Defense Costs May Be Recovered If Insurer's Obligation To Defend Arises Solely Out Of Court Order
August, 2007
The Illinois Appellate Court, First District implicitly creates an exception to the Illinois Supreme Court’s prohibition against an insurer’s right to reimbursement of defense costs incurred for uncovered claims. Steadfast Ins. Co. v. Caremark RX, Inc., 2007 WL 1485900 (Ill. App. 2007).
Facts:
In 2001, Steadfast issued Caremark a managed care professional liability policy. In 2002, two lawsuits were filed against Caremark in federal court alleging breach of fiduciary duty under the Employee Retirement Income and Security Act (“ERISA”) by conspiring with drug manufacturers to obtain “kickbacks” for favoring certain higher-priced drugs. Caremark tendered defense of these two suits to Steadfast, both of which Steadfast denied. Caremark filed a declaratory judgment action against Steadfast in the U.S. District Court for the Northern District of Illinois seeking determination that Steadfast was obligated to defend and indemnify Caremark in the federal actions. Caremark’s action was dismissed for lack of subject matter jurisdiction.
Steadfast then filed a complaint for declaratory judgment against Caremark in the Circuit Court of Cook County. On cross-motions for summary judgment, the circuit court ruled in favor of Caremark, finding Steadfast owed Caremark a duty to defend under the policy. It ordered Steadfast to defend Caremark during the pendency of Steadfast’s appeal.
The appellate court reversed the circuit court’s decision, finding that Steadfast did not owe Caremark a duty to defend, and remanded the case for a ruling on Caremark’s claim for attorneys’ fees. Steadfast Ins. Co. v. Caremark Rx, Inc., 359 Ill. App. 3d 749, 760 (Ill. App. 2005). The circuit court denied Caremark’s claim for attorneys’ fees, and also denied Steadfast’s “motion for restitution,” (which it treated as a motion for summary judgment) seeking recovery of defense costs expended in the two underlying federal actions. The circuit court based its decision on the Illinois Supreme Court’s opinion in General Agents Ins. Co. of North America, Inc. v. Midwest Sporting Goods Co., 215 Ill. 2d 146 (Ill. 2005), which held that an insurer cannot recover defense costs paid pursuant to a reservation of rights absent a provision in the policy entitling it to such relief. Id. at 166. Steadfast appealed.
Analysis:
On appeal, Caremark argued in reliance upon General Agents, that it was not obligated to return the defense costs paid by Steadfast because the policy at issue did not contain a provision allowing Steadfast to recover such costs. The appellate court disagreed.
First, the appellate court concluded that the circuit court’s denial of Steadfast’s motion for restitution was improperly based upon the Illinois Supreme Court’s holding in General Agents. The appellate court recognized that the Illinois Supreme Court based its decision in General Agents on its conclusion that “an insurer cannot unilaterally alter its policy through a reservation of rights letter to allow for the reimbursement of defense costs in the event that it is later found to have no duty to defend.” Id. at 153. Because Steadfast never agreed to defend Caremark pursuant to a reservation of rights, but rather, Steadfast defended Caremark pursuant to the circuit court’s order, the appellate court determined that the lack of a provision in the policy providing for the recoupment of defense costs had no effect on the disposition of Steadfast and that Steadfast’s defense obligation was not contractual. Thus, the circuit court should not have based its denial of Steadfast’s motion for restitution upon General Agents.
However, despite the appellate court’s disagreement with the circuit court’s reasoning, it recognized that it was able to affirm the circuit court’s decision in Steadfast on any basis in the record. The appellate court affirmed the circuit court’s ruling based upon the fact that the circuit court could not enter summary judgment on a theory of recovery not pled in Steadfast’s complaint. Because Steadfast sought relief based upon a theory of unjust enrichment, which Steadfast did not include in its complaint, nor did it allege any facts satisfying the elements of such a cause of action, the appellate court was unable to grant Steadfast’s motion for restitution. Nevertheless, the appellate court found that the circuit court erred in denying Steadfast’s motion for leave to file a second amended complaint, thereby reversing the circuit court’s denial of same and granting Steadfast permission to amend its complaint to include a claim for unjust enrichment.
Learning Points:
In effect, the appellate court’s ruling limits the holding in General Agents to the extent that an insurer whose only defense obligation arises from a court order may be entitled to recover defense costs paid pursuant to such court order, regardless of whether a policy provision exists entitling it to such relief. Steadfast also underscores the importance of a well-pled complaint. Had Steadfast included a claim for unjust enrichment in its initial complaints the appellate court would likely have granted Steadfast restitution without the need for further proceedings in the circuit court.
Back to CM Report of Recent Decisions (2007v2) 2007 Volume 2 Table of Contents
