KMART CORPORATION'S MOTION FOR ENTRY OF JUDGMENT AGAINST LIBERTY MUTUAL FIRE INSURANCE COMPANY FOR $310,000 PLUS DEFENSE COSTS AND PRE-JUDGMENT INTEREST

SUSAN E. COX, Magistrate Judge.

NOW COMES Plaintiff Kmart Corporation ("Kmart"), by and through its attorneys Reed Smith LLP, and moves this court to enter judgment against Liberty Mutual Fire Insurance Company ("Liberty Mutual") for $310,000 plus defense costs and pre-judgment interest. In support of its motion, Kmart states as follows:

INTRODUCTION

The Court's Memorandum Opinion And Order dated March 30, 2012 (Dckt # 260) ("March 2012 Order") and its Memorandum Opinion And Order dated May 1, 2012 (Dckt # 265) ("May 2012 Order") identified two unanswered questions regarding Liberty Mutual's duty to indemnify Kmart: (1) whether Judy Patrick's injuries actually arose out of Footstar's work, goods and/or services; and (2) if they did, whether Liberty Mutual is obligated to indemnify Kmart for the entire settlement payment. With respect to the first question, a jury definitively found on November 7, 2012, that Footstar proximately caused Mrs. Patrick's injuries. In light of this finding, it now is clear that Mrs. Patrick's injuries actually arose out of Footstar's work, goods, and/or services under the Master Agreement. With respect to the second question, under New Jersey law an additional insured is entitled to full coverage unless the policy explicitly limits coverage to the named insured's negligence. Any limitation on coverage must be clear and explicit. Neither the Policy nor the Master Agreement limit Liberty's obligation to insure Kmart to Footstar's negligence. Liberty Mutual has never argued otherwise. Therefore, in light of the jury's finding of November 7, 2012 that Mrs. Patrick's injuries actually arose out of Footstar's work, goods, and/or services, Liberty Mutual must indemnify Kmart for the full $310,000 settlement of the Patrick Lawsuit and pay Kmart's defense costs and pre-judgment interest.

ARGUMENT

I. CONTRACTUAL PROVISIONS CONCERNING INSURANCE COVERAGE

The Master Agreement's insurance provision states as follows:

(Exhibit 7 (Amended and Restated Master Agreement) at § 18.1, Kmart Corporation's Appendix Of Exhibits In Support Of Kmart's Motion For Summary Judgment On Counts One Through Five Of Its Second Amended Complaint And Defendants' Affirmative Defenses ("Appendix") (Dckt # 215).)

The Blanket Additional Insured Amendment states as follows:

The insurance provided by this amendment:

(Exhibit 8 (Liberty Mutual Policy) at p. 11 of 13 of General Amendatory Endorsement, Appendix.)

II. JUDY PATRICK'S INJURIES ACTUALLY AROSE OUT OF FOOTSTAR'S WORK, GOODS, AND/OR SERVICES UNDER THE MASTER AGREEMENT

The Master Agreement obligated Footstar to purchase insurance coverage for Kmart for bodily injury "arising out of or relating to the goods and services provided pursuant to this Agreement." The Court already has interpreted the term "services" broadly, and rejected Liberty Mutual's argument that "services" is restricted to the definition of the capitalized term "Services" in the Master Agreement. (March 2012 Order at p. 34.) Similarly, coverage under the Blanket Additional Insured Amendment applies to personal injury "arising out of" Footstar's "work." The Court has held that "arising out of" "must be interpreted in a comprehensive sense to mean conduct `originating from,' `growing out of,' or `connected with' the activity in question." (Id. at p. 34). Prior to the jury's verdict on November 7, 2012, the Court stated that a question as to how Judy Patrick was injured hindered "the Court's ability to determine whether Mrs. Patrick's injury actually — rather than merely potentially — arose out of Footstar's work, goods, or services under the Master Agreement." (May 2012 Order at p. 8). In light of the jury's verdict that Footstar, through the actions of Alex Sehat, proximately caused Judy Patrick's injury, it now is clear that Mrs. Patrick's injury actually arose of Footstar's work, goods, and/or services.

It is well established under New Jersey law that "arising out of" insurance policy language only requires a "substantial nexus" between the named insured's work and the injury. New Jersey courts have found additional insured coverage under the same "arising out of language in circumstances where the named insureds connections with the underlying incident were far more remote than in the instant case. See, e.g., County of Hudson v. Selective Ins. Co., 752 A.2d 849 (N.J. App. Div. 2000) (subcontractor's employee fell on courthouse steps while gathering information for bid on general contractor's work; county covered for employee's injuries as additional insured under general contractor's policy); Krastantov v. K. Hovnanian/Shore Acquisitions, LLC, 2008 WL 2986475 (N.J. App. Div. Aug. 6, 2008) (named insured's employee drowned while swimming in man-made lake on constructions site; additional insured covered under named insured policy, even though not entitled to indemnification under terms of contract).

