ACCIDENTS OR OCCURRENCES
Illinois law follows a two-step analysis of "occurrence." First, was the harm "expected" or "intended" by the insured? Second, did the harm result from an "accident?" Aetna Cas. & Sur. Co. v. Freyer, 89 Ill. App.3d 617, 619, 411 N.E.2d 1157 (1980)(defining "accident" as "an unforeseen occurrence of untoward or disastrous character"). The natural and ordinary consequences of an act are not an "accident." Id. at 619. An “accident:” is an “unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character.” Monticello Insurance Company v. Wil-Freds Construction, Inc., 661 N.E.2d 451, 455 (Ill. App. 1996).
The terms "expected" and "intended" have been held to be unambiguous and to have separate and distinct meanings. Thornton v. Illinois Founders Ins. Co., 84 Ill.2d 365 (1981). An insured will be deemed to have "intended" harm if he subjectively meant to cause it. By contrast, the 7th Circuit held in Mutual Service Cas. Ins. Co. v. Country Life Ins. Co., 859 F.2d 548, 552 (7th Cir. 1988) that "expected" meant "reasonably anticipated." Thus, where damages are the ordinary and foreseeable consequence of deliberate actions, Illinois courts have held that they were "expected" even in the absence of subjective intent to cause injury. Monticello Ins. Co. v. Wil-Freds Construction Co., Inc., No. 2-95-0466 (Ill. App. February 1, 1996); Bay State Ins. Co. v. Wilson, 96 Ill.2d 487, 451 N.E.2d 880 (1983); Aetna Cas. & Sur. Co. v. Freyer, 89 Ill. App.3d 617 (1980) and Aetna Cas. & Sur. Co. v. Dichtel, 78 Ill. App.3d 970 (1983).
Although lack of mental capacity is a defense to a claim of intentional harm, voluntarily induced incapacity is not. Prudential Property & Cas. Co. v. Kerwin, 215 Ill. App.3d 11056, 576 N.E.2d 94 (1991). See also American Family Mutual Ins. Co. v. Chiczewski, No. 2-97-1228 (2nd Dist. September 14, 1998)(dicta).
A subjective intent to injure may be inferred as a matter of law in cases of sexual abuse. In Western States Ins. Co. v. J.R., 644 N.E.2d 486 (Ill. App. 1994), the court further ruled that it was not against public policy to deny indemnification to child molesters. While expressing sympathy for the victims of such insureds, the court ruled that "economic liability should be placed with the same precision as moral liability is placed--squarely on the shoulders of the abuser." See also Scudder v. Hanover Ins. Co., 559 N.E.2d 559 (Ill. App. 1990)(no coverage for sexual assault claims). In particular, an intent to harm will be inferred as a matter of law in cases of sexual misconduct involving minors. State Farm Fire & Casualty Company v. Watters, 644 N.E.2d 492, 496 (Ill. App. 1994). In such cases, an intent to injure will be inferred from the nature of the insured’s conduct.
An intent to injure should not be automatically inferred in sexual molestation cases where the perpetrator is a minor, however. In Country Mutual Ins. Co. v. Hagan, No. 2-97-1058 (Ill. App. July 31, 1998), the Appellate Court ruled that a case by case approach should be undertaken to assess whether the child intended to cause injury. Further, the court refused to find that the underlying molestation incident could not be an “accident” as the underlying complaint did not specifically allege that the insured had meant to cause injury and, in fact, alleged that the fourteen year old boy had been negligent in avoiding the sort of conduct that gave rise to her allegations of emotional distress.
Allegations that a medical society conspired with various pedicle screw manufacturers to conceal products hazards were held to fall outside the scope of “occurrence” coverage in Atlantic Mut. Ins. Co. v. American Academy of Orthopedic Surgeons, 734 N.E.2d 50 (Ill. App. 2000).
Allegations of intentional housing discrimination were held not to allege a covered "occurrence" in Commercial Union Ins. Co. v. Image Control Property Management, Inc., 918 F.Supp. 1165 (M.D. Ill. 1996).
Some Illinois courts have ruled that there is at least a duty to defend where a suit makes claims of negligent acts that took place independently of the intentional conduct. See USF&G v. Open Sesame Child Care Center, 819 F.Supp. 756 (N.D. Ill. 1993) (insurer must provide coverage for allegation that day care operator negligently hired employees who committed sexual assaults). In Open Sesame, a federal district court in Illinois ruled that allegations that an employer had negligently hired an employee who molested children in a day care center were covered, although the allegations of vicarious liability were not since the molester's intent would be imputed to the employer under principles of respondeat superior. Accord Lutheran Church in America v. Atlantic Mutual Ins. Co., 169 F.3d 947 (5th Cir. 1999)(allegations that the insured was negligent in training and supervising a Lutheran minister who sexually assaulted a learning disabled adult were covered notwithstanding the intentional nature of the act resulting in the underlying claimant’s injuries).
In GATX Leasing Corporation v. National Union Fire Insurance Company, 64 F.3d 1112, 1118 (7th Cir. 1995), the U.S. Court of Appeals for the Seventh Circuit, applying Texas law, ruled that the insured’s negligent failure to prevent employee’s intentional act not transform claim into one for an “occurrence.”
Under Illinois law, even intentional violations of civil rights statutes may constitute an "occurrence" as long as the injuries were not specifically intended or expected. Argento v. Village of Melrose Park, 838 F.2d 1483, 1498 (7th Cir. 1988); Illinois Farmers Ins. Co. v. Preston, 505 N.E.2d 1343 (Ill. App. 1987).
The mere fact
that a negligence claim may be set forth does not itself mandate “occurrence”
coverage, however. The Appellate Court has declared that allegations
of negligence do not give rise to a duty to defend if the conduct giving
rise to the claim was intentional. State Farm Fire & Casualty
Co. v. Watters, 644 N.E.2d 492, 498 (Ill. App.
breach of contract resulting from the insured’s installation of a defective
EIFS insulation system were held not to arise out of an “occurrence” in
American Fire and Casualty Company v. Broeren Russo Construction, 54 F.
Supp.2d 842 (C.D. Ill. 1999). In Boren Russo, the District Court
declared that the natural results of negligent and unworkmanlike construction
do not constitute an “occurrence.” Id at 846. Similarly, in
West American Insurance Company v. Keno & Sons Construction, Inc.,
2000 U.S. Dist. LEXIS 2181 (N.D. Ill. February 25, 2000), Judge Kocoras
ruled that allegations that a water main ruptured as a consequence
of a subcontractor’s failure to construct the water reservoir as agreed
did not allege an “occurrence. The issue is not whether the
water main rupture was not the result of negligence or an intentional act
but rather that the rupture was unforeseeable or unexpected, which it was
Supreme Court has ruled that the older "caused by accident" policy is not
limited to events of brief duration, declaring in Canadian Radium and Uranium
Corporation v. Indemnity Ins. Co., 104 N.E.2d 250 (Ill. 1952), that the
policies extend coverage to claims in which the plaintiffs allege occupational
exposure to radium over a seventh month period.
ALLOCATION AND SCOPE ISSUES
An insurer is only responsible for occurrences within the scope of its coverage. Thus, where only part of the settlement relates to occurrences within the policy period, the settlement must be apportioned by determining which occurrences fell within the period of coverage. Fidelity & Casualty Co. of New York v. Mobay Chemical Corp., 625 N.E.2d 151, 159 (Ill. App. 1992). In Mobay, the Appellate Court ruled that it was the insured's burden to establish how its settlements relate to the periods for which coverage was claimed. See also St. Michael's Orthodox Catholic Church v. Preferred Risk Mutual Ins. Co., 146 Ill. App.3d 107, 496 N.E.2d 1176 (1986) (water loss apportioned on basis of amount of injury occurring during and outside of policy).
The Appellate Court has ruled in two recent cases that insurers are only responsible for that portion of damages corresponding to injury in their policy periods and that the insured is itself responsible for periods of time for which it self-insured or failed to purchase insurance. the court rejected the insureds' argument that they should be entitled to pick and choose on a "joint and several" basis or that it could recover in full from any single insurer based on the promise to pay "all sums." See Outboard Marine Corp. v. Liberty Mutual Ins. Co., 670 N.E.2d 740 (Ill. App. 1996)(pollution) and Missouri Pacific Railroad Co. v. International Ins. Co., 679 N.E.2d 801 (Ill. App. 1997)(noise-induced hearing loss claims). In Missouri Pacific, the court ruled that allocation should be done on the basis of scientific evidence, if possible, but that it might otherwise be done on a "time on the risk" basis where more precise allocation was impossible.
More recently, the Appellate Court ruled in Illinois Central Railroad v. Acc. & Cas. Co. of Winterthur, 739 N.E.2d 1049 (1st Dist. 2000) that a class action for employment discrimination must be allocated across the period of time that discrimination occurred, using a “time on the risk” allocation for cases in which the dates of discrimination were not known.
Several courts have suggested that these rulings are inconsistent with earlier language in the Illinois Supreme Court’s ruling in Zurich v. Raymark Industries, Inc., 514 N.E.2d 150 (Ill. 1987), which had suggested that pro-ration was not permitted. See Illinois Power Co. v. Home Ins. Co., Macon No. 95-L-284 (Ill. Cir. Ct. August 15, 1997) and Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyds, Middlesex No. 94 07495 (Mass. Super. January 7, 1999)(applying Illinois law).
Where an insured has already obtained payment of certain attorney’s fees from one settling insurer, it cannot obtain a double recovery of the same fees pursuant to a judgment against a non-settling insurer. Illinois Tool Works, Inc. v. The Home Indemnity Co., 24 F.Supp.2d 851 (N.D. Ill. 1998). Also, in Ranger Ins. Co. v. Safety-Kleen Corp., 814 F.Supp. 744 (N.D. Ill. 1993), the court rejected Ranger's argument that it should be entitled to reimbursement for additional amounts that it was forced to pay in the settlement because of the insolvency of an earlier insurer, holding that "drop down" case law was not analogous to this "move over" situation. The court held that Ranger was obligated to indemnify Safety-Kleen up to the limits of its policy and could not claim an off set for amounts relating to a policy year that it did not insure.
On the other hand, the Appellate Court ruled in Benoy Motor Sales, Inc. v. Universal Underwriters Ins. Co., 679 N.E.2d 414 (Ill. App. 1997) that a trial court had erred in finding that a liability insurer was only responsible for that share of a pollution liability settlement corresponding to the amount of oil that the insured had shipped to a site while the policy was in effect. Noting that "environmental pollution does not stop and start in discrete time periods," the Fourth Division ruled that the insurers were jointly and severely liable for pollution if any part of it occurred during the period of their coverage.
Efforts to allocate defense costs between covered and uncovered claims were rejected in Bedoya v. Illinois Founders Insurance Company, 688 N.E.2d 757, 762 (Ill. App. 1997). Similarly, the court ruled in International Insurance Company v. Rollprint Packaging Products, Inc., 2000 Ill. App. LEXIS 214 (1st Dist. March 31, 2000), that an insurer was obligated to pay the entire cost of defending a case even if only a small portion of the claims were covered. The court rejected International’s contention that it should only be obligated to reimburse the insured for those fees that were specifically related to the single count upon which coverage had been found.
The Appellate Court later ruled in Board of Education v. International Ins. Co., 720 N.E.2d 622 (Ill. App. 1999), a first party asbestos case, that any insurer on the risk “is jointly and severally liable to the extent of its policies’ limits for the costs of removing the friable, fiber-releasing asbestos materials present during the trigger period.”
In a ruling with troubling implications for allocation and contribution claims, the U.S. Court of Appeals for the Seventh Circuit has declared in Employers Ins. of Wausau v. James McHugh Construction Co., 144 F.3d 1097 (7th Cir. 1998), that an insured has the right to selectively tender the defense of a liability claim to a single insurer, whether or not it may also be entitled to coverage under other policies, and that in such circumstances, the failure of the insured to tender the claim to other insurers bars any right of contribution or equitable subrogation against the other insurers. (The Illinois Supreme Court has since ruled in Cincinnati Companies v. West American Ins. Co., 711 N.E.2d 499 (Ill. 1998) that an insured may selectively tender a claim). the court refused to find that the insured had breached its duty to cooperate with Wausau by failing to tender to the other carriers nor was such conduct found to be in breach of a separate policy condition requiring the insured to cooperate with the carrier in pursuing rights of subrogation. Finally, the court declared that Wausau had no right of equitable contribution against the other insurers since the insured’s failure to put them on notice of the original claims or tender the claims to them included coverage and therefore negated any separate rights of contribution on the part of the insurer.
The Seventh Circuit’s analysis in McHugh followed on a line of cases beginning with the Appellate Court’s ruling in Institute of London Underwriters. This authority was distinguished by the Appellate Court in American Country Ins. Co. v. Kraemer Brothers, No. 1-97-0032 (Ill. App. August 6, 1998). The court found that if the policy contained a clause requiring the insured to “promptly tender the defense of any claim made or suit to any other insurer which also has available insurance for a loss which we cover...,” the insured’s failure to do so was a breach of the policy’s cooperation clause.
Several Illinois courts have adopted a requirement of "horizontal exhaustion" in continuous trigger cases, requiring all potentially applicable primary policies to be exhausted before the insured may claim coverage under any excess policy. Missouri Pacific Railroad Co. v. International Ins. Co., 679 N.E.2d 801 (Ill. App. 1997)(NIHL); U.S. Gypsum Company v. Admiral Ins. Co., 643 N.E.2d 1226 (Ill. App. 1994), appeal denied (Ill. 1995)(asbestos); Continental Cas. Co. v. Armstrong World Industries, Inc., 776 F.Supp. 1296 (N.D. Ill. 1991).
Appellate Court refused to permit apportionment of defense costs in JG
Industries, Inc. v. National Union Fire Ins. Co. of Pittsburgh, 578 N.E.2d
1259 (Ill. App. Ct. 1991).
has both an intermediate appellate court and a state Supreme Court.
