If a worker is injured and receives benefits under the Illinois Workers’ Compensation Act, the liability of the injured worker to other parties is limited to the amount of the workers’ compensation benefits it had paid to the employee. This is known as the Kotecki Rule, named after an Illinois case. This is an important issue for contractors on construction projects, as it affects the issue of who will pay for massive damages.
A recent Illinois appellate court opinion addressed this issue and provided an example of how this issue works in real life. Fleck v. W.E. O’Neil Cosnt. Co., 151108-U (Ill.App. 1 Div., Nov. 23, 2016). Fleck was employed by Global Fire, a subcontractor to O’Neil. O’Neil had been hired to provide fire protection subcontracting services for a project in Chicago. Fleck was a union journeyman sprinkler fitter and, on the day of the occurrence, suffered a serious back injury while he was attempting to manually install a large cast-iron dry pipe valve.
Fleck sued O’Neil which, in turn, sued Global Fire for contribution on the basis that the injury was due to the negligence of Global Fire and not O’Neil. Global Fire filed an affirmative defense based on the Kotecki rule that argued that, in the event it was found negligent, its liability was limited to $572,833.77, the amount of workers’ compensation benefits it had paid to its employee, Fleck.
The jury found that the damages totalled $2,375,394, and allocated those damages as follows: Fleck, 15%, O’Neil, 35%, and Global Fire, 50%. This would mean that Global Fire had to pay almost $1.2 million. However, because the trial court agreed that Kotecki limited Global Fire’s liability to $572,833.77, O’Neil got stuck having to pay an additional amount of more than $614,000.
O’Neil appealed on the basis that the subcontract between itself and Global Fire contained a provision that waived the Kotecki rule. Prior Illinois cases had held that parties could waive Kotecki by including specific contractual language to that effect. The issue here is whether this specific provision passed muster and did waive Kotecki. If so, then Global Fire and not O’Neil would have to pay the additional $614,000. Here is the subcontract provision:
“INDEMNIFICATION—ARTICLE XX. To the fullest extent permitted by law, the Subcontractor hereby assumes the entire responsibility and liability for any and all damage or injury of any kind or nature whatever (including death resulting therefrom) to all persons, whether employees of the Subcontractor or otherwise, and to all property caused by, resulting from, arising out of, or occurring in connection with the Subcontractor’s (or sub-subcontractor’s) execution of the Work. If any claims for such damage or injury (including death resulting therefrom) shall be made or asserted, the Subcontractor agrees to indemnify and save harmless the General Contractor, W.E. O’Neil Construction Company, O’Neil Industries, Inc ., the Owner and Others required in the contract documents, their officers, agents, servants and employees (hereafter referred to in this Article collectively as ‘Indemnitees’) from and against any and all loss, cost, expense, liability, damage or injury, including legal fees and disbursements, that the Indemnitees may directly or indirectly sustain, suffer or incur as a result thereof.”
A prior Illinois appellate decision, Estate of Willis v. Kiferbaum Construction Corp., 357 Ill.App.3d 1002, 830 N.E.2d 636 (2005) had construed the following provision in a similar indemnification provision as being a Kotecki waiver:
“In any and all claims against the Owner, the Architect, or the Contractor or any of their agents or employees by any employee of the Subcontractor, anyone directly or indirectly employed by him or anyone for whose acts he may be liable, the indemnification obligation under this Paragraph 11.11 shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for the Subcontractor under workers’ or workmen’s compensation acts, disability benefit acts or other employee benefit acts.”
In the O’Neil contract, there is no reference to workers’ compensation acts like there was in Willis. The appellate court found that this was fatal to O’Neil’s argument and ruled in favor of Global Fire.
How can a party protect itself against such an unjust outcome? This is a question for owners, general contractors and other contractors on a construction project. The party responsible for an injury should be the one to pay, not other parties who had lesser or no responsibility. Workers’ compensation acts skew these outcomes, so the only solution is to include a waiver. In Illinois, this means a Kotecki waiver. Note that AIA documents, such as the AIA A201-2007 General Conditions, contain a waiver that complies with the Willis analysis. Paragraph 3.18.2 of that document states:
“In claims against any person or entity indemnified under this Section 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Section 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers’ compensation acts, disability benefit acts or other employee benefit acts.”
Note the specific reference to worker’s compensation. Contractors would be wise to include this type of language in their subcontracts.