In contrast to the extraordinarily broad reading of "arising out of" adopted in County of Hudson and Krastanov, and the very limited relationship of the facts of the injury to the services being provided by the named insured, the jury in the instant case has found that Footstar's employee actually caused injury to Judy Patrick while Footstar's employee was at work, on the job, as an invitee in Kmart's store, during normal business hours, and providing goods and services. These facts and the jury's finding also demonstrate a conclusive nexus between Mrs. Patrick's injuries and the "work" and "goods or services" provided by Footstar. Thus, with respect to the first unanswered question identified by the Court, Kmart has shown that Mrs. Patrick's injuries actually arose out of Footstar's work, goods, and/or services.

III. BECAUSE JUDY PATRICK'S INJURIES ACTUALLY AROSE OUT OF FOOTSTAR'S WORK, GOODS AND/OR SERVICES UNDER THE MASTER AGREEMENT, LIBERTY MUTUAL MUST INDEMNIFY KMART FOR THE FULL SETTLEMENT OF THE PATRICK LAWSUIT

A. Absent Explicit Language Restricting Coverage To The Named Insured's Negligence, Coverage For An Additional Insured Is Not Limited

With respect to the second unanswered question identified by the Court, now that the jury has found that Judy Patrick's injuries actually arose out of Footstar's work, goods and/or services, Liberty Mutual is obligated to indemnify Kmart for the entire amount Kmart paid to settle the Patrick Lawsuit. Courts throughout the country repeatedly have supported the conclusion that an additional insured is entitled to complete indemnification where the policy language does not explicitly limit coverage to the extent of the named insured's negligence.1 None of the New Jersey cases cited by the parties and the Court restrict an insurer's indemnity obligation to an additional insured to only that share of the fault of the named insured. Instead, those cases require complete indemnification of the additional insured regardless of fault. See, e.g., Fed. Home Loan Mortgage Corp. v. Scottsdale Ins. Co., 316 F.3d 431, 444-45 (3d Cir. 2003) (rejecting insurer's contention that "fact-intensive inquiry" regarding named insured's fault was necessary to determine scope of coverage for additional insured); Krastanov, LLC, 2008 WL at *8 ("the wording of the endorsement makes clear that coverage is not contingent on whether the [named insured] had liability for the accident"); County of Hudson v. Selective Ins. Co., 752 A.2d 849, 853-54 (N.J. App. Div. 2000); Harrah's Atlantic City, 671 A.2d at 1125 ("It is also clear that by wording the endorsement as it did, the insurer did not make coverage contingent on whether the [named insured] had any liability for the accident. Therefore, the finding of liability against the [named insured] . . . was not a factor in determining the scope of the [additional insured's] coverage.").

Moreover, under New Jersey law, limitations on coverage are interpreted strictly against the insurer. Estate of Mini v. Metro Supply & Service, Inc., No. A-3976-02T2, 2004 WL 1284173, at *3 (N.J. Super. A.D. 2004). Provisions that purport to restrict coverage must be clear and unequivocal. Id. Thus, full coverage for the insured is the default rule, which only can be supplanted by clear language stating otherwise. The Policy and the Master Agreement are silent as to any restriction on Liberty Mutual's duty to indemnify Kmart. Had either party wished to restrict Kmart's coverage to vicarious liability, they merely had to write such language into the Master Agreement and Policy, respectively, as is done with respect to thousands of contract and insurance policies each year. Lacking such language, the Policy indemnifies Kmart for its full settlement of the Patrick Lawsuit. Liberty Mutual has not cited a single case under New Jersey law stating otherwise.2

B. The Most Reasonable Interpretations Of The Blanket Additional Insured Amendment Do Not Require Limiting Coverage To Footstar's Negligence

The Blanket Additional Insured Amendment does not appear to limit Kmart's coverage. Subparagraph (2) of the Amendment states that the additional insurance "[a]pplies only to coverage and limits of insurance required by the written agreement, but in no event either exceeds the scope of coverage or the limits of insurance provided by this policy." (Liberty Mutual Policy at p. 11 of 13.) Black's Law Dictionary defines "Coverage" as: "Inclusion of a risk under an insurance policy; the risks within the scope of an insurance policy." Black's Law Dictionary 372 (7th ed. 1999). The International Risk Management Institute (IRMI) defines "Limit of Insurance" as: "The most that will be paid by the insurer in the event of a covered loss under an insurance policy." IRMI.com, Glossary of Insurance and Risk Management Terms, http://www.irmi.com/forms/online/insurance-glossary/terms.aspx (last visited November 10, 2012). The most reasonable interpretation of the first clause of the provision is that Kmart only is insured under the Policy for the type of coverage and limits of coverage required by the Master Agreement, i.e., liability insurance for personal injury, with limits of coverage of not less than $5 million for injury to one person. The most reasonable interpretation of the second clause— "but in no event either exceeds the scope of coverage or the limits of insurance provided by this policy"—is that the additional insurance will not provide a different type of coverage or a greater amount of coverage than what is required by the underlying contract, i.e., liability insurance for personal injury, with limits of coverage of not less than $5 million. The provision attempts to prevent an indemnitee from claiming additional insured coverage under a line of coverage and for an amount of coverage for which it did not contract. This interpretation of subparagraph (2) is supported by the only case analyzing its meaning. See Ins. Co. State of Pennsylvania v. APAC-Southeast, Inc., 677 S.E.2d 734, 738 (Ga. Ct. App. April 17, 2009) (interpreting provision to require additional insured coverage for general contractor under excess liability policy procured by subcontractor, because underlying contract required additional insured coverage under "all policies" procured by subcontractor).