The Appellate Court is divided into several separate divisions by geographic
Unfair or deceptive consumer practices are proscribed by Ill. Rev. Stat. ch. 815, 505/1 (Smith-Hurd 1993)
Insurers may also be subject to penalties Section 155 of the Illinois Insurance Code, Ill. RSA c.73 § 767 for "vexatious and unreasonable" delays in claims handling. Section 155 provides:
(1) In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:
(a) 25% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs;
(c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action." 215 ILCS 5/155(1).
The Appellate Court of Illinois ruled in Nelles v. State Farm, No. 1-00-159 (Ill. App. December 27, 2000) that the statutory penalty for vexatious conduct by an insurer under Section 155 cannot exceed $25,000, rejecting the insured’s argument that subsection (b) of the statute merely provided one of three alternative remedies.
The Illinois Supreme Court has ruled that the purpose of section 155 is to provide a remedy for insurer misconduct. " ' Although some companies are very liberal in the payment of claims, this is by no means true of all. In the absence of any allowance of attorneys' fees, the holder of a small policy may see practically his whole claim wiped out by expenses if the company compels him to resort to court action, although the refusal to pay the claim is based upon the flimsiest sort of a pretext. The strict limit on the amount allowable makes the section significant only for small claims. It should prove wholesome in its effect upon companies unreasonably withholding payment of such claims. It is doubtful if there are many judges who would allow such fees when the defense was bona fide although deemed inadequate.' " Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 520-21 (1996).
An insurer is not liable for attorney fees under section 155 merely because it litigated, and lost, the issue of insurance coverage. If the insurer is found to be vexatious and unreasonable in refusing to process a claim, however, section 155 authorizes the court to award fees and costs. Valdovinos v. Gallant Insurance Company, No. 2-99-0799 (Ill. App. July 7, 2000) and Mobil Oil Corp. v. Maryland Casualty Co., 288 Ill. App. 3d 743, 751-52 (1997). A court should consider the totality of the circumstances when deciding whether an insurer's actions are vexatious and unreasonable. Factors to consider are the insurer's attitude, whether the insured was forced to sue to recover, and whether the insured was deprived of the use of his property. If a bona fide dispute existed regarding the scope of the insurance coverage, an insurer's delay in settling the claim may not violate section 155. 288 Ill. App. 3d at 752.
The Illinois Supreme Court ruled in Cramer that Section 155 does not necessarily preempt a first party insurer's ability to pursue common law tort claims for bad faith. However, the tort claim must be based on conduct independent of the decision to deny coverage. Mere allegations of bad faith and fair dealing will not, in and of themselves, support a claim in tort. Earlier cases had split on this issue. See Bagcraft Corp. of American v. Federal Ins. Co., 848 F.Supp. 115 (N.D. Ill. 1994) and Daubert Chemical Co. v. CIGNA Property and Casualty Co. No. 90-C-6587 (N.D. Ill. June 19, 1991)(preempted). But see National Union Fire Ins. Co. v. Continental Illinois, 673 F.Supp. 267, 270 (N.D. Ill. 1987)(doesn't preempt claims for bad faith failure to settle third party claims).
An insurer's denial of coverage is not a per se violation of Section 155. Deverman v. County Mutual Ins. Co., 371 N.E.2d 1147 (Ill. App (4th Dist.) 1977). Nor will liability arise where the insurer reasonably relies on substantive coverage defenses Scudella v. Illinois Farmers Ins. Co., 528 N.E.2d 218 (Ill. App. (1st Dist.) 1988) or where there is otherwise a bona fide dispute between policyholder and insurer. Butler v. Economy Fire & Cas. Co., 557 N.E.2d 1281 (Ill. App. (2d Dist.) 1990). Section 155 preempts any common law remedy based upon an implied duty of good faith as well as any right to recover punitive damages for unfair claims handling. Combs v. Ins. Co. of Illinois, 497 N.E.2d 503 (Ill. App. (1st Dist.) 1986).
The Appellate Court ruled in Avery v. State Farm Mutual Automobile Insurance Company, No. 5-99-0830 (Ill. App. April 5, 2001) that a trial court acted properly in certifying the “after market parts” bad faith class action against State Farm that yielded a $1.2 million bad faith verdict in 1999. Further, the Fifth District ruled that the verdict was supported by evidence that State Farm had wilfully engaged in deceptive practices around the country with respect to the use of “after market parts” to repair insured vehicles and that the award of damages was neither speculative nor motivated by passion or prejudice. The Appellate Court did rule, however, that the trial court erred in imposing a constructive trust on $130 million in disgorgement damages on the plaintiffs’ consumer fraud claims as this equitable remedy was duplicative of the legal damages otherwise awarded to the plaintiffs.
A primary insurer may be liable for the full amount of the judgment, including the amount in excess of its policy limits, if it failed to settle the claim within policy limits due to fraud, negligence or bad faith. Adduci v. Vigilant Ins. Co., 424 N.E.2d 645, 648 (Ill. App. 1981). The primary insurer cannot ignore its obligation to explore a settlement within policy limits merely because the plaintiff has failed to explicitly make a demand within policy limits. Westchester Fire Insurance Company v. General Star Indemnity Company, 97 4035 (7th Cir. June 16, 1999).
The insurer's obligation to settle within policy limits is a fiduciary one which requires the insurer to give its insured's interests at least as much respect as its own. La Rotunda v. Royal Globe Ins. Co., 408 N.E.2d 928, 935-36 (Ill. App. 1980). The insurer is not required to submit to extortion and may reject a bad deal without waiving the protection of its policy limit, however. Further, the existence of a coverage dispute is a factor to be considered in assessing whether an insurer may be liable for failure to settle within policy limits. Stephenson v. State Farm Fire & Casualty Co., 628 N.E.2d 810, 813 (Ill. App. 1993). Finally, a demand to settle within policy limits is a necessary precondition to a lawsuit against an insurer for negligent failure to settle. Ranger Ins. Co. v. Home Indemnity Co., 741 F.Supp. 716, 718 (N.D. Ill. 1990).
When an insurer chooses to defend its policyholder, it must provide an effective defense and must not put its own interests ahead of those claiming to be insureds. Briseno v. Chicago Union Station Company, 557 N.E.2d 196 (Ill. App. 1990). An insurer that provides an inadequate defense, causing prejudice to its policyholder, will be estopped to assert defenses to any indemnity obligation. Maryland Casualty Company v. Peppers, 355 N.E.2d 24 (Ill. 1976).
In California Union Ins. Co. v. Liberty Mutual Ins. Co., 920 F.Supp. 908 (N.D. Ill. 1996), a federal district court ruled that the insurer's fiduciary duty to protect its insured against the possibility of an excess verdict included an affirmative obligation to initiate settlement negotiations to explore the possibility of a settlement within policy limits. Although an insurer ordinarily has no affirmative obligation to make an offer to settle, such an obligation does arise where the probability of an adverse finding on liability is great and the amount of probable damages would greatly exceed the primary coverage. Aducci, 424 N.E.2d at 649 and Kavanaugh v. Interstate Fire & Casualty Co., 342 N.E.2d 116, 121 (Ill. App. 1975).
Indeed, the Appellate Court has ruled that the duty to settle is implied in law to protect the policyholder from exposure to liability in excess of coverage as a result of the insurer’s gamble on which only the policyholder may lose. Haddick v. Valor Insurance Company, No. 3-00-0027 (Ill. App. August 14, 2000). When an insurer breaches that duty by refusing to settle, the insurer may be liable for the full amount of the judgment against the policyholder, regardless of the policy limits. Kramer v. Insurance Exchange Agency, 675 N.E. 2d 897, 903 (1996). Thus, the Illinois Supreme Court has ruled that the insurer’s exclusive control over the defense and settlement create a duty of good faith to respond to settlement offers and that an insurer who is defending a case may not arbitrarily refuse a settlement within policy limits. Krutsinger v. Illinois Casualty Company, 141 N.E. 2d 16, 21 (Ill. 1957). Nevertheless, an insurer may not be held liable in bad faith for refusing to settle within policy limits if the insurer has in fact offered to settle and has been refused for no reason. Brocato v. Prairie State Farmers Insurance Association, 520 N.E. 2d 1200 (4th Dist. 1988).
A primary insurer that negligently fails to settle may be liable to an excess insurer for the amount that the excess insurer is forced to pay as a result of its negligence.Westchester Fire Insurance Company v. General Star Indemnity Company, 97 4035 (7th Cir. June 16, 1999). In Schal Bovis, Inc. v. Casualty Insurance Company, No. 1-96-2968 (1st Dist. May 21, 1999), the First District ruled that the excess carrier could pursue a claim both on a theory of equitable subrogation and based on a direct duty of care owed by the primary insurers to it. Further, the court ruled that the diminution of the excess carrier’s limits was an element of damages for which the insured could claim recovery, although it left open the issue of whether the amount of damages should be the amount that Northbrook’s limits were reduced by its payments merely the pro-rated cost of the Northbrook coverage if the limits were not actually exhausted by future claims.
A federal district court in Illinois has predicted that California courts will not extend the duty of good faith and fair dealing to actions between insurers, particularly in the reinsurance context. Stonewall Insurance Company v. Argonaut Insurance Company, 75 F.Supp.2d 893 (N.D. Ill. 1999).
An insurer that has refused to afford coverage will be bound by a good faith settlement if its policy is ultimately found to apply. In such circumstances, the insured takes the risk that it will be obligated to pay a settlement for which insurance is unavailable and therefore will have every incentive to drive a hard bargain. By contrast, an insurer will not be held liable for a settlement that extinguishes any personal liability on the part of the insured. Citizens Electric Corp. v. Bituminous Fire & Marine Ins. Co., 68 F.3d 1016, 1021 (7th Cir. 1995) (Illinois law) and Charter Oak Fire Ins. Co. v. Color Converting Industries Co., 45 F.3d 1170 (7th Cir. 1995). On the other hand, an insurer is not strictly liable for even a reasonable settlement if it has a reasonable basis for disputing coverage and need not offer its policy limits. Stephenson v. St. Farm Fire & Casualty Co., 257 Ill. App. 3d 179, 184, 628 N.E.2d 810 (1993), review denied, 155 Ill. 2d 577 (1994).
A third-party tort claimant has no right to assert bad faith claims against the tortfeasor’s liability insurer. Squagans v. Allstate Insurance Company, 393 N.E.2d 718 (Ill. App. 1979).
Insurers that issued overlapping liability policies did not owe each other any good faith obligations in paying their policy limits to settle some but not all of the underlying claims, leaving the other insurer to defend the remaining aspects of this suit. Country Mutual Ins. Co. v. Anderson, 628 N.E.2d 499 (Ill. App. 1993).
A good faith settlement that extinguishes the underlying claims against certain insureds in exchange for payment of full policy limits extinguishes the insurer’s obligations with respect to all of its policyholders even if certain claims remain with respect to some of these insureds. Pekin Insurance v. Home Insurance Company, 479 N.E. 2d 1078 (Ill. App. 1985) and Country Mutual Insurance Company v. Anderson, 628 N.E.2d 499, 501 (Ill. App. 1993). It is important that the insurer seek to include all of its policyholders in the settlement, however, and not to discriminate between its policyholders with respect to the manner in which the defense is conducted.
A cause of
action for reverse bad faith was seemingly recognized by the Seventh Circuit.
Twin City Fire Ins. Co. v. Country Mutual Ins. Co., 23 F.3d 1175, 1180
(7th Cir. 1994) (Illinois law)(recognizing that good faith is a reciprocal
duty). The court has since opined in Willis Corroon Corporation v.
Home Insurance Company, No. 99-1799 (7th Cir. February 10, 2000), however,
that Illinois law will not recognize a claim for reverse bad faith.
The Appellate Court has ruled that "bodily injury" requires "actual physical injury" and does not encompass mental anguish or mental disease. University of Illinois v. Continental Cas. Co., 599 N.E.2d 1338, 1353 (Ill. App. 1992). But see Kufalk v. Hart, 636 F.Supp. 309 (N.D. Ill. 1986)("bodily injury" held to encompass claims for emotional distress under 42 USC §1983). Kufalk was distinguished by the Appellate Court in International Ins. Co. v. Allied Van Lines, Inc., 1997 Ill. App. LEXIS 781 (1st Dist. November 17, 1997)(emotional distress resulting from age discrimination held outside scope of CGL coverage) since, apart from the issue of whether emotional distress is a "bodily injury," any such claims could not give rise to damages as damages for mental suffering are not recoverable under the Age Discrimination in Employment Act of 1967. Further, the fact that the plaintiff's emotional suffering might have suffered from their economic loss did not turn that economic loss under the ADAA into one seeking recovery for "bodily injury."
Cour has ruled in Fremont Casualty Insurance Company v. Ace-Chicago Great
Dane Corporation, 2000 Ill. App. LEXIS 837 (1st Dist. October 26, 2000)
that a Chicago court erred in declaring that a liability insurer had a
duty to defend negligent spoliation claims against a product manufacturer
for having failed to save the ladder that injured the plaintiff.
The First District ruled that the damages that the plaintiff sought in
his negligent spoliation action were not for bodily injury but rather were
based upon the plaintiff’s negligent handling of evidence that impeded
the plaintiff’s ability to prove its cause of action against the insured.
“The inability to prove a cause of action against a third party does not
fall within the plain and ordinary meaning of the term bodily injury.”
BREACH OF POLICY CONDITIONS
A notice of suit requirement in a policy enables the insured to conduct a timely and thorough investigation of the insured’s claim and to participate in the defense of its policyholder. American States Insurance Company v. National Cycle, Inc., 631 N.E.2d 1292, 1300 (Ill. App. 1994) and Cincinnati Insurance Company v. Baurs Opera House, 694 N.E.2d 593, 596 (Ill. App. 1998).
