Insured Bound By Declaration of Non-Coverage Obtained by Insurer Against Putative Additional Interest
November, 2009
by Edward M. Kay and Melinda S. Kollross
The Illinois Appellate Court, First District holds that a declaratory judgment finding that a purported additional insured was not covered by a liability policy precludes the named insured from relitigating the coverage issue in a subsequent lawsuit for breach of contract to procure insurance. State Farm Fire & Cas. Co. v. John J. Rickhoff Sheet Metal Co., 2009 WL 2581700 (Ill. App. 1st Dist.).
Facts
Quality Storage Products ("Quality") sold an overhead conveyor to ITW Signode and contracted Rickhoff to install the equipment. Before the installation had been completed in March of 2000, an ITW Signode employee ("Coleman") was injured by the equipment and subsequently sued Quality and Rickhoff for his injuries.
Quality and Rickhoff had been working together for more than a decade and had a verbal agreement that whenever Rickhoff performed a job for Quality, Rickhoff would name Quality as an additional insured on its general liability policy. At the time, Meridian Mutual Insurance Company ("Meridian") was Rickhoff's general liability insurer. Horton was Rickhoff's insurance agent. Sometime prior to commencing work on the Quality-ITW Signode project, Rickhoff requested that Horton provide Quality with a certificate of insurance naming Quality as an additional insured under Rickhoff's policy with Meridian. Horton had issued Rickhoff a certificate of insurance on September 30, 1999, naming Quality and Nabisco, Inc., as "additional insureds" with respect to "general liability only."
Quality requested defense and indemnification from Meridian for the Coleman lawsuit but Meridian denied coverage. Meridian then filed a declaratory judgment action against Quality claiming that it did not have a duty to defend Quality because there was no written agreement between Quality and Rickhoff as required for Quality to be named an additional insured under the terms of Rickhoff's liability policy.
In February 2004, Quality filed a claim for breach of contract to procure insurance against Rickhoff in the Coleman injury litigation. Meridian subsequently moved for summary judgment in the DJ action, arguing that Quality could not be an additional insured under Rickhoff's policy because there was no written contract between Quality and Rickhoff. The circuit court granted Meridian summary judgment in October 2004; Quality did not appeal.
In 2005, Quality and Rickhoff settled the injury litigation with Coleman and Quality voluntarily dismissed its claims against Rickhoff. State Farm, Quality's general liability insurer, as subrogee, subsequently commenced this action against Rickhoff for breach of contract to procure insurance. State Farm had defended Quality in the Coleman litigation, paying out a $110,000 settlement and roughly $82,000 in attorney fees and other defense costs.
Rickhoff filed a third-party complaint against Meridian and Horton, contending, inter alia, that the certificate of insurance was sufficient to satisfy the writing requirement of its liability policy. Meridian moved to dismiss Rickhoff's third-party complaint as barred by the prior declaratory judgment adjudicating Meridian's duty to defend Quality. Rickhoff opposed the motion arguing that privity was lacking between itself and Quality and that it was an indispensable party to the DJ action such that Meridian's failure to join it in that action prevented the declaratory judgment from binding Rickhoff. The circuit court granted Meridian's motion to dismiss, finding that Rickhoff's claim was precluded by the declaratory judgment because Quality espoused the same position that Rickhoff would have taken in the DJ action, and that Rickhoff was not a necessary party to that action because Rickhoff's coverage was not at issue.
Analysis
Privity Established Between Named Insured and Putative Additional Insured
On appeal, Rickhoff first contended that the prior judgment does not bar its third-party complaint against Meridian here because it was not in privity with Quality because (1) they did not share the same legal interest; and (2) Quality did not adequately represent Rickhoff's interests in the DJ action.
A prior judgment may have preclusive effects on a subsequent action under either the doctrine of res judicata or collateral estoppel. Res judicata provides that a final judgment on the merits by a court of competent jurisdiction bars any subsequent action between the same parties or their privies on the same cause of action. In order for res judicata to procedurally bar an action, three requirements must be satisfied: (1) a final judgment has been rendered by a court of competent jurisdiction; (2) an identity of the causes of action exists; and (3) the parties or their privies are identical in both actions. Under collateral estoppel, the adjudication of a fact or issue in one cause bars relitigation of the same fact or issue in a subsequent suit. The party asserting collateral estoppel must show: (1) the issue previously adjudicated is identical to the question presented in the subsequent action; (2) a final judgment on the merits exists in the prior case; and (3) the party against whom estoppel is directed was a party to the prior litigation or is in privity with such a party.
