In Kmart v. Footstar and Liberty Mutual the 7th Circuit Court of Appeals was presented with 2 primary issues:
- Is an indemnification clause triggered when an employee acts outside the scope of his duties?
- Does an insurance company have a duty to defend the lawsuit arising from such an incident?
Footstar operated the footwear department at various Kmart locations. Footstar employees could only work in shoe department unless they had written permission from Kmart. The agreement between the two stores provided that Footstar was to “reimburse, indemnify, defend and hold [Kmart] harmless” in the event of an accident. Footstar also bought insurance from Liberty Mutual.
In 2005 a Kmart customer asked for assistance retrieving a stroller. Both a Kmart and Footstar employee attempted to secure the stroller, which fell out of the box and hit the customer in the face. The accident took place well outside the Footstar department. The customer sued Kmart in negligence. Kmart in turn sued Footstar and Liberty Mutual, alleging that they owed a duty to defend and indemnify it.
First, the 7th Circuit ruled that Footstar and Liberty Mutual did not have a duty to indemnify Kmart: for such a duty to arise the injury would have to arise “pursuant to” or “under” the agreement between the stores. But that agreement in this case prohibited Footstar employees from taking action outside the footwear department. The Court also noted that the duty to indemnify arises only where the insured’s activity and resulting damages fall within the policy’s coverage terms. Since the Footstar employee here was acting in an extra-contractual manner, there was no indemnification requirement.
Second, the Court noted that under Illinois and New Jersey law Footstar and Liberty Mutual were liable for defense costs incurred following notice of the lawsuit because an insurer may be required to defend its insured even when there will ultimately be no obligation to indemnify. In other words, an insurer has a duty to defend unless the complaint in issue simply did not involve its insured.
In summary, the Court concluded that the actions of the Footstar employee were “potentially covered” and arose out of his performance under the agreement between the stores.
This case reminds us that even in this day and age contract drafting is a nuanced but critical part of what lawyers do. Here, the Agreement and the Policy were both deemed ambiguous by the Court, which left them open to competing interpretations. Had they been better written, the issue may not have come up at all.