Absent a valid justification for failing to give notice of an occurrence or suit, the insured’s failure will defeat coverage. American Country Insurance Company v. Efficient Construction Corporation, 587 N.E.2d 1073, 1075 (Ill. App. 1992). In considering whether the insured had a valid excuse for its delay, Illinois courts will consider (1) the specific language of the policy; (2) the insured’s relative commercial sophistication; (3) the insured’s awareness that a “suit” had been filed; and (4) the insured’s diligence and reasonable care after learning that a suit had been filed in ascertaining whether policy coverage was available. Ankus v. Geico, 674 N.E.2d 865, 870 (Ill. App. 1996).
Ignorance as to the availability of coverage is not an excuse for delayed notice where the insured was a sophisticated business and had the ability to consult with counsel if it had chosen to. The Appellate Court ruled in Northbrook Property & Casualty Insurance Company v. Applied Systems, Inc., No. 1-98-1170 (Ill. App. May 17, 2000) that a trial court did not err in ruling that a computer software manufacturer failed to give timely notice of a competitor’s copyright infringement suit. The First District ruled that the insured’s two-year delay in providing notice was not justified by the insured’s subjective belief that it was not covered for intentional torts and did not realize that Coverage B might apply until the plaintiff issued a third request for production of documents seeking information concerning the insured’s marketing of the infringing software. The court ruled that the insured was a commercially sophisticated business represented by counsel and had failed to act as a reasonably prudent insured in assuming that there was no insurance coverage and failing to give notice of the plaintiff’s suit to Northbrook. If the insured had not understood the scope or availability of insurance coverage, it could easily have consulted with someone more expert in such matters.
Prejudice is not required but is one of several factors that are considered to determine whether the insured's delay was unreasonable under the circumstances. Barrington Consol. High School v. American Ins. Co., 58 Ill.2d 278, 281, 319 N.E.2d 25 (1974). The absence of prejudice to the insurer is not determinative of this issue but is one of the most significant factors to be determined in evaluating the question of reasonableness. U.S. Fidelity & Guaranty Co. v. Maren Engineering Corp., 82 Ill. App.3d 894, 403 N.E.2d 508 (1980). Courts applying Illinois law have used a sliding scale in measuring the lack of prejudice against the reasonableness of the delay. American Institute of Architects v. Interstate Fire & Cas. Co., 986 F.2d 1444 (D.C. Cir. 1993)(applying Illinois law).
A stricter standard is applied to late notice of a claim or suit. In general, while the issue of prejudice will be considered in determining whether notice of an "occurrence" was unreasonably delay, prejudice may not be considered in assessing whether the insured's failed to give "immediate" notice of a claim or suit. Highlands Ins. Co. v. Lewis Rail Serv. Co., 10 F.3d 1247, 1250 (7th Cir. 1993); Transamerica Ins. Co. v. Interstate Pollution Control, No. 91-37-2380 (N.D. Ill. June 16, 1995).
Similar rules have been applied in assessing late notice defenses by excess insurers. Thus, delay in giving notice to excess insurer was held not unreasonable in Hartford Acc. & Ind. Co. v. Rush-Presbyterian Medical Center, 231 Ill. App.3d 143, 595 N.E.2d 1311 (1992) where insured did not realize at the time that there was any reasonable likelihood that claim would exceed the underlying limits of coverage. However, the Appellate Court (First District) has ruled that an insured waived its rights to claim coverage under an excess liability policy by waiting several years to give notice of a serious burn case where the ad damnum was in excess of the stated underlying limits. In First State Ins. Co. v. Montgomery Ward Co., 642 N.E.2d 715 (Ill. App. 1994), the court ruled that the insured's delay was unreasonable as a matter of law, noting also that the insured could have settled the claim for less than the policy limits earlier. See also Highlands Ins. Co. v. Lewis Rail Service Co., 10 F.3d 1247 (7th Cir. 1993) and Imperial Cas. & Indem. Co. v. Chicago Housing Authority, 759 F.Supp. 446 (N.D. Ill. 1991), aff'd 987 F.2d 459 (7th Cir. 1993)(insured had sufficient sophistication to know when claims were likely to arise requiring notice to excess insurers). But see, Federated Mutual Ins. Co. v. State Farm Mutual Automobile Ins. Co., 1996 WL 416946 (Ill. App. July 24, 1996)(rejecting distinction based on relative knowledge or sophistication of insured).
actual notice is sufficient to trigger coverage, even if the insured does
not formally comply with the letter of the notice requirement in a policy.
Long v. Great Central Ins. Co., 190 Ill. App.3d 159 (1989).
“Actual notice” means notice from “any source sufficient to permit the
insurer to locate an defend its insured.” Insurance Company v. Federal
Ins. Co., 683 N.E.2d 947 (Ill. App. 1997). An insurer may receive
actual notice from a variety of sources, including agents and other parties
to the litigation, including plaintiffs. Illinois Founders Ins. Co.
v. Barnett, 1999 WL 170351 (Ill. App. 1999). Similarly, notice to
an agent of the insurer, including an attorney, satisfies the actual notice
standard. Cincinnati Ins. Co. v. Baur’s Opera House, Inc., 694 N.E.2d
593 (Ill. App. 1998).
Court has ruled that it is not necessary that an insured give notice under
a specific policy inasmuch as notice to the insurer is deemed to be notice
under all policies issued by it to the policyholder. Northbrook Property
& Casualty Insurance Company v. Applied Systems, Inc., No. 1-98-1170
(Ill. App. May 17, 2000) and Casualty Insurance Company v. E.W. Corrigan
Construction Company, 617 N.E.2d 228, 233 (Ill. App. 1993)(notice of claim
under worker’s compensation policy also deemed to satisfy notice requirement
under insurer’s GL policy.
A breach of the cooperation clause will only defeat coverage if it results in prejudice to the insurer. In MFA Mut. Ins. Co. v. Cheek, 363 N.E.2d 809 (Ill. 1977), the Illinois Supreme Court rejected a per se rule that the insured’s failure to appear at trial, even if wilful and even if the insurer has done what it reasonably could do to produce the insured, suffices on its own to establish, or to create a presumption of, prejudice.
payment provision provides that an insurer will not be held liable for
expenses voluntarily incurred by an insured before tendering defense of
a suit to the insurer. G. Heileman Brewing Co. v. Westchester Fire
Ins. Co. , 2001 Ill. App. LEXIS 204 (1st Dist. March 30, 2001).
The purpose of this clause is to prevent collusion between the insured
and the injured party. Pittway Corp. v. American Motorists Insurance Co.,
56 Ill. App. 3d 338 (1977). An insurer seeking to avoid responsibility
because of a breach of this clause must show prejudice. Pittway, 56 Ill.
App. 3d at 346.
BROAD FORM COVERAGES
The Appellate Court has ruled in Millers Mutual Ins. Association of Illinois v. Graham Oil Co., 668 N.E.2d 223 (2d Dist. 1996) that a neighboring property owner's trespass claims against a gas station alleged a claim for "wrongful invasion" outside the scope of the policy's "absolute" pollution exclusion.
The Appellate Court suggested in Abrams v. State Farm Fire & Cas. Co., 1999 Ill. App. LEXIS 481 (1st Dist. June 30, 1999) that coverage for “malicious prosecution” claims might not be limited to the common law meaning of that term but ultimately disposed of the case on other ground without resolving this question.
Allegations of intentional housing discrimination were held not to allege a claim for "invasion of the right of private occupancy" in Commercial Union Ins. Co. v. Image Control Property Management, Inc., 918 F.Supp. 1165 (M.D. Ill. 1996). On the other hand, coverage for “wrongful eviction” has been held under Illinois law to extend to situations in which plaintiffs are evicted from public premises. See ZRL Corporation v. Great Central Insurance Company, 510 N.E.2d 102 (Ill. App. 1987)(rowdy patron evicted from insured’s bar) and International Insurance Company v. Rollprint Packaging Products, Inc., 2000 Ill. App. LEXIS 214 (1st Dist. March 31, 2000)(employee evicted from insured’s office).
A wrongful termination claim was held to be outside the scope of a policy's "personal injury" coverage since that cause of action was not among the enumerated "offenses" for which coverage was listed. JG Industries, Inc. v. National Union Fire Ins. Co., 218 Ill. App.3d 1061 (1991). See also Emtech Machining & Grinding, Inc. v. CNA Insurance Companies, 695 N.E.2d 545 (Ill. App. 1998).
Under Illinois law, a claim for advertising injury must be supported by evidence that the injury resulted from the insured's advertising activities. The Home Ins. Co. v. American National Can Co., 1997 WL 467180 (N.D. Ill. August 12, 1997).
A federal district court has ruled in American National Fire Insurance Company v. Methods Research Corporation, 2000 WL 1785519 (N.D. Ill. December 5, 2000) that allegations of trademark infringement, unfair competition and deceptive trade practices did not constitute the “misappropriation of advertising ideas or style of doing business” under New Jersey law, citing Tradesoft Tech, Inc. v. The Franklin Mutual Insurance Company, 746 A.2d 1078 (N.J. Super. 2000).
An award of sanctions for filing a frivolous appeal is not the same as a claim for "malicious prosecution." Spiegel v. Zurich Ins. Co., 687 N.E.2d 1099 (Ill. App. 1997) and William J. Templeman Company v. Liberty Mutual Insurance Company, 735 N.E.2d 669 (Ill. App. 2000). In Templeman, the Appellate Court ruled that judicially imposed sanctions are different from claims for malicious prosecution in their elements of proof and origin.
"occurrence" policy limitation bars coverage for intentional acts, ambiguity
has been found given the conflict between this limitation on coverage and
the grant of insurance for intentional torts under "personal injury" coverage
provisions. Hurst-Roche Engineers, Inc. v. Commercial Union Ins. Co., 51
F.3d 1336, 1345 (7th Cir. 1995) (Illinois law)
BURDEN OF PROOF
Insured has initial burden of demonstrating that its claim falls within policy Hays v. Country Mutual Ins. Co., 192 N.E.2d 855, 28 Ill.2d 601 (1963). But see, Maryland Cas. Co. v. Iowa National Mutual Ins. Co., 283 N.E.2d 27, 5 Ill. App.3d 384 (1972)(insurer must prove that claimant was not "insured"). Thereafter, insurer must prove applicability of policy exclusion. Fidelity & Deposit Co. of Maryland v. Reliance Federal Savings & Loan, 795 F.2d 42 (7th Cir. 1986); USF&G v. State Farm, 152 Ill. App.3d 46, 504 N.E.2d 123 (1987)(property policy); Warren v. Lemay, 494 N.E.2d 206, 144 Ill. App.3d. 107 (1986).
Where a settlement includes both covered and non-covered claims, It is the burden of the insured to establish what portion of the settlement falls within the scope of the insurer's policy period. Fidelity & Casualty Co. of New York v. Nalco Chemical Co., 625 N.E.2d 151, 159 (1992).
Court adopted a "preponderance" standard for evaluating evidence of missing
policies in Sears, Roebuck & Co. v. Seneca Ins. Co., 627 N.E.2d 173
(Ill. App. 1993). Specimen forms have not been held to be persuasive
evidence of the contents of a missing policy. Fidelity & Cas.
Ins. Co. v. Wil-Freds, Inc., 496 N.E.2d 336, 339 (Ill. App. Ct. 1986).
CHOICE OF LAWS
The Illinois choice of law rule for insurance contracts is the "most significant contacts" test. Pursuant to this test, insurance policy provisions are "governed by the location of the subject matter, the place of delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance, or other place bearing a rational relationship to the general contract." Thus, the Illinois Supreme Court ruled in Lapham-Hickey Steel Corporation v. Protection Mutual Ins. Co., 166 Ill.2d 520, 655 N.E.2d 842 (1995) that Illinois law should be applied to claims arising out of pollution at a facility owned by the insured in Minnesota, inasmuch as the insured was headquartered in Illinois and all of the policies in question had been issued to it in Illinois. In Lapham-Hickey, the Illinois Supreme Court adopted a grouping of the contacts approach to the resolution of choice of laws questions. The contacts approach considers such factors as (1) the location of the subject matter; (2) the place of delivery of the contract; (3) the domicile of the insured; (4) the domicile of the insurer; (5) the place of the last act to give rise to a valid contract; and (6) the place of performance or other place bearing a rational relationship to the general contract.
The Appellate Court has since ruled that Lapham Hickey did not compel the use of a “law of the site” approach involving a Missouri corporation that faced environmental liabilities involving dozens of different sites around the country. In such circumstances, the court ruled in Emerson Electric Company v. Aetna Casualty & Surety Company, 2000 Ill. App. LEXIS 15 ( Ill. App. January 16, 2001) that the better approach was to apply Missouri law, as being the place where the insured was headquartered and where the policies had been executed.
Likewise, in Household International, Inc. v. Liberty Mutual Insurance Company, No. 1-99-2094 (Ill. App. March 2, 2001) the Appellate Court ruled that the trial court had correctly applied New York law as being the place where the policies were issued and where the insured was domiciled even if the underlying claims involved out-of-state sites.
Illinois courts will most often look to the place where the policy was issued. American Home Assur. Co. v. Dykema, Gossett, 625 F.Supp. 1052 (N.D. Ill. 1985) and Criterion Ins. Co. v. Reed, 66 Ill. App.3d 925 (1978). The Illinois Supreme Court has also noted that courts should consider "the location and the subject matter, the place or delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance or other place bearing a valid relationship to the general contract." Hofeld v. Nationwide Life Ins. Co., 59 Ill.2d 522 (1975) and Jadczak v. Modern Service Ins. Co., 151 Ill. App.3d 589, 593, 503 N.E.2d 794, 797 (1987).
In the absence of any conflict between the law of Illinois and any foreign jurisdiction, the law of the forum state will control. Dearborn Insurance Company v. ISLIC, 719 N.E.2d 1092 (Ill. App. 1999).