As the appellate court explained, regardless of which doctrine applies, only privity is in dispute, and privity is the same under either doctrine. Privity generally exists when parties adequately represent the same legal interest. In determining whether privity exists, the identity of the interest controls, not the nominal identity of the parties. The Restatement (Second) of Judgments offers the most useful rationale for determining whether privity exists here:
The Restatement (Second) of Judgments explains that " ‘privity' refers to a cluster of relationships, [citation], under which the preclusive effects of a judgment extend beyond a party to the original action and apply to persons having specified relationships to that party" and identifies three general categories of relationships that may establish privity....The second category of relationships includes "an array of substantive legal relationships," referred to in sections 45 through 61 of the Restatement (Second) of Judgments, in which one of the parties to the relationship is "treated as having the capacity to bind the other to a judgment in an action to which the latter is not a party." These relationships include, inter alia, co-obligors, parties who are vicariously liable for one another, bailees and bailors, co-owners of property, assignees and assignors, the promisee and intended beneficiary of a contract, corporations and their officers, directors, and shareholders, and members of partnerships.
The relationship between Rickhoff and Quality falls into this second category, specifically, that of promisee and intended beneficiary to a contract described by Section 56 of the Restatement. Under Section 56, the determination that Meridian (promisor) did not have a duty to insure Quality (intended beneficiary) also terminated Meridian's obligation to Rickhoff (promisee) to provide additional insured coverage to Quality for the job in question.
The appellate court rejected Rickhoff's argument that privity was lacking because Rickhoff faced liability from Quality pending the outcome of the DJ action, noting that the Restatement (Second) of Judgments does not consider it material that there were additional obligations running between the beneficiary and the promisee, which may have been impacted by the adjudication between the beneficiary and the promisor. Thus, whether Rickhoff had other obligations to Quality that would be affected by the discharge of Meridian's obligation to Quality is immaterial to whether the declaratory judgment precludes Rickhoff's cause of action here.
The court also rejected Rickhoff's claim that Quality did not adequately represent Rickhoff's interest in the DJ action. Under Section 75 of the Restatement (Second), Rickhoff, the represented party, is required to show that Quality, the representative party, mismanaged the conduct of the DJ and that the opposing party, Meridian, knew it. The Illinois Supreme Court performs this analysis by asking whether the representative "vigorously" advocated the position in the prior litigation; the mere fact that the court rejected the representative party's arguments is not dispositive. People ex rel Burris v. Progressive Land Developers, Inc., 151 Ill. 2d 285, 602 N.E.2d 820 (1992). While Rickhoff asserted that Quality did not have an incentive to vigorously defend the DJ action because if it lost, it could simply turn around and sue Rickhoff for breach of contract to procure insurance, the court did not believe "that the prospect of having to prosecute an additional lawsuit to obtain relief would constitute an incentive." Moreover, the record reveals that "Quality briefed and argued its position in favor of coverage at length with competent counsel." Therefore, Quality did adequately represent Rickhoff's interest in advocating for additional insured coverage in the DJ action and Rickhoff's current claim against Meridian is precluded.
Named Insured Not A Necessary Party
Rickhoff next asserted that the declaratory finding that Meridian had no duty to defend Quality was violative of due process and void because Meridian failed to join Rickhoff in the DJ action. Specifically, Rickhoff maintained that it was a necessary party to the DJ action because it could be subject to liability from Quality pending the outcome of the suit and thus is not bound by the declaratory judgment.
Assuming that Rickhoff may properly raise an objection to joinder here -- a matter which raises serious doubt in the court's view as Rickhoff was aware of the DJ proceedings but never sought to intervene or directly challenge the declaratory judgment rendered -- its presence was not necessary in the DJ action. A party is necessary where its presence in a lawsuit is required to: (1) protect an interest which the absentee has in the subject matter which would be materially affected by a judgment entered in his absence; (2) reach a decision which will protect the interests of those who are before the court; or (3) enable the court to make a complete determination of the controversy.
Here, the DJ court was obviously able to reach a final judgment without the presence of Rickhoff, and Meridian and Quality never suggested that their interests were somehow compromised by Rickhoff's absence. Only Rickhoff now complains that its rights were adversely affected by its absence. However, Illinois law excuses the presence of a necessary party where that party is represented by others in the suit that give the absent party's interest "actual and efficient protection." The so-called "doctrine of representation" requires that those who are brought into the suit "have the same interest as have those not brought in, and are equally certain to bring forward the entire merits of the controversy as would the absent persons."
Because Quality would have received the primary benefit in receiving coverage as an additional insured, any cause of action Rickhoff would have against Meridian as far as that coverage was contingent upon Meridian's obligation to cover Quality. Once it had been determined that Meridian did not have that obligation under the insurance contract, Rickhoff could have no cause of action against Meridian for failure to cover Quality. Further, because Quality vigorously defended that expectation of coverage, Quality adequately represented Rickhoff's interest in the DJ action. As such, Rickhoff's presence in the DJ suit was not necessary to defend that interest.
Learning Point: A declaratory judgment of non-coverage obtained by a liability insurer in an action against the putative additional insured will bind the named insured, precluding any further coverage litigation by the named insured against the insurer, where the putative additional insured vigorously pursued coverage in the DJ action.
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