
City of Chicago, 670 F.3d 810, 813 (7th Cir. 2012). Here, there are no disputed facts raised by
the parties’ cross-motions; there is simply the legal dispute over the interpretation of the
applicable insurance policies as applied to the allegations in the underlying Volling complaint.
The parties agree that this question is governed by Illinois law, under which the Court
must compare the allegations in the underlying complaint with the express language in the
insurance policies to determine whether the insurer’s duty to defend has been triggered. See
Northfield Ins. Co., 701 F.3d at 1129; Pekin Ins. Co. v. Wilson, 930 N.E. 2d 1011, 1016-1017
(Ill. 2010); Am. States Ins. Co. v. Koloms, 687 N.E.2d 72, 75 (Ill. 1997). “If the facts alleged in
the underlying complaint fall within, or potentially within, the policy’s coverage, the insurer’s
duty to defend arises.” Wilson, 930 N.E. 2d at 1017. An insurer may justifiably refuse to defend
the insured only if it is clear from the face of the underlying complaint that the allegations fail to
state facts which bring the case within, or potentially within, the policy’s coverage. Northfield
Ins. Co., 701 F.33d at 1129 (quotation marks and citations omitted).
“Like any contract under Illinois law, an insurance policy is construed according to the
plain and ordinary meaning of its unambiguous terms.” Schuchman v. State Auto Property &
Casualty Ins. Co., 733 F.3d 231, 235 (7th Cir. 2013) (quotation marks and citation omitted). See
also, e.g., Koloms, 687 N.E.2d at 75. But if the terms of the policy are susceptible to more than
one meaning, despite application of the standard tools of textual interpretation, they are
considered ambiguous and will be construed strictly against the insurer who drafted the policy.
Schuchman, 733 F.3d at 238; Koloms, 687 N.E.2d at 75. Furthermore, “[a] court must construe

7

the policy as a whole and take into account the type of insurance purchased, the nature of the
risks involved, and the overall purpose of the contract.” Id.
As the proponent of coverage, Metro invokes several provisions of the policies that it
contends required AAIC to defend it in the Volling lawsuit. First, it argues that it is a “blanket
additional insured” under the ML Coverage Form because Metro was alleged to be liable for
ARS’s wrongful acts and employment offenses. Second, it argues that it is an “insured” under
both the ML and GL Coverage Forms because it was alleged to be in a partnership or joint
venture with ARS. Third, Metro contends that the underlying complaint alleges events that
constitute employment practices offenses, bodily injuries, and wrongful acts so as to trigger
coverage, whether it is an insured or an additional insured. ARS contends, in turn, that Metro is
not covered under any applicable policy as an insured or additional insured. It further argues that
coverage is not triggered by any “wrongful acts” because the underlying complaint alleges
intentional conduct, and furthermore, that the policy exclusions for “sexual abuse” apply.
A. Is Metro an “Additional Insured” under the Policy?
As set forth above, Metro argues that it is an “additional insured” because it falls under
the blanket definition of “any person or organization liable for [ARS’s] ‘employment practices’
offenses . . . or other ‘wrongful acts’ committed or alleged to have been committed by [ARS].”2
Metro maintains that the Volling complaint seeks to hold it liable for the employment practices
offenses and wrongful acts of ARS because it “contains allegations of wrongdoing solely on the

2

Metro does not separately argue that it is also an “additional insured” with respect to the
“bodily injury” and “property damage” coverage provided by the GL Liability Coverage Form.
Metro expressly disclaims any intention to rely upon that provision. See Mem., Dkt. # 30 at 14
(“Metro is not claiming that it is entitled to coverage under the General Liability Coverage Form
because ARS was required to name it as an additional insured.”) Metro rests its argument for GL
coverage on its status as an “insured” under the “partnership or joint venture” definition. See
infra at 12-14.
8