Earlier, the Appellate Court ruled in Diamond States Ins. Co. v. Chester-Jensen Co., 611 N.E.2d 1083 (Ill. App. 1993) that liabilities arising out of a defective thermal bank system that the insured had installed in a building in Illinois must be governed according to Illinois law, even though the insured and insurers were both Pennsylvania corporations and that the policies had been issued in Pennsylvania. See also Society of Mount Carmel v. National Ben Franklin Ins. Co., 268 Ill. App.3d 655 (1994)(California law should be applied to a coverage litigation involving wrongful termination action that had been commenced in California against a religious order that was domiciled in Illinois. The court held that Section 193 of the Restatement required that California law apply since the claims arose out of an insured location there).
A corporation’s “principal place of business” is the place where it has its “nerve center.” Krueger v. American State’s Insurance Company, 996 F.2d 928 (7th Cir. 1993)(Illinois law). The nerve center test focuses on the location of decision making as opposed to the volume of activity at various locations. Illinois courts determine an entity’s principal place of business by looking at the location of the offices responsible for the main activities of the entity, the location where the business of the entity is carried out, the location of the business decision making, the residences of trustees and beneficiaries and the “nerve center” of the entity. Illinois Life & Health Insurance Company Guarantee Association v. Boozell, 289 Ill. App. 3d 621 (1997) and Westchester Fire Insurance Company v. G. Heileman Brewing Company, Inc., 2001 Ill. App. LEXIS 204 (1st Dist. March 30, 2001).
of punitive damages for a risk located in Indiana was held subject to Indiana
law even though the policy was issued in Illinois to an Illinois insured
in KNS Companies, Inc. v. Federal Ins. Co., 866 F.Supp. 1121 (N.D. Ill.
1994)(waste site was location of "insured risk" even though policy issued
out of state).
CONFLICTS OF INTEREST
Defense counsel represents both the insurer and the insured. Nandorf, Inc. v. CNA Insurance Companies, 479 N.E.2d 988 (Ill. App. 1985). See also Waste Mgt., Inc. v. ISLIC, 579 N.E.2d 322, 329 (Ill. 1991)(“when insurer regtains attorney to defend insured, attorney represents both insured and insurer in furthering the interests of each”).
Under Illinois law, where an actual conflict of interest exists between the insurer and its policyholder, the insurer must not participate in the insured's defense but, instead, should reimburse the insured for a defense conducted by counsel of the insured's choosing and must reimburse counsel for fees as they are incurred. Murphy v. Urso, 88 Ill.2d 444, 430 N.E.2d 1079 (1981); Thornton v. Paul, 74 Ill.2d 132, 384 N.E.2d 335 (1980). Gibraltar Cas. Co. v. Sargent & Lundy, 214 Ill. App.3d 768, 574 N.E.2d 664 (1990); Maryland Cas. Co. v. Peppers, 355 N.E.2d 24, 31 (Ill. 1976); Illinois Masonic Medical Center v. Turegum Ins. Co., 522 N.E.2d 611 (Ill. App. 1988).
must to advise their insureds that the counsel that they propose to retain
is from a law firm that the insurer regularly retains to represent its
interests. Allstate Ins. Co. v. Carioto, 194 Ill. App.3d 767, 551 N.E.2d
382 (1st Dist. 1990).
Claims for breach of contract are outside the scope of liability insurance. Aetna Casualty & Surety Co. v. Spancrete of Illinois, Inc., 726 F.Supp. 204, 206 (N.D. Ill. 1989).
Superfund "clean up costs" were held to be covered by the Illinois Supreme Court in late 1992 in Outboard Marine v. Liberty Mutual Ins. Co., 154 Ill.2d 90, 607 N.E.2d 1204 (1992). In view of this holding and the court's separate finding that insurers have no duty to defend administrative claims, insureds will generally argue that all costs arising out of environmental liability claims are in the nature of indemnity and not costs of defense. See e.g.,Benoy Motor Sales, Inc. v. Universal Underwriters Ins. Co., 679 N.E.2d 414 (Ill. App. 1997).
The Appellate Court ruled in Zurich Ins. Co. v. Carus Corp., 689 N.E.2d 130 (Ill. App. 1997), review denied (Ill. 1998) that costs that the insured had incurred in hiring consultants in voluntarily conducting its own investigation through the IEPA's site remediation program fell within the scope of any indemnity obligation. the court refused to find that the insured had ever become "legally obligated to pay" these costs, noting that the insured had ever been ordered to undertake these tasks and had voluntarily participated in the IEPA program. Similarly, in Vogue Tyre & Rubber Co. v. CIGNA Property & Casualty Ins. Co., 1998 U.S. Dist. LEXIS 18219 (N.D. Ill. November 13, 1998), the U.S. District Court ruled that a property owner had not been “legally obligated” to pay sums that it incurrred in voluntarily cleaning up oil on its property, particularly as the clean up went far beyond the work requested by the IEPA. In a footnote, the court dismissed the insured’s argument that such a result would discourage insureds from undertaking prompt clean ups, finding that such public policy arguments were “dubious” and, in any event, did not provide him with the authority to rewrite a contract: “Vogue would get clean property for the cost of insurance premiums calculated to cover only legally obligated remediation, and CIGNA would get blind sided by the contractor’s bills and a strong disincentive to provide environmental liability insurance at all. In short, if Vogue wanted better coverage, it should have contracted for it.”
The First District ruled in Crawford Laboratories v. St. Paul Ins. Co. of Illinois, 715 N.E.2d 653 (Ill. App. 1999) that a Proposition 65 claim in California against a paint manufacturer did not state a claim for “damages” under a liability policy. The court noted that the only remedies available for a violation of Proposition 65 are an injunction and civil penalties of $2,500 per day. Even though a portion of the fines are paid into a “hazardous substance account” to compensate victims, said payments bore no relation to the amount of the claimed injuries and therefore could not be said to be compensatory damages.
In non-environmental cases, the Appellate Court has ruled in Board of Education v. Country Mutual Ins. Co., 121 Ill. App.3d 124, 459 N.E.2d 273 (1984) that a petition demanding the reinstatement of a discharged employee did not seek damages. See also Ladd Construction Co. v. INA, 73 Ill. App.3d 43, 391 N.E.2d 568 (1977)(cost of undertaking debris removal pursuant to injunction not "damages").
Attorney's fees may be "damages" if included in a judgment against an insured but generally do not encompass the insured's own defense costs. Bankers Trust Co. v. Old Republic Ins. Co., 7 F.3d 93 (7th Cir. 1993).
The Supreme Court of Illinois has declared that although injunctive relief
may fall within the scope of “damages” for purposes of insurance coverage,
the cost of complying with injunctive remedies is not “compensatory damages”
for purposes of the state’s tort immunity act. People Who Care v.
Tax Objectors, 2000 Ill. LEXIS 1687 (Ill. October 26, 2000).
Illinois favors the use of declaratory judgment actions to resolve coverage disputes. Sims v. Illinois National Cas. Co., 43 Ill. App.2d 184, 199, 193 N.E.2d 123 (1964). However, such proceedings should not be utilized to resolve a crucial issue in the underlying case, such as whether an insured's conduct was negligent or intentional. Maryland Cas. Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24 (1976) and Thornton v. Paul, 74 Ill.2d 132, 159, 384 N.E.2d 335 (1978). No such controversy exists to bar a DJ where the insured's conduct has already been adjudicated in a prior criminal proceeding (Allstate Ins. Co. v. Carioto, 194 Ill. App.3d 767, 551 N.E.2d 382 (1st Dist. 1990)) or where the coverage issues are "separable" from those involved in the liability case. Maryland Cas. Co. v. Chicago & North Western Transportation Co., 126 Ill. App.3d, 466 N.W.2d 1091, 1095 (1984) and Illinois Founders Ins. Co. v. Smith, 231 Ill. App.3d 269, 596 N.E.2d 59 (1992) (dismissal of DJ upheld where issue of "expected or intended" was also a question in underlying dram shop action).
If the duty to defend exists, an insurer's indemnity obligation cannot be determined until the underlying action has been adjudicated. Outboard Marine Corporation v. Liberty Mutual Insurance Company, 607 N.E. 2d 1204 (Ill. 1992). If, however, the court has determined that the insurer has no duty to defend, it may simultaneously determine that the insurer has no duty to indemnify. Abrams v. State Farm Fire and Casualty Company, 1999 Ill. App. Lexis 487 (First District June 30, 1999); State Farm Fire and Casualty Company v. Hatherley, 621 N.E. 2d 39 (Ill. App. 1993).
judgment action must name all "necessary parties." A "necessary party"
is one whose presence is required to (1) protect an interest in the policy;
or (2) to reach a decision or (3) to enable the court to make a complete
determination of the controversy. Brumely v. Touche, Ross, 463 N.E.2d
195 (Ill. App. 1984). Illinois courts have repeatedly held that the
underlying plaintiff is a necessary party. Flashner Med. Partnership
v. Marketing Management, Inc., 545 N.E.2d 177 (Ill. App. Ct. 1989) and
Society of Mount Carmel v. National Ben Franklin Ins. Co., 643 N.E.2d 1280
(Ill. App. 1994). However, where the underlying claims involve mass
tort litigation such that it would not be feasible to name every plaintiff
in the DJ, jurisdiction may still be afforded if a smaller sub-set of representative
plaintiffs is named that may represent the interests of the group as a
whole. Zurich Ins. Co. v. Baxter International, 655 N.E.2d 1153 (Ill. App.
1995), aff'd, 670 N.E.2d 664 (Ill. 1996).
In G. Heileman Brewing Co. v. Westchester Fire Ins. Co. 2001 Ill. App. LEXIS 204 (1st Dist. March 30, 2001) the First District declared that “absent vexatious behavior by the insurer, an insured cannot recover attorney fees incurred in bringing a declaratory judgment action against the insurer to establish coverage. Nor can an insured recover attorney fees and costs for defending a declaratory judgment action brought by an insurer absent vexatiousness.” Brotherhood Mutual Insurance Co. v. Roseth, 177 Ill. App. 3d 443 (1988).
Section 155 of the Illinois Insurance Code allows for the imposition of a penalty against an insurer whose refusal to defend is found to be vexatious and unreasonable:
(1) In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts ***." 215 ILCS 5/155 (West 1992).
The Appellate Court has also rejected a policyholder's argument that attorneys' fees incurred by a policyholder in responding to a declaratory judgment action commenced by the insurer are "reasonable expenses incurred" at the request of the insurer within the Supplementary Payments provision of standard general liability policies. Brown Bag Co. v. Bituminous Casualty Corp., 254 N.E.2d (Ill. App. 1969).
A tort claimant
was deemed to have a sufficient interest in the availability of insurance
to satisfy its claim to justify both compulsory or permissive intervention
into a declaratory judgment action where the insured had already defaulted
in Security Ins. Co. of Hartford v. Schipporeit, Inc., No. 95-1405 (7th
Cir. November 17, 1995).
proceedings may be brought pursuant to Illinois Supreme Court Rule 277
in Section 2:1404 of the Illinois Code of Civil Procedure. The summons
is accompanied by an affidavit by the judgment predator setting forth the
claimed debt and directing interrogatories to the debtor or a third party
to identify the assets available to satisfy this debt. Prerequisite
to such an action is the existence of a judgment to be satisfied.
Discovery permitted to prove missing policies in Coltec Industries, Inc. v. American Motorists Insurance Company, No. 99C-1087 (N.D. Ill. May 26, 2000).
Courts have denied discovery of reinsurance information on the grounds that it is irrelevant to the issues in a coverage dispute. Fruit of the Loom, Inc. v. Travelers Ins. Co., Ill. Cir., No. 89 CCH 09846, Tr. at 13 (May 17, 1991); UNR Indus., Inc. v. Continental Ins. Co., No. 85-C-3532 (N.D. Ill. Sept. 4, 1986)(excluding from trial all evidence related to reinsurance).
On the other
hand, a federal magistrate allowed discovery to go forward to prove the
existence of missing policies in Coltec Industries, Inc. v. American Motorists
Insurance Company, No. 99C-1087 (N.D. Ill. May 26, 2000).
DUTY TO DEFEND
Under Illinois law, an insurer must defend any action whose allegations allege facts within or potentially within the scope of coverage, even if those allegations are false. National Union Fire Ins. Co. of Pittsburgh v. Glenview Park District, 632 N.E.2d 1039 (Ill. 1994). If any of several theories of recovery are insured, the carrier must provide a defense to the entire action.
For a potential of coverage to exist, the complaint need presently only a possibility of recovery, not a probability of coverage. Lagrange Memorial Hospital v. St. Paul Fire Insurance Company, 2000 Ill. App. LEXIS 872 (1st Dist. September 9, 2000); Bituminous Casualty Corp. v. Gust K. Newberg Construction Co., 578 N.E.2d 1006 (Ill. 1991).
As a general rule, the duty to defend is determined by comparing the allegations of the complaint with the terms of the policy. International Minerals & Chemical Co. v. Liberty Mutual Ins. Co., 168 Ill. App.3d 361, 366, 522 N.E.2d 758 (1988). The insurer must defend covered allegations even if it knows that these claims are untrue. Consolidated Rail Corp. v. Liberty Mutual Ins. Co., 92 Ill. App.3d 1066, 1070, 416 N.E.2d 758 (1981). As a result, extrinsic evidence may generally not be relied on to contradict allegations that otherwise trigger a duty to defend. Maryland Casualty Co. v. Peppers, 355 N.E.2d 24 (Ill. 1976). Further, the judge in a declaratory judgment action may not resolve a disputed factual question that is to be determined in the underlying tort action. Millers Mutual Ins. Association of Illinois v. Ainsworth Seed Co., Inc., 552 N.E.2d 254 (Ill. App. 1989).
Nevertheless, where the factual dispute involves matters that are not of ultimate concern in the tort action, that is to say one that is not critical to the determination of the insured’s liability, they may appropriately be determined by the trial court. Fidelity & Casualty Co. of New York v. Envirodyne Engineers, Inc., 461 N.E.2d 471 (Ill. App. 1983). Accordingly, the fact that the underlying action is still pending should not bar a reviewing court from resolving a factual issue in the coverage case so long as the facts at issue are not determinative of the insured’s liability to the third-party claimant. Fremont Compensation Ins. Co. v. Ace-Chicago Great Dane Corp., 710 N.E.2d 132 (Ill. App. 1998)(undisputed affidavit as to when injury occurred) and American Family Mutual Ins. Co. v. Savickas, 711 N.E.2d 1 (Ill. App. 1998), rev’d on other grounds (Ill. 2000)(whether premium was paid).
