Most employers are aware that the Illinois Workers’ Compensation Act (“WCA”) limits their liability for employee workplace injuries. Many employers may not be aware that the Illinois Contribution Act (“Contribution Act”) provides a method for equipment manufacturers and general contractors to avoid the liability limitations of the WCA. The Contribution Act requires the liability of responsible parties, including employers, be divided according to each party’s share of fault. Thus, if an employee filed suit against a third party, such as an equipment manufacturer or general contractor, for an on-the-job injury, the Contribution Act allows the equipment manufacturer or general contractor to file suit against the employer for contribution according to the employer’s share of fault, notwithstanding the liability limitations of the WCA.
Given this inconsistency, the Illinois Supreme Court in Kotecki v. Cyclops Welding held that an employer’s maximum liability in a third-party suit for contribution is limited to an amount no greater than its liability to its employee under the WCA. This ruling allowed non-employer defendants to recover limited contribution from employers, but still gave employers the benefit of the limited liability protection of the WCA.
After the Kotecki ruling, manufacturers and general contractors were able to avoid the WCA liability limitations, however, by arguing that employers could waive their Kotecki protection by contract, and thereby be liable for their full share of contribution. Manufacturers and general contractors relied on “indemnity provisions” contained in many contracts which required a party to “indemnify and hold harmless” the manufacturer or general contractor for the injury to person or property occurring in connection with the employer’s work, maintaining that these clauses, agreed to by subcontractors, included an implied waiver of the Kotecki limitation. Moreover, some bold general contractors and owners have gone so far as to attempt to obtain “Kotecki waivers” from their subcontractors.
The waiving of Kotecki protection created a new problem for employers because Illinois courts found that “Kotecki waiver” exposure was an uninsured event under both the standard commercial general liability policy and the standard employer’s liability policy. Insurers successfully argued that the employer’s potential liability under the indemnity provision did not come within the employer’s general commercial liability policy’s “insured contract” coverage, thus the insurer had no obligation to defend or indemnify an employer with respect to a third-party claim for indemnification based on the provision. Moreover, under the terms of most liability policies, the policy excluded coverage for a “loss” which was “voluntarily assumed” under contract.
The uninsured exposure created by Kotecki waivers presents a serious problem for many Illinois employers, particularly construction companies which act as subcontractors on construction sites. Subcontractors can, however, protect themselves from uninsured exposure by making certain their contracts with general contractors contain a standard provision requiring subcontractors to provide insurance coverage to the general contractor for injuries or losses resulting from the subcontractor’s work on the project. As long as the insurance coverage provided by the subcontractor requires the insurer to fully defend and indemnify the general contractor, Illinois law will only allow the general contractor to look to the insurance coverage for recovery. Thus, the general contractor will not be able to pursue the subcontractor for contribution.
If you have any questions about Kotecki waivers, please telephone the member of the firm with whom you regularly work.