As the Court previously stated, Liberty Mutual has never asserted that its duty to indemnify was "coextensive" with Footstar's. (May 2012 Order at 4.) Moreover, Liberty's own coverage counsel advised Liberty in a coverage opinion letter with respect to the Stretavski matter that the Master Agreement's indemnity provision does not restrict Liberty's indemnity obligations to Kmart under the Policy. In a letter dated October 30, 2009, Wilson, Elser attorney William P. Krauss advised Liberty: "We read the scope of Footstar's indemnity obligation to Kmart as broadly as the scope of additional insured coverage owed to Kmart. The indemnity obligation does not narrow the scope of additional insured coverage." (emphasis added) (See p. 14, October 30, 2009 Letter, attached hereto as Exhibit 1). Mr. Krauss cites to the Krastanov case in support of his analysis. Id.

Another reasonable interpretation of subparagraph (2) is that it makes clear that Kmart only is an additional insured for coverage for bodily injury "arising out of or related to [Footstar's] goods or services," i.e., the coverage mandated by the Master Agreement. Because the phrase "relating to" is broader than "arising out of,"3 this coverage is even broader than the coverage required by the Policy. This interpretation of subparagraph (2) would tend to explain why the second clause then emphasizes that this coverage would, in any event, not exceed the coverage under the Policy.

To the extent the Court believes subparagraph (2) reasonably can be interpreted to limit coverage, the provision is ambiguous and must be construed in favor of Kmart. See Puhlovsky v. Rutgers Cas. Ins. Co., No. L-8037-08, 2012 WL 3870408, at *7 (N.J. Super. A.D. September 7, 2012) ("If the policy language is sufficiently ambiguous to support two meanings, one that favors the insurer and one that favors the insured, the policy should be construed to provide coverage" (citing Search EDP, Inc. v. Home Assurance. Co., 267 N.J.Super. 537, 542 (N.J. App. Div. 1993). See also APAC, 677 S.E.2d at 738 (construing nearly identical additional insured endorsement in favor of coverage, in context of unique requirements of underlying contract).

C. Interpreting The Blanket Additional Insured Amendment To Limit Coverage To Footstar's Indemnity Obligation Renders Kmart's Additional Insured Coverage Illusory

An interpretation of the Blanket Additional Insured Amendment that limits coverage to the relative fault of Footstar also renders this coverage illusory. Kmart already is indemnified for Footstar's relative fault under the Master Agreement and the Policy provides Footstar "contractual liability" coverage for its obligation to indemnify Kmart under the Master Agreement. (Liberty Mutual Policy at pp. 4-5 of 13 of General Amendatory Endorsement). Interpreting Kmart's additional insurance under the Policy as no broader than Footstar's relative indemnity obligation renders such coverage illusory and the additional insured endorsement to be mere surplussage. "When construing the language of a contract, courts give meaning to every word, avoiding constructions which render portions of a contract meaningless, inexplicable or mere surplusage." Tanita Corp. of Amer. v. Befour, Inc., 2009 WL 54509, at *5 (N.D. Ill. 2009). Time and again, courts have recognized that limiting the scope of the Blanket Additional Insured Endorsement to vicarious liability would render meaningless the promise to insure additional insureds directly for their own negligence. See Chevron U.S.A., Inc. v. Bragg Crane & Co., Inc., (4th Dist. 1986) 180 Cal.App.3d 639, 646. As the federal Tenth Circuit observed in Marathon Ashland Pipe Line LLC v. Maryland Cas. Co. (10th Cir. 2001) 243 F.3d 1232:

243 F.3d at 1240 n.5.

For these reasons, the Court should find that Kmart is indemnified under the Policy for its entire $310,000 settlement of the Patrick Lawsuit and enter judgment against Liberty Mutual for payment of this amount.

IV. KMART ALSO IS ENTITLED TO ENTRY OF JUDGMENT AGAINST LIBERTY MUTUAL FOR DEFENSE COSTS AND PRE-JUDGMENT INTEREST

The Court previously held that Footstar and Liberty Mutual breached their duties to defend Kmart on January 23, 2008. (March 2012 Order). The parties have stipulated that Kmart incurred $50,220.50 in costs defending the Patrick Lawsuit after this date.4 (Dckt. # 309). Thus, Liberty Mutual owes Kmart $50,200.50 in defense costs. Liberty Mutual further owes Kmart $62,764.30 in pre-judgment interest on Kmart's $310,000 settlement payment and $10,167.90 in pre-judgment interest on Kmart's $50,220.50 in defense costs. Therefore, the Court should enter judgment against Liberty Mutual for payment of $310,000 to indemnify Kmart for its settlement of the Patrick Lawsuit, $50,200.50 in defense costs, and $72,932.20 in total pre-judgment interest, for a total judgment, not including potential bad faith and punitive damages, of $433,132.70.

