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Avoiding the “Kotecki Gap” May 13, 2008

Posted by Arieh M. Flemenbaum in Banking/Financial, Business best practices, Business Law, Chicago Business.
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Have you signed contracts that increase your liability without insurance coverage? There are traps here that you will need your attorney’s knowledge of the law to avoid.

Suppose you buy or lease some heavy equipment for use in your business. Often your seller or lessor will require — in the purchase contract, lease or maintenance contract — that you assume any liability it may have if your employee is injured while using the machine.

Ordinarily, your liability for any claim by your employee against you is limited by workers’ compensation laws. But the employee may sue the manufacturer or your seller or lessor — the “supplier” — based on defects in the product or its maintenance. Under Illinois law, the supplier can sue you for contribution — paying part of a judgment awarded to the employee — to the extent you are also responsible for the injury. However, under the Kotecki case,(1) your total liability would be limited to the maximum amount under the workers’ compensation law.

Your supplier will want more protection from this liability. At the least, it will require that you accept responsibility for your full contributory share of the judgment, waiving the protection of Kotecki. But it will often require more, that you indemnify it against all losses resulting from your use of the equipment. Your supplier will not want any liability, whether or not you failed to maintain or use the equipment properly or to provide adequate safety precautions for your employees or otherwise.

You may think that your insurance covers the additional liability when you waive Kotecki protection and/or indemnify your supplier. But a “general liability” policy usually excludes from its coverage damages for bodily injury or property damage that you are obligated to pay because you assumed the liability in a contract or agreement.(2) So by signing a contract with such a waiver and/or indemnification, you may lose insurance coverage for the additional liability you assume under those provisions.

This loss of coverage can occur in other indemnification situations as well. The Illinois Supreme Court just last year held that a construction subcontractor whose employee suffered injury had no coverage for indemnification liability it undertook in its contract with the general contractor.(3)

Whenever you are asked to sign a contract requiring waiver or indemnification of losses by your vendor, your carrier or customer, you should have an attorney look carefully at both the proposed waiver and indemnification provisions of the contract and your general liability policy. There are usually ways to modify the protection you are to provide to the other party in the contract in order to avoid falling into the exclusion from insurance coverage.

The legal fees will be well-spent if they avoid your ending up with a significant uninsured liability!

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At Griffith & Jacobson, LLC, we can help you address the “Kotecki Gap” and help you identify many other similar issues in your every day business dealings that can be a trap for the unwary.
For more information please contact Louis Michael Bell ( 312-236-8110 or at lmb@gjlaw.com) at Griffith & Jacobson, LLC.
Griffith & Jacobson, LLC – We know your business!

Check us out at http://www.GJlaw.com

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  1. Kotecki v. Cyclops Welding Corp., 146 Ill.2d 155, 585 N.E.2d 1023 (1991). Other states will have similar decisions.
  2. In Illinois this uninsured liability can be referred to as the “Kotecki gap.”
  3. Virginia Surety Company, Inc. v. Northern Ins. Co. of New York, 224 Ill.2d 550, 866 N.E.2d 149 (2007).
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