Insured's Own Counterclaim Can Be Relevant To Insurer's Defense Obligation
July, 2010
Introduction
The usual rule for determining whether an insurer has a duty to defend in Illinois, as in most states, requires an analysis of whether the facts alleged in the underlying complaint against the insured fall within, or potentially within, the insurance policy. See, e.g., Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 860 N.E.2d 307 (Ill. 2006). A question sometimes arises, however, whether pleadings other than the underlying complaint may or must be taken into account in assessing the duty to defend. Recent Illinois case law has suggested that such other pleadings may sometimes be considered, but not when the pleading is one filed by a purported insured who is seeking coverage. Compare American Economy Ins. Co. v. Holabird and Root, 886 N.E.2d 1166, 1178-79 (Ill. App. 1st Dist. 2008) (“consideration of a third-party complaint [not filed by party seeking coverage] in determining a duty to defend is in line with the general rule that a trial court may consider evidence beyond the underlying complaint”), with Nat’l Fire Ins. of Hartford v. Walsh Construction Co., 909 N.E.2d 285, 292-93 (Ill. App. 1st Dist. 2009) (“a third-party complaint cannot bolster a third-party plaintiff’s claim, as a putative additional insured, that the facts in the underlying construction negligence complaint potentially fall within the policy’s coverage”).
In Pekin Ins. Co. v. Wilson, 2010 WL 1999669 (Ill. May 20, 2010), the Illinois Supreme Court did not fully resolve the use of pleadings other than the underlying complaint in assessing an insurer’s defense obligation. It did, however, provide at least one instance of where the potential insured’s own pleading – a counterclaim – should be taken into account.
Facts
The insured, Wilson, was named a defendant in an underlying complaint brought by Johnson alleging that Wilson struck Johnson with a pipe and lacerated Johnson’s hand with a knife in October of 2002. The complaint further alleged that Johnson eventually restrained Wilson from doing any further harm at that time, but that in January of 2004, Wilson threatened Johnson with a pistol. The complaint sought recovery for assault, battery and intentional infliction of emotional distress. In addition, the complaint contained a negligence count alleging that Wilson failed to use tools and knives in a proper manner, thereby causing Johnson harm.
Wilson filed a counterclaim against Johnson alleging that, during the first incident, Johnson was the aggressor, that Wilson was defending himself, and that Johnson was the one guilty of assault, battery and intentional infliction of emotional distress. Wilson further alleged that Wilson had picked up the pipe to defend himself against Johnson, who was much larger than Wilson, and that Johnson grabbed Wilson, took away the pipe, and smashed Wilson’s head into the wall.
Pekin had issued a CGL policy to Wilson, and he therefore tendered defense of the underlying complaint to Pekin. In response, Pekin filed the instant declaratory judgment action asking for a determination that it did not owe Wilson a duty to defend. Pekin eventually filed a motion for judgment on the pleadings, relying on various pleadings in the coverage action and the amended complaint in the underlying lawsuit.
As part of its motion Pekin argued that coverage was excluded by the “expected or intended” exclusion in the CGL policy. It further argued that the negligence count of Johnson’s complaint did not bring the matter within coverage because Johnson had merely couched allegations of intentional conduct by Wilson in negligence terms.
The trial court agreed with Pekin and granted its motion for judgment on the pleadings. It also dismissed the counterclaim Wilson had filed in the coverage action which alleged, among other things, that Pekin’s refusal to provide coverage was vexatious and unreasonable.
Wilson appealed, and the appellate court reversed. It agreed with the trial court that, because the facts alleged by Johnson were inconsistent with negligence, the negligence count on its own did not give rise to a duty to defend. (This issue was not considered further by the Supreme Court.) It further held, however, that a duty to defend arose based on the allegations of self-defense in Wilson’s counterclaim in the underlying lawsuit, along with the self-defense exception to the “expected or intended” exclusion in the Pekin policy.
Pekin petitioned for leave to appeal, which the Supreme Court allowed.
Analysis
In an opinion by Justice Lloyd Karmeier, the Supreme Court affirmed the appellate court. The Court began by noting Pekin’s main argument, based on Zurich Ins. Co. v. Raymark Industries, Inc., 514 N.E.2d 150 (Ill. 1987), that a trial court must look solely to the underlying complaint and the applicable policy provisions to determine whether there is a duty to defend. After examining the language from Zurich Ins. and similar cases relied on by Pekin, however, the Court determined that an insurer’s duty to defend “solely” on the content of the underlying complaint was only a general rule as to which particular circumstances could dictate a different result.
The Court pointed specifically to American Economy, where the appellate court held that it was appropriate to examine the content of a third party complaint to determine whether there is a duty to defend. The Court also discussed Fidelity & Casualty Co. of New York v. Envirodyne Engineers, Inc., 461 N.E.2d 471 (Ill. App. 1st Dist. 1983), holding that, in the context of a declaratory judgment action, an insurer ought to be able to rely on extrinsic evidence in challenging the duty to defend.
In cases like the present one, involving a motion for judgment on the pleadings and not summary judgment, the Court stated that Wilson’s counterclaim in the underlying lawsuit was a part of the pleadings in that lawsuit for which Pekin was seeking a determination on the duty to defend. Given that Pekin’s policy included a self-defense exception to the “expected or intended” exclusion, that counterclaim must be examined for the presence of allegations sufficient to trigger the exception.
The Court suggested further that facts set forth in Wilson’s memorandum in opposition to Pekin’s motion in the coverage action might also be relevant. The Court pointed specifically to statements in the memorandum that Wilson had consistently denied any intentional harm and that he acted only in self defense. The memorandum also referred to a police report that appeared to contradict certain of Johnson’s allegations.
The Court also observed that it would be very unlikely for Johnson in his underlying complaint to have set forth facts giving rise to the self-defense exception to the exclusion relied on by Pekin. Thus, unless Wilson were allowed to plead facts alleging self-defense, there would be no way for the self-defense exception to be triggered, and coverage would be illusory. Having promised coverage to Wilson under the self-defense exception, Pekin could not ignore Wilson’s pleading.
Finally, the Court stated that its decision did not resolve any issue critical to the underlying lawsuit. On the other hand, if the Court were to agree with the trial court based solely on Johnson’s allegations and the “expected or intended” exclusion, it would in essence be condoning the resolution of the issue at the heart of the underlying lawsuit.
Thus, given the existence of fact issues concerning Wilson’s conduct in self-defense, and considering all well-pleaded facts of Wilson as the nonmoving party in the coverage action, Pekin’s motion should not have been granted. The Court therefore affirmed the appellate court’s reversal of the grant of judgment on the pleadings and dismissal of Wilson’s counterclaim against Pekin.
Learning Points:
- The Wilson case establishes that a court, in deciding the duty to defend, should not reject reliance on a pleading just because it is one that the purported insured prepared and filed and may contain self-serving allegations designed to trigger coverage.
- On the other hand, the case does not go so far as to suggest that a court must consider every pleading filed by a purported insured. Of significant importance in Wilson was the Court’s suggestion that coverage pursuant to the self-defense exception could be regarded as illusory unless Wilson’s counterclaim were taken into account.
- Clarification of the dividing line between an insured’s pleadings that must be considered and those which may not awaits further development.
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