CONCLUSION

Wherefore, for the foregoing reasons, Plaintiff Kmart Corporation respectfully requests this Court grant its Motion For Entry Of Judgment Against Liberty Mutual Fire Insurance Company For $310,000 Plus Defense Costs And Pre-Judgment Interest, and grant such further relief as is just and appropriate

Exhibit 1

Dear Mr. Pardy;

This report sets forth our coverage analysis under the above-referenced policy for the suit captioned Lisa and John Stretavski v. Kmart pending in the Superior Court of New Jersey, Morris County (hereinafter "the Stretavski suit"). We reviewed the above-referenced policy, the coverage referral, the claim notes, a Master Agreement and an Amended and Restated Master Agreement between Kmart Corporation and Footstar, Inc., the complaint in the Stretavski suit, the declaratory complaint brought against Liberty Mutual by Kmart, discovery in the Stretavski suit and investigation.

ALLEGATIONS OF THE STRETAVSKI SUIT AND THE DECLARATORY COMPLAINT

By Complaint filed on December 10, 2007, claimants Lisa and John Stretavski alleged that Claimant Lisa Stretavski slipped and fell while a patron at the Kmart Store in Wayne, New Jersey. Plaintiff alleged that she "passed through the shoe department" and slipped and fell (First Count, paragraph 2). Plaintiff further alleged that "a Kmart employee had been stocking shelves" in the vicinity of plaintiffs fall and that employee was "negligent in stocking the shelves" and created a hazardous condition as a result which was the cause of plaintiffs fall (First Count, paragraphs 3 and 4). The second and final count of the claim asserted per quod claim on behalf of Claimant's husband John Stretavski.

Defendant Kmart answered the complaint and on September 18, 2008 filed a Third-Party Complaint against Footstar, Inc. The Third-Party Complaint alleged that Kmart and Footstar entered into an agreement that provided, among other things, that Footstar would operate a shoe concession in the Wayne Kmart Store and that Footstar would agree to indemnify and defend Kmart in connection with claims arising out of Footstar's operation of the concession (First Count, paragraph 2).

Kmart asserted the following legal claims against Footstar:

On September 4, 2009, Kmart filed a Complaint for Declaratory Judgment against both Footstar and Liberty Mutual Insurance Company. That complaint alleged that discovery in the Stretavski suit indicated that a Footstar employee dropped a "foreign substance" on the floor that was the cause of Claimant's slip and fall. Kmart alleges that it is entitled to contractual indemnification from Footstar for the Stretavski suit based on the indemnity provision in the agreement between the two, Kmart reasserts a claim of negligence against Footstar and seeks common law indemnification in the second count of this complaint (this is duplicative of the claim in the third-party complaint). In the third count, Kmart seeks joint tortfeasor contribution from Footstar (this is also duplicative of the claim in the third-party complaint).

The fourth count of the declaratory complaint asserts that Footstar breached its agreement to extend additional insured coverage to Kmart and asserts that Footstar qualifies an additional insured under the Liberty Mutual liability policy issued to Footstar with the result that Kmart should be declared to be an additional insured under that policy.

The fifth and final count of the declaratory complaint asserts a breach of contract claim against Footstar based on the contention that Footstar failed to obtain additional insured coverage as provided in the agreement between Kmart and Footstar.

FACTS

Liberty Mutual was notified of the Stretavski suit on May 8, 2008 by receipt of a tender letter from counsel for Kmart attaching the Stretavski Complaint. Liberty Mutual was advised that Kmart had been served with the Stretavski suit in December of 2007.

By correspondence of May 5, 2008, counsel for Kmart tendered the defense of Kmart to Footstar under an agreement between Kmart and Footstar dated August 24, 2005 (the Amended and Restated Master Agreement) whereby Footstar agreed to indemnify, defend and hold harmless Kmart from any and all damages or claims "arising out of [Footstar's] performance or failure to perform under this Agreement ..." The tender letter directed Footstar to refer this matter to Footstar's insurance carrier.

The next day Liberty Mutual reviewed the incident report for the slip and fall accident completed within hours after the incident. The incident report reflected that Claimant Lisa Stretavski was in the shoe department and "going down the first aisle" when her "left leg went out from under me" and she fell on her left knee. Claimant explained that there was a "Kmart employee stocking the shelves right next to me." The employee was "kind enough to help me up." Claimant concluded her statement by noting that the "floor may have been slippery and there were boxes on the floor."

By correspondence of July 10, 2008 Liberty Mutual denied Kmart's request for defense and indemnification from Footstar. The denial letter explained that the Stretavski complaint alleged a Kmart employee was working in the vicinity of Claimant's fall and concluded that the incident did not arise out of "Footstar's operations". The correspondence further provided that Kmart is not listed as an additional insured on the liability policy for Footstar.

