The Seventh Circuit found there was a duty to defend the additional insured under the policy, but not a duty to indemnify. Kmart Corp. v. Footstar, Inc., 2015 U.S. App. LEXIS 1775 (7th Cir. Feb. 4, 2015).
By agreement, Footstar operated the footwear department in hundreds of Kmart stores around the country. Footstar's footwear departments were in designated areas of the Kmart stores. Section 18.1 of the Master Agreement required Footstar to defend and indemnify Kmart from "all damage . . . arising out of Footstar's performance or failure to perform under this Agreement." The same section also required Footstar to obtain additional insurance coverage for Kmart.
Footstar obtained additional insurance coverage from Liberty Mutual. The coverage for Kmart was dictated by Section II of Footstar's policy, which limited coverage for any entity for whom the insured agreed to provide liability coverage as follows:
1. Applies only to "personal injury" or "property damage" arising out of (a) "your work". . .;
2. Applies only to coverage and limits of insurance required by the written agreement . . .
A customer named Judy Patrick was injured in a Kmart store when a Footstar employee, Alex Sehat, attempted to assist in getting a stroller down from a shelf. As Sehat was bringing the stroller down from the shelf, it fell and struck Patrick in the face. The accident took place outside of Footstar's area of the store.
Patrick sued Kmart alleging negligence, with no mention of Footstar in the initial complaint. Patrick's attorney later learned that Sehat was an employee of Footstar. Kmart wrote to Footstar formally requesting defense and indemnification. Footstar forwarded the request to Liberty Mutual. Patrick then amended her complaint to include Footstar as a defendant. Liberty Mutual wrote to Kmart refusing to defend or indemnify. Kmart eventually settled with Patrick.
Kmart sued Footstar and Liberty Mutual, alleging both owed Kmart a duty of defense and indemnification. The magistrate granted partial summary judgment for Kmart, finding both defendants owed a duty to defend. Further, there was a duty to indemnify, but only for Footstar's relative fault, which the jury apportioned at 15%.
The Seventh Circuit reversed on the duty to indemnify. Under the policy, Liberty Mutual was liable to Kmart for injuries "arising out of" Footstar's "work." Under subpart 2, the Policy applied only to "coverage and limits of insurance required by" the Master Agreement. The court looked at the Master Agreement to determine what acts could give rise to coverage. Here, Sehat was acting outside of the footwear department when Patrick was injured. He was therefore violating the Master Agreement. Since Sehat was acting in an extra-contractual manner and not "pursuant to this Agreement," there was no indemnification requirement under the policy.
Turning to Footstar, it had a duty to indemnify for those injuries "arising out of Footstar's performance or failure to perform under this Agreement." A breach of contract, however, was not a "performance" under the Master Agreement. Instead, it was an act taken in direct violation of the contract. Therefore, Footstar did not have a duty to indemnify under the Master Agreement.
Regarding the duty to defend, the complaint alleged that Footstar caused Patrick's injuries by "negligently and carelessly . . . failing to properly remove" the infant stroller from the shelf. Based on these allegations and the phrase "arising out of" your work in the policy, the claim could have been potentially covered under subpart 1. As to Footstar, it was possible that Sehat's actions were potentially covered and arose out of his performance under the Master Agreement since, but for the Master Agreement, he would not have been working in the store. Therefore, both Liberty Mutual, under the policy, and Footstar, under the Master Agreement, had a duty to defend Kmart.