part of ARS, including ARS’s refusal to investigate the Claimants’ reports of harassment and
other misconduct”; because the Complaint suggests “an attempt by ARS to conceal the
complaints from Metro”; and because “many of the allegations of wrongdoing are centered on
the acts or omissions of ARS’s Chief and Deputy Chief.” Mem., Dkt. # 28 at 9; Mem., Dkt. # 30
at 5-6. Metro argues that because all the factual allegations of the complaint are incorporated into
the counts applicable to Metro, then it logically follows that the claimants sought to hold Metro
liable for the acts of ARS.
Metro’s argument fails because, as AAIC contends, it is not consistent with the Volling
complaint, which does not seek to hold Metro derivatively liable for the acts of ARS.
Irrespective of the blanket incorporation of all the factual allegations into all counts of the
complaint, the claimants did not any facts consistent with a theory of vicarious liability or
derivative liability on Metro’s part. Metro certainly does not point to a single factual allegation in
the underlying complaint that could support this kind of liability rather than direct liability for
Metro for its employment of and failure to train and supervise the offenders. Nothing in the
complaint suggests that Metro’s liability was contingent on ARS’s liability, but that is clearly
what the policy would require under the definition of “blanket additional insured.” It applies only
when there is primary liability for ARS for which another person or organization is liable.
The relevant allegations of the complaint are that Metro itself—albeit it jointly with
ARS—employed and was otherwise responsible for the conduct of the wrongdoers. See, e.g.,
Volling TAC ¶¶ 9, 11, 20-23. It might be that, in reality, Metro was neither, or that the claimants
would have been on sounder legal footing had they alleged vicarious or derivative liability. But
that is irrelevant to the duty to defend. “[B]ecause the duty to defend is gauged by the allegations
of the complaint, what the facts subsequently show is immaterial.” In re Country Mutual Ins.

9

Co., 889 N.E.2d 209, 210 (Ill. 2007). AAIC was not required to read into the Volling complaint
potential theories of liability that were not supported by (and, indeed, would be inconsistent
with—see infra at 12-13) the existing factual allegations. The alleged conduct in “the actual
complaint, not some hypothetical version” determines whether the insurer has a duty to defend.
Pekin Ins. Co. v. Precision Dose, Inc. 2012 IL App. (2d) 110195 ¶ 60, 968 N.E.2d 664, 690 (Ill.
App. Ct. 2012).
Metro’s motions to dismiss in Volling are instructive. In that case, Metro never raised
arguments for dismissal that were consistent with its current position that its liability depended
upon ARS’s; for example, it might have attacked the absence of any factual allegations
supplying a basis for vicarious liability as between ARS and Metro, but it did not—most likely
because, like the Court, Metro recognized that the plaintiffs sought to hold the two defendants
directly liable as co-employers. See, e.g., Mem. Op., Dkt. # 72 at 11-12 (“[T]he Court has no
way to separately analyze the two putative employers. Plaintiffs assert in their complaint and
emphasize in their response to the motions to dismiss that ARS and Metro are ‘joint operators
and joint employers.’”). 3 That view is implicit in Metro’s arguments (contrary to the allegations
in the complaint) that it was not the “employer” of claimants Banser and Soulak (see, e.g., Mem.,
Dkt. # 37 at 9-10 in 11 C 04920); Metro was addressing claims brought against it directly, not
arguing that there was no basis alleged upon which it could be derivatively liable for ARS’s
actions. Similarly, in arguing for dismissal of the section 1983 claims (id. at 4-8), Metro
contended that it was not a state actor; had it believed the complaint only sought to hold it
derivatively liable, it would have argued that ARS was not a state actor or—again—that ARS’s
actions could not be imputed to Metro under the facts alleged.
3

In referring to the motions to dismiss, the Court recognizes that Metro (like the Court)
was bound to take the complaint’s allegations of joint operation as true.
10