An October 1, 2008 a claim entry notes that discussion with Kmart's attorney indicated that Kmart would determine its position on the tender of its defense and indemnification to Footstar following the deposition of Claimant. Counsel for Kmart agreed that if the cause of the fall was a slippery floor, a circumstance within the responsibility of Kmart, that tender would be withdrawn.

Defense counsel for policyholder Footstar was assigned in October 2008 to defend Footstar in connection with the third-party complaint filed against it by Kmart.

By Agreement dated July 1, 1995 entitled "Master Agreement" Kmart and Melville Corporation, a predecessor to Footstar, agreed to terms and conditions for the operation of footwear departments in various Kmart stores. Paragraph 9.1 of the Master Agreement provides that the personnel working the in footwear departments shall be the employees of Footstar and Footstar will exercise control over the employees including hiring, firing, wages and work procedures and the like. Paragraph 15.1 obligates Footstar to indemnify Kmart for liabilities or claims arising out of Footstar's performance or failure to perform "under this Agreement". This provision also obligates both Footstar and Kmart to obtain liability insurance coverage of specified limits and obligates each to name the other as an additional insured on this coverage. Paragraph 17.1 of the Master Agreement obligates Kmart to "maintain and provide janitor service at its cost for the Footwear Departments".

At the time Footstar entered into the Master Agreement it was in voluntary bankruptcy under Chapter 11. Footstar debtors sought to assume the Master Agreement and this gave rise to a dispute in the bankruptcy proceedings that led to Kmart and Footstar entering a new agreement.

On January 2, 2009 Liberty Mutual received and reviewed the agreement between Kmart and Footstar entitled "Amended and Restated Master Agreement" dated August 24, 2005 (hereinafter the "Agreement"). The significant provisions of the Agreement are as follows:

The Agreement expressly supersedes the Master Agreement with the exception of ¶ 15 of the Master Agreement providing indemnity and additional insured obligations. Article 15 of the Master Agreement survives for all "causes of action" that were or could have been commenced prior to the Effective Date. The Agreement applies to causes of action after the Effective Date (1.2 of the Agreement). The Effective Date is defined in ¶ 8.1 of the Agreement as either the date the Master Agreement is assumed by order of the Bankruptcy Court or by dates in September 2005 provided other conditions are met. For purposes of this coverage analysis the distinctions between the Master Agreement and the Agreement are not relevant. The key indemnity and additional insured provisions of the two agreements are identical. Counsel for Kmart tendered the claims under the Agreement and our analysis here focuses on the Agreement.

Claimant Stretavski was deposed and her deposition testimony was summarized by defense counsel. Claimant testified that at the time of the accident she was in the shoe aisle and someone was nearby placing shoes on the racks. Claimant indicated that she saw empty shoe boxes on the floor and testified that she slid "on something" and fell. Her daughter did not witness the fall. The employee stocking shoes assisted her up. Claimant "did not see anything on the floor in the area where she fell". A day or two later she found what appeared to be a silicone bead from a moisture pack stuck to the bottom of her shoe. Claimant testified that she was in excruciating pain and went to the customer service area of Kmart where she took her shoe off and did not put it back on to leave the store.

The Footstar employee who was stocking shoes nearby was identified as Shonta Scott. Ms. Scott provided a written statement immediately following the accident, Ms. Scott describes the incident as follows: Claimant accidentally knocked over a shoe on display, bent over to pick up the shoe and in the process "her heel twisted and she caught her balance by putting her weight on one knee". Ms. Scott asked Claimant if she was okay, Claimant advised that she was fine and just embarrassed. Ms. Scott helped her up and Claimant walked away with her daughter, laughing about the incident.

By correspondence of September 1, 2009, counsel for Kmart was advised by Liberty Mutual and Footstar that "discovery has definitively demonstrated that the employee (Shonta Scott) allegedly responsible for Claimant's accident was not a Kmart employee but rather she was an employee of Footstar". Counsel for Kmart referred to an arbitration award in the Stretavski suit finding Footstar 75% responsible for the accident, Claimant 25% responsible for the accident and Kmart 0% for the accident and awarding a net award of $30,000. Counsel's correspondence advises that his review of the applicable Liberty Mutual Policy shows an additional insured endorsement extending coverage to Kmart as an entity that Footstar agreed in writing to provide liability insurance coverage.

THE LIBERTY MUTUAL FIRE INSURANCE COMPANY POLICY AT ISSUE

Liberty Mutual Fire Insurance Company (hereinafter "Liberty Mutual") issued Commercial General Liability Policy No. RG2-631-004228-026 to named insured Footstar, Inc. for the period of January I, 2006 to January 1, 2007 (hereinafter "policy"). The policy provides two million dollars personal injury and property damage liability coverage per occurrence with a ten million dollar general aggregate.