Illinois courts have suggested that an insurer that has doubts as to whether it owes a defense must defend or bring a declaratory judgment action. American Liberty Ins. Co. v. City of Joliet, 711 F.Supp. 455 (N.D. Ill. 1989) and Northbrook Prop. & Cas. Co. v. USF&G, 150 Ill. App.3d 47, 501 N.E.2d 817 (1986). However, it is not obligated to do both. Transamerica Ins. Co. v. Interstate Pollution Control, Inc., No. 92 C 20247 (N.D. Ill. June 16, 1995). As below, an insurer runs the risk of estoppel if it simply denies coverage and is later found to have wrongfully refused to defend.
The Illinois Supreme Court ruled in Northbrook Property & Casualty Company v. Transportation Joint Agreement of School Districts, No. 88-900 (Ill. December 1, 2000) that a CGL policy issued by Northbrook clearly did not owe coverage for injuries arising out of the collision of a train with a school bus in light of a policy exclusion for losses arising out of the ownership, maintenance or use of automobiles. The court reversed the Appellate Court’s determination that the auto exclusion did not apply to allegations that the school district had been negligent in planning or inspecting bus routes. The Supreme Court ruled that these claims were not “wholly independent” of any negligent operation of the bus” and, in fact, were “nothing more than re-phrasings of the fact that the students’ injuries arose from the school district’s use or operation of a motor vehicle.”
Resolving a longstanding question in Illinois law, the State Supreme Court has ruled in Cincinnati Companies v. American Ins. Co., 711 N.E.2d 499 (Ill. 1998), that formal tender of the insured’s defense is not necessary so long as the insurer has actual notice of a suit. In rejecting the insurer’s contention that it should have no obligation to reimburse another insurer for that portion of the cost of defending a mutual insured that were incurred prior to the date of tender, the court explicitly rejected the analysis that the Seventh Circuit had adopted in earlier cases requiring tender as a precondition to the payment of defense costs. Further, the court rejected distinctions in the “tender” rule that earlier courts have adopted based on the relative sophistication of a policyholder. Accordingly, an insurer’s duty to defend is triggered by actual notice of a suit and remains in effect unless or until the insured explicitly indicates to the insurer that its assistance is not wanted. Notice has been defined as “notice sufficient to permit the insurer to locate and defend the law suit.” An insured that has given notice of a claim may “deactivate” the tender through post-notice communications with the insurer. Alcan United, Inc. v. West Bend Mutual Insurance Company, 707 N.E. 2nd 687 (Ill. App. 1991).
Earlier cases had suggested that an insured was free to pick and choose among its carriers and that it was therefore important to focus on the date of tender so as to avoid an insured getting a defense from a carrier that it did not wish or intend. See Institute of London Underwriters v. The Hartford Fire Ins. Co., 234 Ill. App.3d 70, 599 N.E.2d 1311 (1992) and Federated Mutual Ins. Co. v. State Farm Mutual Automobile Ins. Co., 668 N.E.2d 627 (Ill. App. 1996); Aetna Cas. & Sur. Co. v. Chicago Ins. Co., 994 F.2d 1254 (7th Cir. 1993); Hartford Acc. & Ind. v. Gulf Ins. Co., 776 F.2d 1380 (7th Cir. 1985). The Supreme Court declared in Cincinatti that its ruling would not negate the insured’s right to forego the assistance of certain insurers as the insured, rather than merely ignoring the insurers, could accomplish the same purpose by sending them letters stating that their assistance was not requested. Further, the Supreme Court later ruled John Burns Construction Company v. Indiana Ins. Co., No. 86552 (Ill. January 21, 2000) that its 1998 Cincinnati analysis should not be controverted on the basis of an “other insurance” clause. As with its prior rulings, the court declared that when the policyholder elects to claim coverage under one policy, that insurer is barred from obtaining a contribution from other insurers whose policies might similarly apply and that the insurers’ rights of contribution are not increased merely because of the language of the applicable “other insurance” clauses.
The Appellate Court has since ruled that an insured’s right to “deactivate” a previous tender of coverage in light of the Illinois Supreme Court’s recent Burns and Cincinnati rulings was not lost merely because the underlying lawsuit had settled prior to the date that the insured issued a letter withdrawing the earlier tender. In Richard Marker Associates v. Pekin Insurance Company, No. 2-00-0236 (Ill. App. January 29, 2001), the Second District ruled that a trial court had incorrectly ruled that a contractor’s insurer was entitled to equitable contribution from another insurer in light of the “other insurance” provision in the Pekin policy.
A formal tender of claim is not required to trigger the insurer’s defense duty. The court ruled that the insured’s precautionary notice of claim was sufficient to trigger a duty to defend in the absence of an unequivocal statement by the insured that it was not seeking coverage. Dearborn Insurance Company v. ISLIC, 719 N.E.2d 1092 (Ill. App. 1999).
A federal district court has ruled in Centennial Insurance Company v. Transitall Services, Inc., 2001 WL 289879 (N.D. Ill. March 15, 2001) that a motor carrier cargo insurance policy issued to a trucking company that only gave the insurer the “right” to provide a defense to legal proceedings did not impose any correlative “duty” to defend if the insurer chose not to exercise that right.
An insurer has no continuing defense obligation once it pays its full policy limit. Country Mutual Ins. Co. v. Anderson, 628 N.E.2d 499 (Ill. App. 1993). However, an insurer may not terminate its defense obligation by simply tendering its policy limits. Conway v. Country Casualty Ins. Co., 423 N.E.2d 559 (Ill. App. 1981). Where a liability policy provided that the duty to defend terminated when its limits were “exhausted by payment, “ the insurer breached its duty to defend by tendering its limits and instructing defense counsel to withdraw on the eve of trial. Douglas v. Allied American Ins. Co., 2000 Ill. App. LEXIS 164 (5th Dist. March 16, 2000).
Further, an insurer may not extinguish that obligation by paying its limit if a good faith basis exists for taking an appeal. This does not mean, however, that an appeal must be taken in every case. There is no obligation to pursue a totally groundless appeal. Illinois Founders Ins. Co. v. Guidish, 618 N.E.2d 436 (Ill. App. 1993).
The Appellate Court of Illinois has ruled in International Insurance Company v. Rollprint Packaging Products, Inc., 2000 Ill. App. LEXIS 214 (1st Dist. March 31, 2000) that a liability insurer’s “defense” obligation did not extend to attorney’s fees and costs incurred in prosecuting the insured’s counterclaim against the underlying plaintiff. Whether or not the counterclaim was “integral to the insured’s complete defense of the lawsuit” as alleged, the court ruled that prosecuting a counterclaim could not be construed as a “defense” task.
An insurer that agreed to provide a defense under a reservation of rights and expressly reserves the right to seek reimbursement was entitled to recover its defense costs upon a determination that it in fact had no contractual duty to defend. Grinnell Mutual Reinsurance Company v. Shierk, 1998 WL 113885 (S.D. Ill. January 9, 1998).
An insurer is only obligated to reimburse a policyholder for reasonable fees incurred in the defense of a covered suit. The party seeking attorney’s fees has the burden of presenting sufficient evidence of the reasonableness of the fees. Kaiser v. MEPC American Properties, Inc., 518 N.E.2d 424 (Ill. App. 1978). A petition for fees must specify the services performed, by whom they were performed, the time expended thereon and the hourly rate. A court may also consider additional factors such as the skill of the attorneys involved, the nature of the case, the novelty and/or difficulties of the issue and work, the importance of the matter, the responsibility required, the usual and customary charge for comparable services, the benefit to the client, and whether there is a reasonable connection between the fees and the amount involved in the litigation. In Re Estate of Healy, 484 N.E.2d 890 (Ill. App. 1985). An award of attorney’s fees will only be overturned if the trial court has abused its discretion. In Re Estate of Healy, 484 N.E.2d 890 (Ill. App. 1985) and International Insurance Company v. Rollprint Packaging Products, Inc., 2000 Ill. App. LEXIS 214 (1st Dist. March 31, 2000).
An insurer has been held not to owe coverage for defense costs incurred prior to the date that the defense was tendered to it. In Westchester Fire Insurance Company v. G. Heileman Brewing Company, Inc., 2001 Ill. App. LEXIS 204 (1st Dist. March 30, 2001) the First District ruled that the insurer had no duty to pay pre-tender defense costs since it had been prejudiced by its exclusion from the defense in breach of the policy’s cooperation clause.
Attorney’s work undertaken for the purpose of determining the availability of insurance coverage for a claim are not “defense costs.” W.E. O’Neil Construction Company v. General Casualty Company of Illinois, 1-99-1502 (1st Dist. March 30, 2001)(“A benefit to the primary insurer is not a test of what is a defense cost”).
The Illinois Supreme Court ruled in Lapham-Hickey Steel Corporation v. Protection Mutual Ins. Co., 166 Ill.2d 520, 655 N.E.2d 842 (1995) that the duty to defend "suits" only extends to court proceedings and would not encompass claims by a state environmental agency. See also Lapham-Hickey Steel Corp. v. Protection Mut. Ins. Co., 633 N.E.2d 199 (Ill. App. 1994)(duty to defend did not arise automatically just because insured owned property that was subject of governmental investigation absent any indication that governmental claim was "probable and imminent." More recently, the Appellate Court has ruled that Lapham-Hickey applies retroactively, not just prospectively. Forest Preserve District of Dupage County v. Pacific Ind. Co., 665 N.E.2d 305 (1st Dist. 1996).
On the other hand, the Supreme Court has since ruled in Employers Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122 (Ill. 1999) that any “suit” is a “suit” overturning an intermediate appellate ruling that a legal proceeding that the EPA filed for the sole purpose of effectuating a settlement was not a "suit."
The Appellate Court has distinguished Lapham-Hickey in a case where the insured first received a PRP letter from the U.S. EPA and then was sued by the Illinois EPA, holding that in such circumstances the insurer's duty to pay defense costs includes the pre-suit proceedings. In Benoy Motor Sales, Inc. v. Universal Underwriters Ins. Co., 679 N.E.2d 414 (Ill. App. 1997), the Fourth Division found that the two claims were part of a unified proceeding and that the insurer's duty to defend the IEPA suit therefore also extended to administrative costs with respect to the U.S. EPA.
District also ruled in Zurich Ins. Co. v. Carus Corp., 689 N.E.2d 130 (Ill.
App. 1997), review denied (Ill. 1998) that the insured's participating
in a voluntary IEPA clean up program not only did not involve a "suit"
but that, in the absence of any duty to defend, the insurers also had no
ESTOPPEL AND WAIVER
of estoppel and waiver are distinct, although Illinois courts sometimes
confuse them. Vaughn v. Speaker, 126 Ill.2d 150, 161, 533 N.E.2d
885 (1988). Whereas waiver is the intentional relinquishment of a
known right, claim or privilege, estoppel may arise even though there is
no intention on the part of the party to relinquish any existing right.
However, a party asserting a claim of equitable estoppel must prove prejudice,
whereas waiver does not necessarily imply that the party asserting it has
been misled to its detriment.
Ordinarily, estoppel cannot be relied upon to create coverage that was not contractually provided for. Bourne v. Seal, 53 Ill. App.2d 155, 203 N.E.2d 12 (1964) and Nationwide Mutual Ins. Co. v. Filos, 673 N.E.2d 1099 (Ill. App. 1996). As recognized in Filos, however, an exception to this general rule exists where the insurer undertakes the defense of an action without reserving rights, even though the facts implicating the coverage issue were readily known to the insurer from the face of the complaint. Similarly, Illinois courts have ruled that an insurer that undertakes the defense of its insured without reserving its rights may be estopped to dispute coverage if its conduct prejudiced the insured's interests. Mutual Service Cas. Ins. Co. v. Country Life Ins. Co., 859 F.2d 548 (7th Cir. 1988), citing Gibraltar Ins. Co. v. Varkalis, 46 Ill.2d 481, 488, 263 N.E.2d 823 (1970). In Insurance Company of Ireland v. Board of Trustees, 937 F.2d 331 (7th Cir. 1991), the 7th Circuit ruled that ICI was estopped, even though it had never formally accepted coverage, where it had voluntarily paid defense bills over the years without raising any question of coverage. An insurer is not estopped to raise policy defenses if it files a declaratory judgment action prior to judgment in the underlying suit. State Farm Fire & Casualty Company v. Martin, 710 N.E. 2d 1228, 1232 (Ill. 1999).
Court has distinguished this line of authority in situations where the
claimant is ultimately shown not to be an insured, as issues of estoppel
only arise between insurers and policyholders. Pepper Construction Co.
v. Transcontinental Ins. Co., 673 N.E.2d 1127 (1st Dist. 1996).
On the other hand, estoppel may arise based upon an insurer’s failure to either defend or bring a DJ. In Illinois, when a complaint against an insured alleges facts potentially within the scope of the policy coverage, an insurer who disputes its duty to defend must either seek a declaratory judgment that there is no coverage or defend the action under a reservation of rights. State Farm Fire & Casualty Co. v. Martin, 186 Ill. 2d 367 (1999). If an insurer fails to take either course of action and a duty to defend exists, it will be estopped from later raising coverage defenses. Clemmons v. Travelers Insurance Co., 88 Ill. 2d 469 (1981). In State Farm, the Illinois supreme court rejected the argument that an insurance company should be required to actually secure a declaratory judgment or defend under a reservation of rights.. However, an insurer cannot avoid estoppel by seeking a declaratory judgment at its leisure. Providence Hospital v. Rollins Burdick Hunter of Illinois, Inc., 824 F. Supp. 131 (N.D. Ill. 1993). "[A] liability insurer in doubt over whether to defend its insured, cannot simply stand on the sidelines and wait until the tort action is complete before contesting the question of coverage." Reis v. Aetna Casualty & Surety Co., 69 Ill. App. 3d 777, 782 (1978).