In short, any fair reading of the Volling complaint requires the conclusion that Metro was
sued—properly or improperly—for its own misconduct, not on any theory of derivative liability
for the misconduct of ARS. Therefore, Metro cannot invoke the Blanket Additional Insured
provision of the ML Liability Coverage Form that provides coverage for those who are “liable
for [ARS’s] ‘employment practices’ offenses . . ., or other ‘wrongful acts.’” 4
Metro’s reliance on Pekin Ins. Co. v. Hallmark Homes, LLC, 392 Ill. App. 3d 589, 912
N.E. 2d 250 (Ill. App. Ct. 2009) and Am. Alternative Ins. Co. v. Lisle-Woodridge Fire Protection
District et al., 2014 WL 2601675 (Ill. App. Ct. June 9, 2014) does not compel a different
conclusion. In Hallmark Homes, the court held that an insurer had a duty to defend a contractor
that was potentially vicariously liable for the insured’s acts or omissions. The relevant policy
defined an “insured” to include “any person or organization for whom you are performing
operations when you and such person or organization have agreed in writing in a contract or
agreement that such person or organization be added as an additional insured on your policy,”
with the qualification that “[s]uch person or organization is an additional insured only with
respect to liability incurred solely as a result of some act or omission of the named insured and
not for its own independent negligence or statutory violation.” 392 Ill. App. 3d at 591, 912 N.E.
4

The two Metro-ARS agreements contain the following indemnification provision: “It is
expressly understood and agreed that each party shall in all events defend, indemnify, save, and
hold harmless the other, their agents, offices, volunteers, and employees from any and all claim,
liabilities, obligations, debts, charges, settlements or judgments (including attorney’s fees)
arising from injuries or property damage, including any and all employment related causes of
action attributable to the acts or failure to act of the offending party, its agents, officers, and
employees while engaged in the performance of duties under this contract.” Def. Ex. 1 Article
15, Dkt. # 21-1; Def. Ex. 2, Article 13, Dkt. # 21-2. Each party must indemnify the other when it
is “the offending party”; there is nothing in the plain language of the contract requiring either
party to pay for the other party’s liability. Furthermore, a provision that indemnifies a party
against its own negligence is generally disfavored under Illinois law, and such provisions will be
strictly construed against the party seeking indemnity; clear and explicit contractual language is
required to accomplish the result. See McNiff v. Millard Maintenance Service Co., 303 Ill. App.
3d 1074, 1077 715 N.E.2d 247, 249 (Ill. App. Ct. 1999).
11

2d at 252. The underlying complaint sought to hold general contractor Hallmark Holmes, among
other defendants, liable on theories of construction negligence and premises liability. The insurer
argued that because Hallmark Homes’ own negligence made it liable to the underlying plaintiff,
any possible liability could not be based solely on the negligence of codefendant MC Builders.
The court rejected that argument, concluding instead that the underlying complaint “asserts both
direct and vicarious liability,” and further explaining: “Hallmark Homes is potentially
vicariously liable solely on the basis of the acts or omissions of MC Builders. Inasmuch as
Hallmark Homes was the general contractor on the project, with responsibility for overall
supervision of the site, under section 414 of the Restatement it is possible that Hallmark Homes
could be vicariously liable for the negligence of MC Builders. This could result if, for instance,
MC Builders caused or knew of the dangerous condition that caused Bremer's injury, as alleged
in the premises-liability claim against MC Builders, but Hallmark Homes had no knowledge of
the condition. As at least one of the theories of negligence alleged against Hallmark Homes
could rest solely on the acts or omissions of the named insured, Pekin has a duty to defend
Hallmark Homes against all of the claims raised against it by Bremer.” Hallmark Homes, 392 Ill.
App. 3d at 595, 912 N.E.2d at 255.
This case is different. The underlying complaint does not allege both vicarious and direct
liability. In fact, the allegations in the complaint are actually inconsistent with a theory of
derivative liability; the claims all are premised on the allegation that “[w]hile jointly operating
the Antioch Rescue Squad, Defendant Metro takes no measures to separately identify itself, but
rather, acts as an agent and joint operator in a single identity with ARS. [TAC ¶¶21, 24, 25].”
Plt’s Mem. In Opposition to Mot. to Dismiss, No. 11 C 4920, Dkt. # 41 at 2 (emphasis added).
Only amending the complaint to plead contrary facts supporting separate organizational