By endorsement entitled "General Amendatory Endorsement" the policy definition of Who Is an Insured is amended as follows:

The insurance provided by this amended:

ANALYSIS

The Agreement between Kmart and Footstar provides that the law of Illinois shall apply to govern the interpretation and application of the Agreement. The Agreement governs the business relationship between Kmart and Footstar for operation of footwear departments in Kmart stores including indemnification of Kmart by Footstar in certain circumstances. We apply the law of New Jersey to the issues presented for several reasons. First, the issue whether Kmart is owed defense and indemnification as an additional insured under the policy for the Stretavski suit is a question of policy interpretation and does not arise from the Agreement. Second, the question is presented whether Footstar is owed defense and indemnity under applicable Kmart coverage based on the obligation of Kmart to designate Footstar as an additional insured under the Agreement. This issue is also a question to be resolved by the terms and conditions of the Kmart policy and not the Agreement itself. Finally, to the extent that the indemnity provision of the Agreement are at issue in this coverage analysis, we apply New Jersey law as consistent with principles of contract interpretation of Illinois.

The Agreement between Kmart and Footstar plainly obligates Footstar to obtain liability insurance and to name Kmart as an additional insured on its policy ¶ 18.1 of the Agreement).

Reference to the blanket additional insured portion of the policy provides that Kmart, as an organization for whom Footstar had agreed in writing to provide liability insurance, is an additional insured under the policy.

The scope of the additional insured coverage extended to Kmart is defined as applying only to personal injury "arising out of the work of Footstar. The policy definition of "Your Work" defines Footstar's work as "work or operations performed by you [Footstar] or on your behalf.

The tender letter of Kmart dated May 5, 2008 was made to Footstar and cited the indemnification provision of the agreement The tender made no reference to a claim for additional insured coverage although the letter did direct Footstar to refer the tender to Footstar's insurance carrier. In response to this tender, Liberty Mutual advised counsel for Kmart by correspondence of July 10, 2008 that investigation conducted by Kmart indicated that the slip and fall was apparently caused by Kmart's failure to maintain the floor and did not arise out of Footstar's operations. That correspondence advised that Kmart "is not listed as a named insured and additional insured on our policy". This letter is correct to the extent that Kmart is not scheduled as an additional insured on the policy, however, the blanket additional insured endorsement does not require specific scheduling of Kmart to extend additional insured coverage.

The critical question is whether Kmart, as an additional insured under the policy, is entitled to coverage under the policy for this Stretavski suit. The question turns on whether the allegations against Kmart, as well as the facts to date, show that the accident "arises out of" the operation of the shoe concession by Footstar. We conclude that the very broad interpretation of the phrase "arising out of applied by New Jersey Courts when analyzing additional insured coverage will obligate Wausau to defend and likely indemnify Kmart for the Stretavski suit.

New Jersey Courts have given a very broad and liberal interpretation to policy language pertaining to coverage for additional insured parties for injuries "arising out of work performed by the named insured. The most striking example is the decision of County of Hudson v. Selective ins. Co., 332, N.J. Super. 107 (App. Div. 2000) in which the appellate court analyzed an additional insured provision identical to this one here and determined that additional insured coverage applied. In that case a general contractor was insured under a commercial general liability policy on which Hudson County, which hired the general contractor, was an additional insured. The additional insured endorsement extended coverage for liability "arising out of the work of the named insured general contractor.

The County of Hudson, as a property owner, made claim for additional insured coverage after it was sued for injuries arising from a slip and fall. The named insured was a general contractor on a county construction project that had not yet broken ground. An employee of a sub-contractor, visiting the county courthouse for purposes of obtaining information in order to prepare a bid for the project, slipped and fell and sued the county. The insurer for the general contractor, Selective Insurance, denied coverage to the county because the slip and fall did not "arise out of the work of the general contractor. After noting the broad application of the term "arising out of", the appellate court concluded that additional insured coverage was due to the county because the word "work" was ambiguous in this circumstance and referred to the construction contract between the county and the named insured such that the employee's slip and fall while obtaining information to prepare a bid "arose out of the general contractors work.

The broad interpretation of the "arising out of term resulted in additional insured coverage to the County of Hudson despite that the named insured general contractor was not sued in connection with the accident and could not be liable in tort for that accident because it had no role in the sub-contractor employee's slip and fall.

The broad reading of additional insured coverage including the term "arising out of continues to be applied by New Jersey in various contexts. Franklin Mut. Ins. Co. v. Security Indemnity. Ins. Co., 275 N.J.Super. 335 (App. Div. 1994) (the phrase "arising out of in an additional insured endorsement requires only that there be a "substantial nexus" between the occurrence and the use of the named insured's premises or the named insured's work).

In Staples, Inc. v. Wausau Underwriters Ins. Co., 2004 U.S. App. LEXIS 10790 (3rd Cir. 2004) Wausau initially denied additional insured coverage for an accident involving the employee of named insured Brenner Associates that took place at a Staples store. The employee was injured when a Staples employee swung open a door causing two tables to fall on the employee's back. Staples tendered the employee's lawsuit to Wausau, contending that Staples was an additional insured under a provision extending additional insured coverage for liability "arising out of `your work'". Wausau denied the request for additional insured coverage because the accident appeared to be caused by "independent acts of negligence" of the Staples employee. On appeal of the trial court's summary judgment ruling, counsel for Wausau conceded that Staples was an additional insured under the policy and conceded that the accident "arose out of the work the injured employee was performing on behalf of his employer, the named insured Brenner Associates.

