Illinois Supreme Court Defines Proof of Mailing Requirement for Notice of Material Change to Existing Policy and Construes "Legally Obligated to Pay" Language
January, 2003
The Illinois Supreme Court holds that (1) an insurer who mails notice to its insured of a material change in an insurance policy, as required under Section 143.17a(b) of the Illinois Insurance Code, must maintain proof of mailing on a recognized U.S. Post Office form or a form acceptable to the U.S. Postal Service or other commercial delivery service; and (2) an insured who enters a settlement agreement consisting of an agreed payment amount, covenant not to sue and an assignment of the insured’s rights is still “legally obligated to pay” the injured party for purposes of establishing the insured’s right to indemnity under standard liability policy language. Guillen v. Potomac Ins., 785 N.E.2d (Ill. 2003).
Facts
Plaintiff (“Guillen”) filed suit against her former landlords (“Ortiz”) alleging exposure to deteriorating lead-based paint and paint dust present in an apartment in which she resided during her first two years of life. Ortiz tendered Guillen’s claim to their liability insurer (Potomac) which refused the tender and denied any obligation to defend or indemnify based upon an endorsement containing a lead paint exclusion which had recently been added to the Ortiz’ liability policy through mailed written notice prior to renewal. Ortiz later entered into a settlement agreement with Guillen for the sum of $600,000 but providing that this amount would be satisfied solely through assignment of Ortiz’ right to payment from Potomac.
Under the assignment of rights, Guillen sought a declaratory judgment that Potomac was obligated to pay the $600,000 settlement amount agreed to by Ortiz. Guillen alleged Potomac failed to comply with the statutory notice requirements of the Illinois Insurance Code, thereby rendering the lead exclusion null and void with regard to the Ortiz’ policy. Potomac thus wrongfully refused to defend and would be responsible for the reasonable settlement amount of $600,000 agreed to by Ortiz. Potomac denied these assertions and provided the court with an unsigned copy of correspondence forwarded to all insureds with the lead exclusion and an affidavit of a Potomac employee as to its custom and practice in mailing notices of material policy changes to its insureds. The circuit court found Potomac had not satisfied the notice requirements of the Illinois Insurance Code and held that Potomac breached its duty to defend. However, the court further found that Potomac was not liable for the $600,000 settlement as it did not require payment by Ortiz. Because Ortiz had not incurred any liability for damages with respect to the lawsuit, there was no coverage under Potomac’s liability policy.
The appellate court reversed the indemnification ruling, finding that Ortiz properly assigned a right of indemnification to Guillen and disagreeing with the trial court’s interpretation of the terminology “legally obligated to pay” found within Potomac’s liability policy. The appellate court affirmed the finding that Potomac failed to comply with the Illinois Insurance Code’s notice requirements for a material change of policy, but remanded for a hearing to determine whether the settlement amount agreed to by Ortiz was reasonable due to the possibility of collusion between the insured and plaintiff.
Analysis
Proof of Mailing Requirement
The Illinois Supreme Court affirmed the First District Appellate Court’s holding that Potomac did not satisfy the notice requirements of the Illinois Insurance Code. Section 143.17a(a) of the Code requires an insurance company to mail to a named insured, at least 60 days in advance, a notice of an intention not to renew an insurance policy and to maintain proof of mailing of such notice on either a recognized U. S. Post Office form or a form acceptable to the U. S. Postal Service or other commercial mail delivery service. Further, within Section 143.17a(b), the Code notes that an insurance company may not materially alter a policy unless the company has mailed or delivered to the named insured written notice of such change in coverage, at least 60 days prior to renewal, and the company shall maintain proof of mailing or proof of receipt, whichever is required. In construing this statutory language, the Court followed the general rule that when the same words appear in different places in a statute, they are given the same meaning. Therefore, the Illinois Supreme Court read Section 143.17a(b), requiring proof of mailing, to require the same defined proof of mailing set forth in Section 143.17a(a): the mailing of notice as to a material change must be on a recognized U.S. Post Office form or a form acceptable to the U.S. Postal Service or other commercial mail delivery service. Because Potomac failed to maintain proof of mailing as required under Section 143.17a(b), the lead exclusion never became part of the Ortiz’ insurance policy. Thus, Potomac breached its duty to defend and was estopped from raising policy defenses.
Indemnification /Assignment
The Court next reviewed the duty of indemnification and validity of the assignment by Ortiz to Guillen, examining the liability policy language stating that coverage is provided for damages the insured is “legally obligated to pay.” Review of the policy language “legally obligated to pay” was one of first impression for the Illinois Supreme Court. After evaluating other jurisdictions dealing with the same or similar issues, the Illinois Supreme Court followed the majority in finding that the construction of the “legally obligated to pay” language is a technical rather than practical one. An insured remains “legally obligated to pay” when a settlement consists of an agreed amount of payment, a covenant not to execute against the insured, and an assignment of the insured’s right because such a settlement agreement is a contract, not a release. The insured remains liable in tort. Thus, the Court reasoned that the insured is still legally obligated to the injured plaintiff so the insured retains the right to indemnification from the insurer.
The Illinois Supreme Court noted that public policy supports the technical construction of the “legally obligated to pay” language because to hold otherwise would allow an insurer to hide behind its policy language and refuse to defend claims. Once an insurer has breached its duty to defend, it is in no position to demand that the insured be held to a strict accounting under the policy language; an insured is afforded liberal construction of the “legally obligated to pay” language. Therefore, Potomac has a duty to indemnify Ortiz and that right of indemnification was assigned to Guillen.
The Court did remand to the circuit court for evaluation of the reasonableness of the settlement agreement and amount in settlement. The Court held that because of the risk of collusion, plaintiff must prove that the settlement reached with the insured was reasonable before the settlement could have any binding effect upon the insurer. Potomac must have an opportunity to present any evidence on the issue of the reasonableness of Ortiz’ decision to settle. With this remand, the general proposition of law that if a settlement amount falls below the policy limits, the settlement amount is upheld as reasonable, was noted by the Court as too broad a standard to apply in the context of settlement agreements such as that in this matter, which contained both a covenant not to sue and an assignment of the rights of the insured.
Learning Points:
The Illinois Supreme Court clearly sets forth that any material changes to an insurance policy must follow the notice provisions of Section 143.17a(b), with the modified proof of mailing language to be inclusive of that set forth in Section 143.17a(a), noting that proof of mailing must be maintained on a recognized U.S. Post Office form or a form acceptable to the U.S. Postal Service or other commercial mail delivery service for a material change in the policy provisions to be valid.
The Court further holds, as a matter of first impression, that the policy language “legally obligated to pay” will be liberally construed and read with a technical construction, rather than a practical one, where a settlement agreement containing a covenant not to sue and an assignment of rights is presented. In such a situation, the Court, giving way to public policy, will read the agreement as a contract under which the insured is still legally obligated to pay any proceeds of the agreement and therefore entitled to indemnification from the insurer.
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