12

identities could make Metro even potentially liable under such a theory, and that plainly was not
the view the plaintiffs took of the relationship between ARS and Metro. The Volling claimants
made a clear choice to assert that, in effect, there are no employees of either ARS or Metro, but
only employees of a jointly operated entity, the Rescue Squad, for which ARS and Metro share
full—direct—supervisory authority. Particularly illustrative of this point are the claimants’
allegations in Count XIII, which alleges negligent supervision by Metro. There, the claimants
unambiguously target Metro as the employer of wrongdoers Shouse and McBrady; there is no
hint (there or elsewhere) that those individuals are employees of ARS for whom Metro is
vicariously responsible. See TAC ¶¶ 161-168; see also pp. 5, 9-10, supra. The allegation that the
wrongdoers were the employees of Metro is inconsistent with the type of derivative liability
contemplated by the blanket additional insured provisions. In Hallmark Homes, the same set of
facts could support liability for the additional insured under either a direct or vicarious liability
theory; here, however, the facts alleged in Volling are actually inconsistent with vicarious
liability, and therefore the blanket additional insured provision is not triggered.
The same can be said of Am. Alternative Ins. Co. v. Lisle-Woodridge Fire Protection
District et al., 2014 WL 2601675 (Ill. App. Ct. June 9, 2014), where the court held in part that
defendant Chicago Metropolitan Fire Protection Company was potentially covered as an
additional insured (under AAIC policy language identical to the provision at issue here) based on
its potential vicarious liability for the acts of the Fire Protection District. The court reasoned that
Chicago Metro, which was alleged to be part of a conspiracy with the District, could be
vicariously liable to the extent that the District adopted certain ordinances that allegedly
restricted competition in the area of fire alarm services for the benefit of Chicago Metro. But in
any alleged conspiracy, each member is liable for the other members’ acts that are foreseeable

13

and in furtherance of the shared goal. The very nature of the underlying claim made it possible
for Chicago Metro to be held to account for another actor, assuming the conspiracy were
established. That situation is not comparable to the allegations in the Volling case, where Metro’s
own acts and omissions as the employer of the wrongdoers were the only alleged basis of
liability.
Metro’s contention that the decision in Lisle-Woodridge has preclusive effect in this case,
barring AAIC’s argument that Metro faces direct, not vicarious, liability under the Volling
complaint fails for the same reason. Mem., Dkt. # 28 at 10; Mem., Dkt. # 30 at 8-9. 5 The legal
theory advanced in Lisle-Woodridge was based on a theory of derivative accountability that is
inconsistent with the theory direct liability pleaded by the plaintiffs in this case. The doctrine of
issue preclusion does not apply here because the issue decided in the prior proceeding is not
identical to the one in the suit in question. See Du Page Forklift Service, Inc. v. Material
Handling Services, Inc., 195 Ill.2d 71, 77, 744 N.E.2d 845, 849 (Ill. 2001) (“Collateral estoppel
may be applied when the issue decided in the prior adjudication is identical with the one
presented in the current action, there was a final judgment on the merits in the prior adjudication,
and the party against whom estoppel is asserted was a party to, or in privity with a party to, the
prior adjudication.”). It is true that the Court is confronted in this case with an identical blanket
addition insured provisions, but it cannot be said the underlying complaints in the two cases are
identical in view of the different liability theories pursued by the plaintiffs based upon the
specific facts of the underlying complaints.

5

Much of the issue preclusion argument is directed at rebutting AAIC’s argument that
the policy language requires the entity ostensibly being held responsible for ARS’s employment
practices offenses and wrongful acts to itself be only an “innocent bystander.” The Court has not
found it necessary to address that argument, having concluded that the Volling complaint simply
does not allege the kind of derivative liability that the policy language refers to.
14

In summary, Metro is not an “additional insured” under the ML Coverage Form
(covering employment practices injuries and wrongful acts) because the underlying complaint
does not seek to hold it liable for ARS’s misconduct. It also is not, and does not claim to be, an
“additional insured” under GL Coverage Form (which covers bodily injury and property
damage).
B.