The employee of the named insured injured during the course of his work clearly arises out of the work of the named insured as conceded in the Staples decision. The employee of the subcontractor walking up the courthouse steps to gather information to prepare a bid for the general contractor is factually far removed from the "work" of the named insured general contractor but was deemed to qualify as falling within the general contractor's "work" for purposes of construing the additional insured provision. The cases illustrate the extreme scope that New Jersey courts give to the "arising out of your work language. The facts here arc not as attenuated as the facts in the Hudson County decision. This slip and fall accident took place in the footwear department where Footstar employee Shonta Scott was stocking the shelves nearby. Under the Agreement both Kmart and Footstar have obligations in connection with accidents taking place in the footwear department. Footstar is obligated to supervise its employees and agreed to indemnify Kmart for bodily injury claims arising out of the operation of the footwear department. This broad language suggests Footstar alone is responsible for accident in the footwear department, however, the agreement also obligates Kmart to provide janitorial services for the footwear department. This obligation is significant in this case since the precise cause of the accident is not clearly known but appears to arise from foreign material on the floor or may arise from an overwaxed floor. The available facts demonstrate that both Footstar and Kmart may be responsible for the accident. Both Kmart and Footstar have obligations to maintain the footwear department in a safe condition.

The allegations of the Stretavski Complaint identify a Kmart employee as potentially responsible for claimant's slip and fall. We agree that Liberty Mutual properly denied a defense to Kmart as an additional insured since these allegations do not assert a claim that the accident arose out of the work of Footstar. Subsequent investigation and discovery in the Stretavski suit identified Shonta Scott of a Footstar, not Kmart, employee in the vicinity of claimant's accident. Claimant's deposition testimony indicates that her fail may have occurred when she stepped on a silicon bead that was part of packing material. Considering these additional facts in conjunction with the allegations of the Stretavski suit, we conclude that a potentially covered claim against Kmart is presented, as an additional insured, arising from the work of Footstar. We conclude that Kmart is owed a defense as an additional insured under the policy. The defense obligation incepts, at the earliest, on the date of claimant's deposition testimony of March 26, 2009. Reasonable fees of defense counsel for Kmart from that date to the present must be reimbursed and defense of Kmart provided going forward. In light of the November 9, 2009 trial date the defense would likely have to remain with current defense counsel for Kmart

Whether Kmart is entitled to indemnification as an additional insured for any settlement or judgment will turn on the facts underling liability. At this point, where discovery and investigation appears to be completed, we conclude that Kmart will likely be entitled to indemnification as an additional insured. The facts show that Footstar employee Shonta Scott was the only employee in the immediate vicinity of claimant's accident. Claimant's testimony asserts that she found a silicon bead on the sole of her shoe at some point following the accident. Kmart, not Footstar, could face liability for the accident if there was some proof that claimant slipped on an overwaxed floor or other condition that is the responsibility of Kmart to provide janitorial service in the footwear department For example, if shoe packaging material is left on the floor for a sufficient amount of time that Kmart should have been aware of this condition and cleaned it, then Kmart's liability for the accident is clearly presented. Our review of the record indicates that there are no facts pointing to Kmart's negligence in providing janitorial services as the cause of the accident. We acknowledge that we have not reviewed all discovery (we reviewed a summary of deposition testimony not the transcripts themselves) and accordingly we wish to make clear that the conclusion Kmart is likely entitled to indemnification as an additional insured is a tentative conclusion subject to close review of the precise circumstances of the cause of the accident.

A question is raised in the coverage referral as to whether Kmart's tender of May 5, 2008 is sufficiently late to forfeit coverage to Kmart as an additional insured. Kmart was served in the Stretavski suit in December 2007 and waited five months before tendering to Footstar. In order to forfeit additional insured coverage under the policy Liberty Mutual must prove that it suffered "appreciable prejudice" as the result of the five-month (December 2007 to May 2008) delay in notification from Kmart. Appreciable prejudice under New Jersey law is defined as the irretrievable loss of facts that would support a defense to coverage or the irretrievable loss of facts supporting defenses to the slip and fall lawsuit. Based on the coverage analysis in this report we conclude that Liberty Mutual did not lose any available coverage defenses as a result of the delay. There is no indication that any information was lost or made unavailable due to the delay that would have impacted the coverage analysis here. We also conclude that the delay did not result in the loss of facts or evidence supporting a defense of Kmart in the slip and fall case. Kmart was represented by counsel immediately following the service of the Stretavski suit and there is no indication that counsel's representation of Kmart during the period of the delay was inadequate or resulted in the loss of information supporting a defense of Kmart. We conclude that the five-month delay in providing notice to Liberty Mutual did not result in "appreciable prejudice" sufficient to forfeit additional insured coverage to Kmart. See, Cooper v. Government Employees Ins. Co., 51 N.J. 86, 94 (1068).