In Unigard Insurance Co. v. Whitso, Inc., 195 Ill. App. 3d 740 (1990), the court found that a CGL insurer was not estopped from raising a policy defense where it filed a declaratory judgment action four months after receiving notice of a claim and three months before the underlying action was settled. In Central Mutual Insurance Co. v. Kammerling, 212 Ill. App. 3d 744 (1991), the court found that the insurer was estopped from asserting its coverage defenses where it filed a declaratory action ten months after it received notice of the underlying claim and several months after it had notice of a potential settlement of the underlying action. "[T]he most important factor...is not the raw chronological delay in an insurer's filing a declaratory judgment action, but whether the insurer waited until trial or settlement was imminent." Providence Hospital, 824 F. Supp. 131, 136 (N.D. Ill. 1993) (finding that insurer was not estopped from claiming noncoverage where it filed a declaratory judgment action over one year after denying coverage because the trial of the underlying case was several months away and the settlement was not an option at the time the declaratory action was filed). Thus, the time period between notice of an underlying action and filing of a declaratory judgment action is not determinative of whether estoppel applies.
An insurer that wrongfully refuses to defend or bring an action to determine whether it owes a defense will also be deemed to have waived its right to dispute any indemnity issues. Ehlco, supra; Trovillion v. USF&G, 474 N.E.2d 953, 956 (Ill. App. 1985); La Rotunda v. Royal Globe Ins. Co., 408 N.E.2d 928, 035 (Ill. App. 1980) and Shell Oil Co. v. AC&S, 649 N.E.2d 946 (Ill. App. 1995). However, several Illinois courts have recently refused to find estoppel where the insurer fails to defend or bring a DJ but a DJ is nonetheless commenced by the insured in short order. Thus, in Sportmart, Inc. v. Daisy Manufacturing Co., 645 N.E.2d 360 (Ill. App. 1994), the Appellate Court refused to find estoppel based on the fact that the insured (and not the insurer) had commenced the DJ, holding that there had been no prejudice since the insured had commenced the DJ a month after the claim had been denied. Similarly, in Waitzman v. Classic Syndicate, Inc., 648 N.E.2d 246 (Ill. App. 1995), the First District ruled that the estoppel rule should not apply where the insured commenced the DJ and the insurer shortly thereafter sought summary judgment concerning its claimed coverage obligations. Accord, Industrial Coatings Group, Inc. v. American Motorists Ins. Co., 658 N.E.2d 1338 (Ill. App. 1995)(the doctrine of estoppel only requires an insured to seek an adjudication of their rights and obligations while the underlying claims were still pending. It is not necessary that such an adjudication actually have been obtained during that period of time, nor is it necessary that such an adjudication be obtained in an action commenced by the insurer if the insured has itself chosen to file suit against the carriers).
When an insurer chooses to defend its policyholder, it must provide an
effective defense and must not put its own interests ahead of those claiming
to be insureds. Briseno v. Chicago Union Station Company, 557 N.E.2d
196 (Ill. App. 1990). An insurer that provides an inadequate defense,
causing prejudice to its policyholder, will be estopped to assert defenses
to any indemnity obligation. Maryland Casualty Company v. Peppers,
355 N.E.2d 24 (Ill. 1976).
may be estopped to rely upon a change in its policy that materially alters
the scope of coverage if it doesn’t give clear notice of the change to
its policyholder. In Perry v. Economy Fire & Casualty Company,
1999 Ill. App. LEXIS 954 (Ill. App. December 30, 1999), the Appellate Court
declared that a liability insurer could not rely upon the lead paint exclusion
that had been added at the time that the policy was renewed as the insurer
had failed to give notice of this material change in the policy coverage
as required under Section 143.17(a) of the Illinois Insurance Code.
In general, the purpose of umbrella liability insurance is both to provide excess insurance as well as coverage for areas that may not be covered under the insured's primary coverage. Continental Casualty Co. v. Roper Corp., 527 N.E.2d 998, 1001 (Ill. App. 1988).
An excess policy that defines coverage as excess of "the limits of the underlying insurance, as set forth in the attached Schedule," "the amounts specified" in the primary policy or the insured's "retained limit," will not be required to drop down. Zurich Ins. Co. v. Heil Co., 815 F.2d 1122 (7th Cir. 1987). Similarly, "drop down" arguments were rejected in Hartford Accident and Indemnity Co. v. Chicago Housing Authority, 12 F.3d 92, 96 (7th Cir. 1993) and Hudson Insurance Company v. Gelman Sciences, Inc., 921 F.2nd 92, 95 (7th Cir. 1990).
The Appellate Court ruled in Occidental Cas. Co. v. Underwriters at Lloyd's London, 19 Ill. App.3d 265, 311 N.E.2d 330 (1974) that excess insurers have no obligation to share defense costs with primary carriers even if the loss is ultimately settled for more than the primary limits.
Under normal circumstances, an excess insurer will not be estopped from disputing its obligations to pay an excess judgment merely because it retained counsel to monitor the progress of the underlying case. California Union Ins. Co. v. Liberty Mutual Ins. Co., 1996 WL 148036 (N.D. Ill. March 28, 1996). The insurer may be estopped, however, if counsel's actions persuaded the insured to try the case or otherwise made settlement more difficult. Sanders v. Standard Mutual Ins. Co., 492 N.E.2d 917, 918 (Ill. App. 1986). Likewise, the excess insurer may have waived its right to object to the settlement if it participated in the discussions directly. California Union Ins. Co. v. Liberty Mutual Ins. Co., 1996 WL 148036 (N.D. Ill. March 28, 1996)
Illinois courts have ruled that excess insurers have no right to bring a direct action against primary insurers in most cases but may bring "equitable subrogation" claims against primary insurers where they negligently fail to settle claims within the policy limits, however. Certain Underwriters at Lloyd's London v. General Acc. Ins., 909 F.2d 228, 232 (7th Cir. 1990); California Union Ins. Co. v. Liberty Mutual Ins. Co., 920 F.Supp. 908 (N.D. Ill. 1996) and Certain Underwriters at Lloyd's London v. Fid. & Cas. Co. of New York, 789 F.Supp. 927 (N.D. Ill. 1992). In Ranger Ins. Co. v. Home Ind. Co., 714 F.Supp. 956 (N.D. Ill. 1989), a federal district court ruled that primary insurers have a duty to protect the interests of the excess insurers that would support a direct claim, even where a subrogation action is for some reason unfeasible. Accord American Centennial Ins. v. American Home Assur., 729 F.Supp. 1228 (N.D. Ill. 1990).
insurer may bring an action against a primary insurer for failure to settle
within the primary limits if it can establish that the primary insurer
had a duty to settle and that its breach of that duty was the proximate
cause of the excess insurer's having to contribute money to the verdict
or settlement. National Union Fire Ins. Co. v. Continental Illinois
Corp., 673 F.Supp. 267, 273 (N.D. Ill. 1987).
Where a physician's umbrella carrier only made specific reference to the doctor's own primary E&O policy and did not list another policy on which he was an additional insured, the policy could not be deemed "excess" to the other policy, nor could it require exhaustion of the other policy before its indemnity obligations accrued. Federal Ins. Co. v. St. Paul Fire & Marine Ins. Co., 649 N.E.2d 460 (Ill. App. 1995).
Unless contractually provided for, courts have not required excess insurers to defend. Outboard Marine Corp. v. Liberty Mutual, 536 F.2d 730, 736 (7th Cir. 1976) and Hudson Ins. Co. v. Gelman Sciences, Inc., 706 F.Supp. 25, 26 (N.D. Ill., 1989), aff'd, 921 F.2d 92 (7th Cir. 1990). Absent express policy language to the contrary, excess insurers also have no duty to pay post-judgment interest. Hartford Acc. & Ind. Co. v. Aetna Ins. Co., 132 Ill.2d 79, 547 N.E.2d 114 (1989). An excess insurer's undertaking to reimburse defense costs does not create an express duty to defend. Zaborac v. American Casualty Company, 663 F.Sup. 330, (C.D. Ill. 1987).
The Appellate Court has ruled that the insolvency of the insured could not serve as a basis for eliminating an excess insurer's payment obligations notwithstanding a condition preceding the coverage providing that the insured's "actual payment" of the underlying retention was a condition to the excess policy's participation. However, the Appellate Court ruled in Home Insurance Company of Illinois v. Hooper, 1998 Ill. App. LEXIS 35 (First District, January 22, 1998) that the excess insurer was not obligated to "drop down" under such circumstances either and was merely required to pay the difference between its limits and the $250,000 self-insured retention.
Excess insurers may contest a primary insurer's classification of earlier losses in considering whether a new loss has exhausted the applicable primary limit. St. Katherine Ins. Co., Ltd. v. INA, 11 F.3d 707 (7th Cir. 1993).
was not required in New Process Baking Co. v. Federal Ins. Co., 924 F.2d
62 (7th Cir. 1991). Accord, Salt Creek Rural Park District v. Safety Mutual
Cas. Corp., No. 88 C 3784 (N.D. Ill. March 13, 1989).
Illinois Supreme Court ruled in Outboard Marine that an insured could not secure coverage for environmental liabilities arising out of its discharge of PCBs into Lake Michigan over period of years under policies issued after the insured was put on notice of the claim. See also Charles H. Eickelkraut & Sons, Inc. v. Bituminous Cas. Corp., 166 Ill. App.3d 550, 519 N.E.2d 1180 (1988)(insured was not entitled to coverage for the continuation of property damage from a leaking roof when the insured had been made aware of the leak problem before the policy incepted) and International Ins. Co. v. Peabody International Corp., 747 F.Supp. 477 (N.D. Ill. 1990)("public policy forbids one from obtaining insurance for a loss the insured knows is already present. Insurers undertaken to indemnify insureds against unknown risks of harm. They do not undertake to indemnify against losses within the insured's control and of which the insured is aware."). See also Spearman Industries, Inc. v. St. Paul Fire & Marine Ins. Co., 2001 U.S. Dist. LEXIS 4537 (N.D. Ill. April 11, 2001)(discussing applicability of ‘known loss” doctrine to first party claim for roof damage).
However, such claims must be based on actual knowledge. Int. Environmental Corp. v. National Union Fire Ins. Co. of Pittsburgh, 860 F.Supp. 511 (N.D. Ill. 1994)(evidence that a product manufacturer "should have" known that its products were causing property damage was insufficient to sustain a "known loss" defense in the absence of proof that the insured actually was aware of the problems). Further, the Illinois Supreme Court noted in Outboard Marine that it is the insured's awareness of the claims of liability against it, not the underlying injuries giving rise to those claims. On remand, the Appellate Court ruled in 1996 that the "known loss" doctrine did not defeat coverage under earlier policies. While noting some discomfort at the fact that OMC had continued to discharge PCB-containing materials for several years after being warned by its manufacturer of the toxic propensities of such materials, the court refused to find the such knowledge rose the level of a "substantial probability" of loss, as required by the Illinois Supreme Courts' analysis in OMC I. See also St. Paul Fire & Marine Ins. Co. v. Lefton Iron & Metal Co., Inc., 694 N.E.2d 1049 (Ill. App.1998)(insured's awareness of pollution on its property did not preclude coverage as, in the era before CERCLA, insured had no reason to expect that this would impose liability upon it).
The Appellate Court ruled in Missouri Pacific Railroad Co. v. American Home Assur. Co., 675 N.E.2d 1378 (Ill. App. 1997) that a known loss is not uninsurable if it is also known to an insurer. Under such circumstances, the court ruled that the burden is on the insurer to add an exclusion if it does not intend to provide coverage.
claims were held to constitute a “known loss” in Westchester Fire Insurance
Company v. G. Heilman Brewing Company, Inc., 2000 Ill. App. LEXIS 990 (1st
Dist. December 22, 2000) based upon the fact a lawsuit had been filed against
the insured prior to the policy period and the insured not only failed
to disclose the lawsuit to its insurer but had persisted in the wrongful
conduct even after the suit was filed.
NUMBER OF OCCURRENCES
Illinois has adopted the "cause" test for determining the number of "occurrences." U.S. Gypsum Company v. Admiral Ins. Co., 643 N.E.2d 1226 (Ill. App. 1994), appeal denied (Ill. 1995) (insured's marketing of asbestos products was cause of thousands of building claims against it). However, in Illinois Nat. Ins. Co. v. Szcepkowicz, 542 N.E.2d 90 (Ill. App. 1989), the First District pointed out that these causes must be closely linked in time and space to be considered one event. As a result, Illinois courts have been quite liberal in finding multiple "occurrences" in many cases. See Illinois Central Railroad v. Acc. & Cas. Co. of Winterthur, 739 N.E.2d 1049 (1st Dist. 2000)(each individual member of a class action for employment discrimination is a separate “occurrence,” rejecting the insured’s claim that the class action is based upon a single, continuing practice of discrimination and should therefore trigger only a single SIR). See also Michigan Chemical Corp. v. American Home Assurance Corp., 530 F.Supp. 147 (E.D. Mich. 1982), rev'd, 728 F.2d 374 (6th Cir. 1984), which was decided under Illinois law, shipments of contaminated cattle feed by manufacturer were each deemed to be separate "occurrences." Accord, Affiliated FM Ins. Co. v. Beatrice Foods Co., 1986 U.S. Dist. LEXIS 24265 (N.D. Ill. June 16, 1986)(separate sales of defective coating product to pool manufacturers constitute separate "occurrences"). But see, Household Manuf. Inc. v. Liberty Mutual, No. 85-C-8519 (N.D. Ill. February 10, 1987)(various claims based upon same defect in plumbing all arose out of one "occurrence") and Missouri Pacific Railroad Co. v. Admiral Ins. Co., DuPage No. 94 MR 198 (Ill. Cir. Ct. August 12, 1996)(noise-induced hearing loss claims all deemed to arise out of a single "occurrence"). In John Mason v. The Home Ins. Co., 177 Ill. App.3d 454, 532 N.E.2d 526 (1988), an improperly prepared batch of onions resulted in numerous incidents of botulism at a restaurant over a three day period. The Appellate Court (3d District) rejected the primary insurer's argument that these many claims all relate to a single "occurrence" (the batch of onions), holding instead that the number of "occurrences" should be determined by the number of portions of contaminated food that were served to customers. Similarly in Village of Camp Point v. Continental Cas. Co., 219 Ill. App.3d 86, 578 N.E.2d 1363 (1991), the Appellate Court ruled that a continuing series of negligent acts by an attorney over a three year period triggered each policy. However, in Denham v. La Salle-Madison Hotel Co., 168 F.2d 576 (7th Cir. 1948), the federal court ruled that claims for fire damage that were filed by numerous guests in the insured hotel were subject to a single policy limit). More recently, in Village Management, Inc. v. Hartford Acc. & Ind. Co., 662 F.Supp. 1366 (N.D. Ill. 1987), a federal court ruled that race discrimination claims against a landlord all arose out of one "occurrence," the insured's adoption of a discriminatory policy for selecting tenants. In Lyon v. Lumbermens Mut. Cas. Co., 566 N.E.2d 388 (Ill. App. 1990), the Appellate Court ruled that the resolution of this issue should be based on the purpose of the insurance. The court held, therefore, that separate thefts of two envelopes containing the receipts for the insured's eleven restaurants involved eleven (not two) occurrences, since each restaurant was separately insured under the policy.