Is Metro an “Insured” as a Member of a Joint Venture with ARS?

Metro also invokes coverage under the policy provisions in both the ML and GL Liability
Coverage Forms defining an “insured” to include any partners or members in a “partnership or
joint venture” with ARS. AAIC argues that the Volling complaint cannot be read to allege any
kind of joint venture within the meaning of Illinois law, and further that Metro has pled itself out
of court by attaching to its counterclaim its contracts with ARS that disclaim any joint venture.
This time, Metro has the better argument.
The underlying complaint is replete with allegations that Metro jointly employed or was
otherwise directly responsible for the bad actors who committed the harassment and torts alleged
in the complaint. More importantly, the complaint alleges joint operation of the Rescue Squad by
ARS and Metro together. See, e.g., Volling TAC ¶ 9 (“Defendant ARS jointly operates and staffs
the Antioch Rescue Squad with Defendant Metro”); ¶ 10 (“Defendant Metro . . . operates
ambulance and paramedic services jointly with Defendant ARS”); ¶¶ 11-15.
AAIC counters that, despite the allegations of a joint operation, all of the elements
required for a joint venture under Illinois common law are not present, and therefore the policy’s
definition of “insured” does not apply. But AAIC does not provide any authority to support its
position that all the requirements under Illinois common law must be met (and the Court
expresses no opinion as to whether they are) to trigger the policy. The policy itself does not

15

define “partnership or joint venture”; therefore, pursuant to Illinois rules of contract
interpretation, the terms should be given their everyday meanings—not treated as legal terms of
art. West American Ins. Co. v. Yorkville Nat. Bank, 238 Ill.2d 177, 184, 939 N.E.2d 288, 293 (Ill.
2010) (“Unambiguous words in the policy are to be given their plain, ordinary, and popular
meaning”). For the “plain, ordinary, and popular meanings,” the Illinois courts look to their
dictionary definitions. Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 223 Ill. 2d 352, 366,
860 N.E. 2d 307, 316 (Ill. 2006). A joint venture, therefore, is simply a cooperative enterprise.
See

“joint

venture,”

Oxford

Dictionaries.

Oxford

University

Press,

www.oxforddictionaries.com/us/definition/american_english/joint-venture (accessed November
4, 2014) (“A commercial enterprise undertaken jointly by two or more parties that otherwise
retain their distinct identities.”); Random House Dictionary of the English Language 1033 (2d
ed. 1987) (defining “joint venture” as “a business enterprise in which two or more companies
enter a temporary partnership”).
A fair reading of the Volling complaint compels the conclusion that Metro was alleged to
be a joint operator of the rescue squad and a joint employer of its crew (and to the extent that
there is any doubt on that score, in assessing duty to defend, such doubt must be “resolved in the
insured’s favor,” Employers Ins. of Wausau v. EHLCO Liq. Trust, 186 Ill.2d 127, 153, 708
N.E.2d 1122, 1136 (Ill. 1999)). Whether these allegations are true—Metro itself surely believes
otherwise—has no bearing on AAIC’s duty to defend. “If the facts alleged fall within, or
potentially within, the policy's coverage, the insurer is obligated to defend its insured . . . . This is
true even if the allegations are groundless, false, or fraudulent, and even if only one of several
theories of recovery alleged in the complaint falls within the potential coverage of the policy.”
Swiderski Electronics, Inc., 223 Ill. 2d at 363, 860 N.E. 2d at 314-15 (Ill. 2006). The insurer