The Agreement imposed a mutual obligation on Kmart and Footstar to add the other as an additional insured on their respective liability insurance policies. As noted, the original allegation of the Stretavski suit was confined to the assertion that a Kmart employee may have been responsible for the accident. In defending that claim Kmart denied responsibility and brought a Third-Party Complaint against Footstar. The basis of Kmart's claim appears to be the identification of the employee in the vicinity of the accident as Shonta Scott, a Footstar employee. Ms. Scott's deposition testimony confirmed that her recollection of the incident was set forth in the Kmart investigation report containing her statement that was made soon after the incident. In sum, Ms. Scott's version of the events is that claimant lost her balance while picking up a shoe that she had knocked over. This statement does not suggest that a foreign object on the floor, or the condition of the floor, caused the slip and fall. Once Footstar was sued as a third-party on the basis that its employee was responsible for the accident, Footstar had a right to tender its defense and indemnification to Kmart's liability insurer based on Footstar's status as an additional insured. We do not have the benefit of the Kmart liability policy and accordingly cannot offer any certain opinion whether the scope of additional insured coverage extended to Footstar under that policy would obligate Kmart to defend and indemnify the Stretavski suit. We suspect that the language of the Kmart insurance policy, if it is in fact an insurance policy and not a self-insured retention, includes language similar if not identical to the additional insured provisions of the policy. Based on these circumstances we recommend that defense counsel for Footstar immediately tender a request to Kmart for defense and indemnification of Footstar as an additional insured pursuant to ¶ 18.1 of the Agreement. That tender should also request a complete copy of the Kmart liability insurance policy. We recognize that the issue of "late notice" is presented by the proposed tender at this eleventh hour. Based on the difficult "appreciable prejudice" standard discussed above, we believe it is unlikely that Footstar would forfeit additional insured coverage based on the delay in tender. The critical facts for determining whether either Kmart or Footstar are entitled to additional insured coverage turn on the precise circumstances of the accident. While the facts as a whole point more to potential responsibility of Footstar for the accident, the statement of Shonta Scott indicating that claimant slipped and fell as she was picking up a shoe from the floor, points to the potentially liability of Kmart for maintaining the area (an overwaxed floor or notice to Kmart that packing material was on the floor sufficient to have obligated Kmart to clean that material up).

The indemnity obligation imposed on Footstar in ¶ 18.1 of the Agreement is one-sided. There is no obligation of Kmart to indemnify Footstar to liability arising out of Kmart's operations. We read the scope of Footstar's indemnity obligation to Kmart as broadly as the scope of additional insured coverage owed to Kmart. The indemnity obligation does not narrow the scope of additional insured coverage. See, Krastanov v. K. Hovnanian, 2008 N.J. Super. Unpub. LEXIS 1350 (App. Div. 2008). We note that Footstar is currently being defended under the policy as to the allegations of the Third-Party Complaint including the allegation that Footstar breached the contractual obligation to indemnify Kmart. We agree that Footstar is properly being defended as to this claim.

RECOMMENDATIONS

We recommend immediately contacting counsel for Kmart to advise that Liberty Mutual has accepted the defense of Kmart. Due to the November 9, 2009 trial date we recommend that counsel for Kmart initially be contacted by phone. I would be happy to call counsel. The purpose of the call would be to advise that Liberty Mutual agrees to defend Kmart and to further coordinate the defense of Kmart going forward. The points to be made in this initial discussion are as follows:

Immediately following this discussion with defense counsel Liberty Mutual should send a reservation of rights fetter confirming the agreement to defend Kmart, confirming defense counsel rates and confirming the dismissal of the declaratory action against Liberty Mutual.

Appointed defense counsel for Footstar is currently defending Footstar as to all claims in the Third-Party Complaint. Defense counsel should appear and defend Footstar in the declaratory action since several of the claims in the declaratory complaint (common law indemnification, statutory joint tortfeasor contribution) trigger a defense obligation and are the same claims being defended. Perhaps defense counsel can negotiate a dismissal of the declaratory complaint in light of the duplication of the claims against Footstar in that action.

We further recommend tendering the Stretavski lawsuit against Footstar to Kmart under the Kmart liability insurance policy that extends coverage to Footstar as an additional insured. Our recommendation to tender to Kmart is not aimed at a tactical advantage but is based on the terms of the Agreement, at ¶ 18.1, obligating both Footstar and Kmart to name the other as additional insureds. The uncertain cause of claimant's slip and fall presents the potential that either or both Footstar and Kmart will be liable in tort for the accident. If defense counsel for Footstar has not done so already, we recommend that defense counsel immediately request a copy of the applicable Kmart liability insurance policy in place for this accident.

We are available to prepare the reservation of rights letter to Kmart and the tender letter to the liability insurer for Kmart. Candidly, in light of the upcoming trial date a discussion between Liberty Mutual and Kmart may be the most effective way of resolving the issues raised by the mutual additional insured obligations.

We remain available to assist you on this file as needed.