Seventh Circuit Rejects Indemnity Claim

Attorney David Osborne won a substantial victory earlier this month in the Seventh Circuit Court of Appeals on behalf of his client, Footstar, Inc. In that case, Kmart sought contractual indemnity and additional insured coverage from Footstar and its insurer for a personal injury action filed against the troubled retail giant in Florida in 2006. The underlying action was based upon an accident in which an unsecured infant carrier fell out of a Kmart stroller on display. Kmart attempted to shift its liability to Footstar – which operated the footwear departments in most of Kmart’s stores – under an indemnity agreement on the premise that a Footstar employee was assisting the plaintiff at the time of her accident. Kmart retained national litigation powerhouse Reed Smith to advance its theory. After numerous pre-trial motions and extensive discovery, the trial court held that liability should be apportioned to Footstar and its insurer based upon relative fault and conducted a jury trial, which resulted in a verdict apportioning 85% liability to Kmart and 15% to Footstar.

Capping five-and-a-half years of pitched litigation, the Seventh Circuit reversed, in relevant part, holding that Footstar and its insurer owed no coverage to Kmart because the coverage provided by their respective contracts was crafted to extend no further than the scope of Footstar’s contractual responsibilities to Kmart. Kmart also failed to shift its hefty legal bill for the litigation to Footstar’s insurer under a bad faith theory.

While the accident did involve a Footstar employee, the court pointed out, he was not engaged in performing any of Footstar’s contractual obligations to Kmart, but rather was merely lending a helping hand to a Kmart employee outside his scope of responsibilities in the footwear department. Although the insurance policy provided broad additional insured coverage to Kmart for injuries “arising out of your [Footstar’s] work,” and although this coverage was otherwise broad enough to include the accident, the court found that the contract between Footstar and Kmart limited that otherwise broad coverage to injuries arising out of the “goods and services provided pursuant to this Agreement.” Kmart sealed its own fate on this issue by pleading that the contract actually prohibited the Footstar employee from providing such gratuitous services outside of the footwear department, even at the Kmart employee’s own request. Kmart “chose to proceed under a different theory in front of the magistrate judge and therefore waived the argument on appeal.” The Seventh Circuit rejected Kmart’s argument that the contract with Footstar was “orally modified” to bring gratuitous acts outside the footwear department by Footstar employees within its scope.

The Seventh Circuit held that Footstar and its insurer did have a duty to defend Kmart, but this obligation was negligible because Kmart – for reasons unknown – delayed tendering its defense until just prior to a mediation held late in the case, which led to a settlement. Despite the fact that Footstar and its insurer should have defended at that late date, the court held that they were not estopped to disclaim coverage and were not guilty of bad faith, because they held a defensible, good faith, “fairly debatable” position on coverage, and Kmart was guilty of its own questionable litigation tactics. Although it did not violate the late notice conditions in the policy or the contract, it did delay its own tender of defense some 30 months, controlling its own defense for nearly the entire case before giving notice to Footstar and its insurer. Finally, the court held that Kmart waived its prejudgment interest claim by failing to properly plead or argue in support of it, finding Kmart’s efforts on this front to be “underdeveloped, conclusory, or unsupported by law,” and “therefore waived on appeal.” The Seventh Circuit remanded the case to the District Court for further proceedings. Kmart v. Footstar, No. 14-1242, ___ F.3d ___, 2015 WL 448633 (7th Cir. Feb. 4, 2015).