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may not justifiably refuse to defend unless it is clear from the face of the underlying complaint
that the allegations set forth in the complaint fail to state facts that bring the case within, or
potentially within, the coverage of the policy. Id. On the face of the Volling complaint AAIC
could not reasonably conclude that there was no potential for coverage in view of the allegations
of the joint operation of the Rescue Squad.
As for the ARS-Metro contract, AAIC is wrong to suggest that Metro pleaded itself out
of court by attaching it to its Rule 12(c) motion in this case. The ARS-Metro contracts contain a
provision disclaiming any agency or joint-venture relationship between those parties. That
private agreement, however, is not legally dispositive of the relationship between the parties with
respect to this litigation or with respect to third parties generally. See 59A Am. Jur. 2d
Partnership § 139 (“In the presence of an intent to do those things which constitute a partnership,
the parties will be considered partners even though they intend to avoid the liability attaching to
partners, or expressly stipulate in their agreement that they are not partners. In other words, the
substance and not the name of the arrangement determines the parties’ legal relation to each
other.”); 805 ILCS 206/202(a) (“Except as otherwise provided in subsection (b), the association
of 2 or more persons to carry on as co-owners a business for profit forms a partnership, whether
or not the persons intend to form a partnership”) (emphasis added). The applicable policy does
not define “joint venture” for purposes of who is an “insured,” and neither does the ARS-Metro
contract define the term in the context of the relationship between those parties. AAIC assumes,
but provides no support for its argument, that the terms mean the same thing in both contexts.
Moreover, that Metro denies that it is a joint venturer with ARS is beside the point; the question
is what the plaintiffs in the underlying suit alleged. While the agreement between ARS and
Metro might operate to bar claims between those parties predicated on the existence of a

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partnership or joint venture, it is not determinative of the rights of either party vis-à-vis the
claimants. The Volling plaintiffs alleged that ARS and Metro operated the rescue squad together,
thereby exposing Metro to potential liability as a joint employer with ARS. It does not matter
whether the claimants were right or wrong about that fact; their allegations suffice to make
Metro an additional insured under the “partnership or joint venture” provision of the policy.
The conclusion that the underlying complaint supports a duty to defend based on theory
of joint venture liability is not inconsistent with the conclusion that there is no duty based upon
derivative liability under the blanket additional insured provision. The Volling claimants alleged
that they were jointly employed by ARS and Metro; they did not allege facts about the
relationship between Metro and ARS that would support a theory of relief based on Metro’s
liability for the conduct of individuals employed solely by ARS. The allegation that the
wrongdoers were the employees of Metro (as well as ARS) is inconsistent with the type of
derivative liability contemplated by the blanket additional insured provisions, but it is perfectly
consistent with joint venture liability. Derivative liability and joint venture liability are not
inherently mutually exclusive; however, under the facts alleged by the claimants, Metro was
indistinguishable from ARS and therefore could not be anything other than directly liable.
For these reasons, Metro has established that it was potentially an “insured” under the
AAIC policy for purposes of AAIC’s duty to defend.
C.

Are the Allegations Arguably Covered by the Policies?

Having concluded that Metro was potentially an “insured,” the Court must next
determine whether the underlying Volling complaint alleges any events of liability for which the

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policy provides coverage. 6 Metro suggests that the provisions providing coverage for
employment practices injury, wrongful acts, and bodily injury each apply. Based on the plain
language of the policy compared to the underlying complaint, the Court has little trouble
concluding that there are allegations of “employment practices” injuries, “wrongful acts,” and
“bodily injury,” as those terms are defined in the policy.
The “employment practices” injuries—covered under the ML Liability Coverage Form—
alleged in the Volling complaint include the sexual harassment, discrimination, and retaliation
that the claimants allegedly endured, as well as the failure to supervise and the negligent
retention of the offenders. See, e.g., Volling TAC ¶¶ 69, 70, 74, 81, 88, 95, 102, 108, 114, 120,
126, 132, 138, 144, 152, 164, 173-75, 185-87. The “wrongful acts” allegations—also covered
under the ML Liability Coverage Form—include the same negligent failures to supervise and
negligent retention of the wrongdoers.
Finally, the assertions pertaining to “bodily injury”—for which there is coverage under
the GL Liability Coverage Form—can be found in the factual allegations that support the battery
claims (Counts XVII and XVIII). These include the groping, slapping, and other offensive
contact with the plaintiffs by Shouse and McBrady. See, e.g., Volling TAC. ¶¶ 26(a)-(z), 211,
218. It is true that the complaint does not expressly allege resultant physical harm or medical
care, but the request for damages for the “injury” and “pain” caused by the battery (see ¶¶ 71,
222), does not foreclose the possibility.
AAIC does not argue in its own motion or in response to Metro’s motion that the Volling
complaint does not allege “employment practices” injuries. Nor does it make any arguments with