Applying Rhode Island law, a federal court ruled in Lee v. Interstate Fire & Cas. Co., 826 F.Supp. 11562 (N.D. Ill. 1993), rev'd 86 F.3d 101 (7th Cir. 1996) that the sexual molestation of a child over several years was one "occurrence" triggering coverage in the year of "first encounter." On appeal, however, the 7th Circuit ruled that claims of negligent supervision against the Archdiocese were a separate "occurrence" in each year that misconduct was alleged. Accord Roman Catholic Diocese of Joliet, Inc. v. Interstate Fire Ins. Co., 685 N.E.2d 932 (Ill. App. 1st Div. 1997)( rejecting a "first encounter" rule, the Appellate Court declared that the claims for negligent supervision constitute an occurrence in each policy period in which molestation continued).
a policyholder to "stack" successive medical malpractice policies were
rejected in Hartford Cas. Ins. Co. v. Medical Protective Co., 641 N.E.2d
545 (Ill. App. 1994), wherein the Appellate Court ruled that the plaintiff's
malpractice claim was a single "occurrence" despite the fact that it continued
over a period of years.
clause will be given priority over an "excess" clause where a conflict
exists between the policies' respective "other insurance" clauses.
Home Ins. Co. v. Liberty Mutual Ins. Co., 266 Ill. App. 3d 1049, 1052,
641 N.E.2d 855 (1994). However, where an excess clause conflicts
with an excess-escape clause, courts will pro-rate liability between the
insurers. Padilla v. Norwegian-American Hospital, Inc., 266 Ill.
App. 3d 829, 836, 641 N.E.2d 572 (1994). In such circumstances, courts
will pro-rate liability according to the respective policy limits.
Universal Underwriters Ins. Group v. Griffin, 1997 Ill. App. LEXIS 107
(1st Dist. March 4, 1997)(where "other insurance" clauses in excess policies
are mutually repugnant, loss should be prorated according to the policy
limits of the respective policies). But see, USF&G v. Alliance
Syndicate Inc., 676 N.E.2d 278 (Ill. App. 1st Dist. 1997)(where two excess
policies had irreconcilable "other insurance" clauses, each paid equally).
After a decade of confusion and conflicting interpretations by lower courts, the Illinois Supreme Court finally issued a decision construing the pollution exclusion in December 1992. In Outboard Marine v. Liberty Mutual Ins. Co., 154 Ill.2d 90, 607 N.E.2d 1204 (1992), the court held that the term "sudden" was ambiguous and therefore overturned the Appellate Court's holding that the exclusion precluded coverage for gradual contamination. However, the Supreme Court acknowledged that the exclusion applies to the cause of pollution, not the resulting damage. Thus, the exclusion will bar coverage for intentional discharges, whether or not the resulting pollution was intended, so long as the discharge is of the chemical and in the area giving rise to the insured's liability.
Earlier rulings found that the exclusion only applied to active polluters. See Willett Truck Leasing Co. v. Liberty Mutual Ins. Co., 410 N.E.2d 376 (Ill. App. 1980) and Reliance Ins. Co. v. Martin, 467 N.E.2d 287 (Ill. App. 1984). However, the exclusion was upheld and a temporal meaning accorded to "sudden" in International Minerals & Chemical Co. v. Liberty Mutual Ins. Co., 522 N.E.2d 758 (Ill. App. 1988). The precedential value of IMC was cast into doubt the following year, however, by USF&G v. Specialty Coatings Co., 535 N.E.2d 1071 (Ill. App. 1989).
On-going discharges of PCB-containing waste even after the insured was warned by Monsanto that special care should be taken with PCBs were held to be "expected" in Fruit of the Loom v. Travelers Ind. Co., 672 N.E.2d 278 (Ill. App., 1st Dist., 1996). The court rejected the insured's "secondary discharge" argument, holding that, unlike the 7th Circuit's ruling in Patz, there was no evidence that these spills in and around the insured's capacitor manufacturing facility were intended to "contain" the waste in any way.
The scope of the pollution exclusion remains in doubt in Illinois. In USF&G v. Wilkin Insulation Co, 578 N.E.2d 96 (Ill. 1991), the Supreme Court ruled that the exclusion did not apply to asbestos abatement claims on the basis that indoor exposures did not result in a discharge into the "atmosphere." But see, Tragarz v. Keene Corp., No. 91-2108 (7th Cir. November 6, 1992)(release of asbestos fibers inside building held to be a discharge "into the environment").
The Illinois Supreme Court has limited the scope of the "absolute" pollution exclusion to traditional environmental contamination. In American States Ins. Co. v. Koloms, 177 Ill.2d 473, 687 N.E.2d 72 (1997), the Supreme Court affirmed the Appellate Court's finding that such exclusions do not apply to indoor exposures to toxic fumes, such as carbon monoxide. The court put particular emphasis on the history of this and earlier forms of the exclusion. Notwithstanding the elimination of the earlier exclusionary requirement that a discharge be into the atmosphere, the court found that a similar intent was still conveyed by the inclusion in the exclusion of environmental terms of art such as "discharge" and "release." Under the circumstances, the court found that it would be unreasonable to give such an expansive interpretation to the exclusion and held that it should be limited in scope to "traditional environmental contamination." Justice Heiple dissented, noting that the policy "reconstruction" adopted by the majority was plainly result oriented and robbed the exclusion of any meaning.
"Absolute" exclusion was upheld by the U.S. Court of Appeals for the Seventh Circuit in Pipefitters Welfare Educational Fund v. Westchester Fire Ins. Co., 976 F.2d 1037 (7th Cir. 1992). However, while the court held that the exclusion plainly applied to the PCB clean up in that case, it cautioned against an unduly expansive construction of "pollutant" in future cases. This dicta in Pipefitters was embraced by the Appellate Court in its 1997 ruling in Insurance Company of Illinois v. Stringfield, 685 N.E.2d 980 (1st Dist. 1997). The court ruled that the term "pollutant" should not be given a boundless meaning that might lead to absurd results and could not, in any event, be extended to lead poisoning claims as lead does not "irritate" anything.
The Appellate Court also ruled in Millers Mutual Ins. Association of Illinois v. Graham Oil Co., 668 N.E.2d 223 (2d Dist. 1996) that the exclusion only applied to claims for bodily injury and property damage and therefore did not extend to a neighboring property owner's trespass claims for "personal injury." By contrast, the Appellate Court has ruled in 1995 that a "total" pollution exclusion barred coverage for personal injuries arising out of an accidental spill of mercury that a child had brought into the plaintiff's home. In Economy Preferred Ins. Co. v. Grandad am, 656 N.E.2d 787 (Ill. App. 1995), the Appellate Court rejected the insured's assertion that the doctrine of concurrent causation required coverage for negligent acts or that such exclusions should only apply to "active polluters." More recently, the Appellate Court ruled in Moon v. State Farm Fire & Casualty Company, 728 N.E.2d 530 (Ill. App. 2000) that the clean up of tetrachloroethane (perc) from one of the insured’s dry cleaning machines was excluded. The court ruled that the Illinois Supreme Court’s opinion in Koloms, while restricting the applicability of the exclusion in the context of indoor exposures to hazardous materials, made clear that the exclusion should apply where, as here, there had been a discharge of hazardous materials into the land, atmosphere or any water course or body of water. The applicability of the exclusion, therefore, does not depend on whether the waste materials were legally or intentionally discharged as part of the insured’s normal business activity.
The Appellate Court has ruled that a “lead hazards” exclusion applies to lead poisoning claims by the insured’s tenant and is not limited, as the insured argued, to pollution claims. Holloway v. Northfield Insurance Company, No. 1-98-4140 (Ill. App. November 5, 1999), review denied (Ill. February 2, 2000).
Under pre-1973 policies, a reduction in property value resulting from the incorporation or installation of a defective product furnished by the insured constitutes "property damage" whether or not it results in physical damage to the structure as a whole. Pittway Corp. v. American Motorists Ins. Co., 56 Ill. App.3d 338, 370 N.E.2d 1271 (1977)(inclusion of defective valve rendered aerosol hairspray cans useless).
Illinois courts have found that the installation of a defective product does not result in physical injury to tangible property until it actually fails and causes third party property damage. Travelers Insurance Company of Illinois v. Eljer Manufacturing, Inc., 2000 Ill. LEXIS 1712 (Ill. December 1, 2000)(rejecting contrary view that 7th Circuit had earlier expressed in Eljer Manufacturing Co. v. Liberty Mutual Ins. Co., 972 F.2d 805 (7th Cir. 1992)).
Pure economic losses, such as loss of good will, injury to reputation, lost profits and investment opportunities were not covered absent some preliminary proof of an actual injury to tangible property. Ludwig Candy Co. v. Iowa Nat'l Mut'l Ins. Co., 78 Ill. App.3d 306, 396 N.E.2d 1329, 1332 (1979) and Dries & Krupp Manufacturing Co. v. Phoenix Ins. Co., 548 F.2d 681 (7th Cir. 1977). Nor does a claim for "loss of use" of tangible property extend to economic losses based on lost financial interest. CMO Graphics, Inc. v. CNA Ins. Co., 450 N.E.2d 860, 863 (Ill. App. 1983). The Appellate Court has ruled that the loss of use of tangible property is the loss of the ability to use property as an incident to ownership, as distinguished from lost profits. Gibraltar Casualty Co. v. Sargent and Lundy, 574 N.E.2d 664, 671 (Ill. App. 1990).
arguments that the cost of removing asbestos from buildings was "economic
loss" were rejected by the Illinois Supreme Court in USF&G v. Wilkin
Insulation (Ill. 1991). More recently, the Appellate Court relied
on Wilkin in holding that termite damage resulting from the insured's negligent
inspection and/or pesticide treatment of the plaintiffs' buildings was
"property damage." Del Posing v. Merit Ins. Co., 629 A.2d 1179 (Ill.
PROFESSIONAL LIABILITY INSURANCE
Court has ruled in Hartford Fire Insurance Company v. Whitehall Convalescent
and Nursing Home, Inc., 2001 Ill. App. LEXIS 191 (1st Dist. March 30, 2001)
that RICO and fraud claims a nursing home operator for mis-stating the
charges for residents’ medications fell within the scope of coverage for
“medical incidents” under the Hartford’s Healthcare Professional Liability
policy. The court ruled that the false billing claims were plainly
asserted “in connection with “the furnishing of...medications,” one of
the specifically enumerated professional health care services for
which the Hartford policy provided coverage. The Appellate Court
refused to find that the E&O policy was limited solely to the provision
of heath care services.
One year suit limitations period does not begin to run until a proof of loss form is received. McDonald v. American Family Mutual Ins. Co., No. 3-93-0030 (Ill. App. October 8, 1993).
A first party
policy that excluded "land" from the definition of "covered property"
was unambiguous and clearly precluded coverage for the cost of excavating
soil from the insured's property that had become contaminated as the result
of acid that leaked out of pipelines. The Seventh Circuit also refused
to find waiver or estoppel in the insurer's delay in denying coverage.
Horning Wire Corp. v. Home Ind. Co., 8 F.3d 587 (7th Cir. 1993).
insuring policyholders against the consequences of their own intentional
misconduct is against public policy. However, the Illinois Supreme
Court has declared that public policy does not disfavor making insurance
available against claims of retaliatory discharge. Dixon Distributing
Co. v. Hanover Ins. Co., No. 75675 (Ill. May 26, 1994).
While noting that public policy favors compensating victims, the Appellate Court declared that public policy disfavors permitting insurance indemnity for intentional acts. State Farm Fire & Casualty Company v. Leverton, No. 4-99-0069 (Ill. App. June 26, 2000).
Indemnity against intentional misconduct may be tolerated where it provides benefits for the victim but not where it compensates the wrongdoer. Lincoln Logan Mutual Insurance Company v. Fornshell, 1999 Ill. App. LEXIS 889 (4th Dist. December 14, 1999).
court has ruled that public policy precluded any form of coverage for a
contempt citation against the insured for his willful breach of the terms
of a consent agreement. Rossoff v. Cincinnati Ins. Co.,
24 F.Supp.2d 1095 (C.D. Ill. 1998)
Illinois does not permit insurance for punitive damages, since indemnification
for such awards would undermine their deterrent effect. Wausau Ins.
Co. v. Valspar Corp., 594 F.Supp. 269 (N.D. Ill. 1984). This is particularly
the case if the award is based on the insured's own intentional acts.