6

Neither party says whether AAIC covered ARS under the policy, but to the extent that it
did, it would be hard-pressed to argue that the policy is not triggered by the identical facts
alleged in the Volling complaint as to Metro.
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respect to “bodily injury.” Metro clearly argued for coverage for these two forms of liability, and
AAIC’s failure to address either provision forfeits any argument against coverage for these types
of events.
AAIC does maintain, in cursory fashion, that there are no “wrongful acts” alleged
because a wrongful act must be conduct “that results directly but unexpectedly and
unintentionally in damages to others.” Although it does not develop the argument (see Mem.,
Dkt. # 26 at 14; Mem., Dkt. # 29 at 10), the implication appears to be that the Volling complaint
alleges only intentional harm. This is not consistent with the complaint, particularly the
allegations of negligent supervision and negligent retention.
Finally, AAIC argues that the exclusions for “sexual abuse” apply to bar any coverage for
Metro. See Mem., Dkt. # 26 at 14; Mem., Dkt. #29 at 10. AAIC does not pinpoint any allegations
of “sexual abuse,” and its argument is inconsistent with its own policy language. The claimants
in Volling do not allege “sexual abuse” as defined in the AAIC policy. Sexual abuse under the
policy “includes sexual molestation, sexual assault, sexual exploitation, or sexual injury, but does
not include ‘sexual harassment.’” It consists of “any actual, attempted, or alleged sexual conduct
by a person, or by persons acting in concert, which causes injury.” There are arguably some
allegations in the complaint of attempted “sexual conduct” as to the claimants, but the
overwhelming weight of the relevant allegations of “sexual harassment” as separately defined by
the policy and excluded from “sexual abuse.” See pp. 3-4, supra. Moreover, with respect to the
other alleged employment related offenses, the assaults, and the negligence, the sexual-abuse
exclusion is inapplicable.

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D.

Duty to Defend or Indemnify

Based on the foregoing analysis, Metro is an “insured” under the policy, and the Volling
complaint alleges conduct within the scope of coverage. Therefore, AAIC had a duty to defend
that it breached when it refused Metro’s tender. This results in the denial of AAIC’s motion for
judgment on the pleadings, and the granting of Metro’s motion as it pertains to Counts I and II of
its counterclaim for breach of contract. The costs of the defense were for AAIC to bear, and
Metro must be awarded damages in the amount of its defense costs, which according to the First
Amended Counterclaim, exceed $500,000.
Metro has not moved for judgment as to Counts III and IV of the counterclaim, which
allege breach of contract to the extent that AAIC has refused to indemnify Metro as to its
settlement obligations to claimants Volling and Soulak. See Motion, Dkt. # 27 at 4-5. A duty to
indemnify arises when the insured’s liability to a third party on the underlying claim has been
determined, and the insured’s activity and the resulting loss or damage actually—not just
potentially—comes within the policy’s coverage. See Outboard Marine Corp., 154 Ill. 2d at 12728. Where the insured settles the underlying lawsuit prior to verdict, it must demonstrate that it
settled “an otherwise covered loss in ‘reasonable anticipation of personal liability’” to recover
the settlement. Santa's Best Craft, L.L.C. v. Zurich American Ins. Co., 408 Ill. App. 3d 173, 183,
941 N.E. 2d 291, 301 (Ill. App. Ct. 2010) (citations omitted). Metro’s counterclaim for breach of
contract premised on the failure to indemnify—Counts III and IV—therefore remains to be
resolved.

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***
For the foregoing reasons, the Court grants Metro’s motion for judgment on the pleadings
and denies that of AAIC.

John J. Tharp, Jr.
United States District Judge

Date: December 12, 2014

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