Magnum Foods v. Continental Cas. Co., 420 N.E.2d 1058, 1059 (Ill. App1994)
and Beaver v. Country Mut. Ins. Co., 420 N.W.2d 1058 (Ill. App. 1981)(punitive
damages are similar to a criminal penalty–they are intended to deter wrongdoers
from committing similar wrongs in the future). However, some courts
have permitted coverage where the insured's liability is vicarious.
Scott v. Instant Parking, Inc., 245 N.E.2d 124 (Ill. App. 1969); USF&G
v. Open Sesame Child Care Center, 819 F.Supp. 756 (N.D. Ill. 1993).
STANDARDS FOR POLICY INTERPRETATION
Under Illinois law, the absence of a definition does not render a policy term ambiguous, nor is it ambiguous simply because the parties can suggest "creative possibilities" its meaning. Lapham-Hickey Steel Corp v. Protection Mutual Insurance Company, 166 Ill. 2d 520, 529, 655 N.E.2d 842 (1995).
Where a policy provision is clear and unambiguous, it will be given its "plain, ordinary and popular" meaning. Hartford Acc. & Ind. Co. v. Case Foundation Co., 294 N.E.2d 7 (Ill. App. 1973). However, if a policy term is capable of multiple meanings, the one more favorable to the insured will be adopted. Marathon Plastics, Inc. v. International Ins. Co., 514 N.E.2d 479 (Ill. App. 1987), American States Ins. Co. v. Hartford Cas. Ins. Co., 950 F.Supp. 885 (C.D. Ill. 1997). All doubts and ambiguities will be resolved in favor of the insured. Northbrook Property & Cas. Co. v. USF&G, 501 N.E.2d 817 (Ill. App. 1986). On the other hand, the Seventh Circuit has ruled that this doctrine of contra proferentum should only apply to resolve ambiguities in favor of coverage after the insurer has had an opportunity to present evidence to dispel the claimed ambiguity. Stone Container Corp. v. Hartford Steam Boiler Inspection and Ins. Co., 165 F.3d 1157 (7th Cir. 1999).
Traditionally, evidence of contracting intent has been deemed inadmissible to vary the written terms of the parties' contract. However, the Seventh Circuit has suggested that while this rule bars using extrinsic evidence to vary the terms of the contract itself, it does not preclude an insured from presenting evidence of drafting history as means of suggesting the evidence of ambiguities that may not be evident from the terms of the policy alone. R.T. Hepworth Co. v. Dependable Ins. co., 997 F.2d 315, 318 (7th Cir. 1993). See also American Mut. Liability Ins. Co. v. Beatrice Companies, Inc., Case No. 86 C 1974 (N.D. Ill. February 18, 1994). Where two parties to a contract have conflicting interpretations of the meaning of its terms, a court may sometimes hear extrinsic evidence as to its meaning. As a result, this uncertainty of meaning will not automatically be interpreted against the insurer unless and until all reasonable efforts at interpretation have failed, including the taking of evidence concerning the drafting or negotiation of the contract. Rhone-Poulenc, Inc. v. International Ins. Co., 71 F.3d at 1305. See also Pratt Central Park Limited Partnership v. Dames & Moore, Inc., 60 F.3d 350, 353 (7th Cir. 1995) (Illinois law). However, if after the taking of such evidence, the insured's conflicting position remains a reasonable one, than the presumption in favor of coverage must be applied. McNeilly v. Bankers United Life Assurance Co., 999 F.2d 1199, 1201 (7th Cir. 1993).
Illinois courts have refused to adopt the principle of "reasonable expectations." American Country Ins. Co. v. Cash, 524 N.E.2d 1016 (Ill. App. 1988), leave to appeal denied (Ill. 1988); Bain v. Benefit Trust Life Ins. Co., 463 N.E.2d 1082 (Ill. App. 1984).
Exclusions can only decrease coverage, they cannot increase it. Continental Casualty Co. v. Pittsburgh Corning Corp., 917 F.2d 297, 300 (7th Cir. 1990). Accordingly, courts cannot find coverage based on coverage that is allegedly reinstated by a policy exclusion that allegedly is in conflict with the grant of insurance in the insuring agreement.
In interpreting an insurance policy, the court must effectuate the intent of the parties as expressed by the contract. State Farm Fire & Cas. Co. v. Moore, 103 Ill. App.3d 250, 255, 430 N.E.2d 641 (1981). If a policy provision has more than one reasonable interpretation, the one favoring coverage will be adopted. Consolidated Rail Corp. v. Liberty Mutual Ins. Co., 92 Ill. App.3d 1066, 1070, 416 N.E.2d 758 (1981). If the policy provisions are not ambiguous, they will be given their plain and ordinary meaning. State Farm v. Moore, supra. In determining whether an ambiguity exists, the court should consider the subject matter of the contract, the facts surrounding its execution, the situation of the parties and the predominant purpose of the contract.
The Appellate Court is in conflict as to whether a distinction should be drawn between sophisticated and unsophisticated insureds. See Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App.3d 70 (1992) (recognizing distinction) and Federated Mutual Ins. Co. v. State Farm Mutual Automobile Ins. Co., 1996 WL 416946 (Ill. App. July 24, 1996) (rejecting any distinction).
A policy will not be deemed ambiguous merely because it initially states a broad coverage and then excludes coverage for specific hazards. Hermitage Ins. Co. v. Action Marine, Inc., 816 F.Supp. 1280 (N.D. Ill. 1993); G.E. Mathis Co. v. Centennial Ins. Co., 400 N.E.2d 621 (Ill. App. 1980)
The Illinois Supreme Court has suggested that even clear policy language may potentially contain a latent ambiguity if its conflicts with the insured's reasonable expectations of coverage. Hoaglund v. State Farm Mut. Auto Ins. Co., 148 Ill.2d 272, 592 N.E.2d 1031 (1992).
Courts may sometimes look to dictionary definitions to supply the plain and ordinary meaning of policy terms. Muller v. Fireman’s Fund Insurance Company, 682 N.E. 2d 331 (Ill. App. 1997) and Abrams v. State Farm Fire and Casualty Company, 1999 Ill. App. LEXIS 487 (First District June 30, 1999).
Reformation will only be permitted where there is clear and convincing evidence that the instrument as it stands does not reflect the true intention of the parties and that there has been either a mutual mistake by the contracting parties or a mistake by one party and fraud by the other. Magnus v. Barrett, 557 N.E.2d 252, 255 (Ill. App. 1990); Board of Trustees v. Ins. Corp. of Ireland, 969 F.2d 329 (7th Cir. 1992).
Where a policyholder received an insurance certificate stating that its policy was being renewed "subject to the terms and conditions thereof, except as hereinafter provided", there was no need to specifically reference an endorsement in the original policy as it would be presumed that the endorsement would be carried over into the renewal policy. In Essex Ins. Co. v. Casten Railcar Services, Inc., No. 97-1760 (7th Cir. November 19, 1997), the court declared that any exclusions added to the original policy would be carried over except to the extent otherwise indicated in the renewal policy.
The Appellate Court has ruled that the description of coverage contained in a brochure accompanying an insurance policy was not a part of the policy itself and could not be relied upon to create an ambiguity where the brochure’s description of coverage for “water damage” seemingly contradicted the actual policy terms. In Whitt v. State Farm Fire & Casualty Company, No. 2-99-0708 (Ill. App. July 7, 2000), the court ruled that a drawing in the brochure of rain water entering an open window and accumulating on the floor captioned “water damage” did not create an ambiguity in the otherwise clear policy exclusions for damage resulting from floods and surface water.
When there is a conflict between the printed provision of a contract and the typed provisions, the typed provisions control. Central Illinois Public Service Company v. Allianz Underwriters Insurance Company, 240 Ill. App. 3d 598, 604 (1st Dist. 1992).
Supreme Court has ruled that an insurance binder is “in the nature of temporary
insurance.” Zannini v. Reliance Insurance Company of Illinois, Inc.,
590 N.E. 2d 457 (Ill. 1992).
THEORIES OF ALTERNATIVE LIABILITY
Supreme Court rejected a modified "market share" theory for DES claims
in Smith v. Eli Lilly, 560 N.E.2d 324, 337 (1990). Earlier, the Appellate
Court rejected it for asbestos claims. Leng v. Celotex, (Ill. App.
1990). However, the Appellate Court has left the door open for DES
claimants to seek recovery on a theory of "alternative liability."
Bowe v. Abbot Laboratories, 608 N.E.2d 223,229 (Ill. App. 1992).
TRIGGER OF COVERAGE
The Illinois Supreme Court adopted a "double trigger" for asbestos bodily injury claims in Zurich Ins. Co. v. Raymark Industries, Inc., 514 N.E.2d 150 (Ill. 1987), holding that the dates of exposure and manifestation were both "triggers" pursuant to the policies' definition of what constitutes a "bodily injury."
The court similarly refused to find coverage for an "exposure in residence" in the pollution context, ruling in Lapham-Hickey Steel Corporation v. Protection Mutual Ins. Co., 166 Ill.2d 520, 655 N.E.2d 842 (1995) that pollution that was already present on property when it was purchased by the insured was a "pre-existing condition" and not a new "occurrence" under later policies. On reconsideration, however, the court struck this portion of its ruling on October 2, 1995, apparently in reaction to several dissenting judges who complained that it was superfluous to the overall result.
Relying on Zurich, the Appellate Court reversed a trial court's use of a "discovery" trigger for asbestos building claims in U.S. Gypsum Company v. Admiral Ins. Co., 643 N.E.2d 1226 (Ill. App. 1994), leave to appeal denied (Ill. 1995), holding instead that the progressive nature of asbestos fiber releases mandated the application of a continuous trigger from the date of first installation through the date that the ACM was removed. The Appellate Court later ruled in a first party asbestos case that all policies in effect from the date of installation through containment or removal should be triggered. Board of Education v. International Ins. Co., 720 N.E.2d 622 (Ill. App. 1999).
In a non-environmental context, a federal district court in Illinois held in Bob Evans Farms, Inc. v. Excellent Builders, No. 84 C 506 (N.D. Ill. July 27, 1988) that coverage for claims arising out of the insured's negligent construction of a building should be triggered when the property damage was discovered. Similarly, the trial court adopted a "discovery" trigger for asbestos building claims in U.S. Gypsum. See also Ranger Ins. Co. v. Safety-Kleen Corp., 814 F.Supp. 744 (N.D. Ill. 1993)(adopting multi-year trigger for leukemia claim).
A "discovery" trigger was rejected in Eljer Manufacturing Co. v. Liberty Mutual Ins. Co., 773 F.Supp. 1102 (N.D. Ill. 1991, aff'd in part, rev'd in part, 972 F.2d 805 (7th Cir. 1992) which involved defective plumbing installations. There, the U.S. District Court held that coverage was triggered when the pipes first leaked water, not at the earlier date that the defective product was installed or a subsequent date when the problem was first discovered. On appeal, the Seventh Circuit held that all of the claims were triggered as of the date of installation, since the value of the property was damaged from that point forward given the propensity of the products to fail.
The Supreme Court of Illinois has refused to follow the Seventh Circuit’s analysis, however. In a later dispute between Eljer and its excess insurers, the court ruled in Travelers Insurance Company of Illinois v. Eljer Manufacturing, Inc., 2000 Ill. LEXIS 1712 (Ill. December 1, 2000) that the incorporation of a defective component into a larger whole does not result in “property damage” until the component caused physical injury to the surrounding property. However, the court did find that coverage might be triggered even prior to the malfunction of the product, if buildings, floors and ceilings in the plaintiffs’ buildings had been damaged in the course of removing and replacing the defective Quest plumbing systems (although the cost of replacing the product itself would not be covered). The case is now pending before the Illinois Supreme Court.
Allegations of emotional trauma of parents whose children were sexually abused by a Catholic priest were held to be covered under the policies in effect at the time of molestation, even though the parents were not made aware of the molestation until after the policies had expired. Roman Catholic Diocese of Springfield in Illinois v. Maryland Casualty Co., 685 N.E.2d 932 (Ill. App. 1st Div. 1997). The U.S. District Court had ruled that there was no coverage under Maryland's policy as the date of injury was the point in time when the parents learned that their children had been abused. However, the Seventh Circuit ruled on appeal that it was easy to imagine that the parents of the abused children were in fact injured long before and were simply in the dark as to the source of their injuries until then. The court found that it was only "common sense" that these injuries could in turn have resulted in concrete identifiable harm to the plaintiffs within the same time period.
The Appellate Court ruled in Benoy Motor Sales, Inc. v. Universal Underwriters Ins. Co., 679 N.E.2d 414 (Ill. App. 1997) that a trial court had erred in finding that a liability insurer was only responsible for that share of a pollution liability settlement corresponding to the amount of oil that the insured had shipped to a site while the policy was in effect. Noting that "environmental pollution does not stop and start in discrete time periods," the court ruled that the insurers were jointly and severely liable for pollution if any part of it occurred during the period of their coverage.
The Appellate Court ruled in Illinois Central Railroad v. Acc. & Cas. Co. of Winterthur, 739 N.E.2d 1049 (1st Dist. 2000) that the “deemer” clause in GL policies was only meant to apply in cases where an individual suffered discrimination in more than one policy, in which event the occurrence was assignable to the policy in which the first material damage took place.
A manufacturer may not obtain coverage for liabilities arising out of subsidiaries that were acquired after a policy expired. Caterpillar, Inc. v. Aetna Cas. & Sur. Co., 668 N.E.2d 1152 (Ill. App. 1996) and Emerson Electric Co. v. Aetna Casualty & Surety Co., 667 N.E.2d 581 (Ill. App. 1996).
In an early pollution case, the U.S. District Court ruled in Wausau Ins. Co. v. Valspar Corp., 594 F.Supp. 269 (N.D. Ill. 1984) that even though the underlying complaint sought to impose liability upon the insured for injuries suffered during the insurer's policy period, the insurer had no duty to defend where the actual facts were that the insured's storage of chemicals at the facility in question did not begin until after the subject policy had expired.