Court Addresses Sanctions, De-tender Issues
January 06, 2010
The 1st District Appellate Court recently held that an award of attorneys fees may be available in coverage disputes between insurers, and that an insurer to whom an insured's defense is initially tendered, may be entitled to damages against another insurer upon a de-tender to the first insurer and a selective tender to the other. Statewide Insurance Co. v. Houston General Insurance Co., 2009 WL 4827845 (1st Dist., Dec. 14).
Plaintiffs Statewide Insurance Co. and Westfield Insurance Co. were represented by the law firm of Freeborn & Peters, LLP, Chicago. Wolfe & Wolfe Ltd., of Chicago, represented defendant Houston General Insurance Co.
An injury occurred at a construction site, and the injured plaintiff, McCartin, ended up suing the general contractor, Joseph Construction Co. (JCC) and two of its subcontractors, Dryden and RC Plumbing, among others, in December 1999. These entities had liability insurance coverage with the insurers indicated below:
Entity - JCC; Relationship - General contractor: Insurer - Statewide
Entity - Dryden; Relationship - Subcontractor; Insurer - Houston
Entity - RC Plumbing; Relationship - Subcontractor; Insurer - Westfield
In September 2001, JCC, as an additional insured under its subcontractors' policies, tendered its defense to Houston and Westfield, advising that it would not be seeking indemnification from Statewide. Houston declined the tender, indicating that if it had any obligation at all under Dryden's policy, it would be for excess coverage only. It did not file a declaratory judgment action for a determination of rights. Westfield took a late-notice position and filed a declaratory judgment action against JCC, seeking a determination of its coverage obligations.
Statewide brought the instant action in September 2003 against Houston, asserting that Houston breached its duty to defend.
In October 2003, JCC, Statewide and Westfield settled Westfield's declaratory judgment action, with Statewide and Westfield each contributing $840,000 to a settlement of the underlying McCartin suit. As part of the declaratory settlement, they also agreed to pursue recovery from Houston of the amounts paid to McCartin, and Statewide and Westfield reserved their rights in accordance with that purpose. In addition, JCC expressed its desire that Houston bear the entire cost of the settlement.
In April 2004, Statewide amended its declaratory complaint adding Westfield as an additional plaintiff against Houston. Following cross motions for summary judgment in 2006, the trial court ultimately ruled that Houston and Westfield both had a duty to defend, and it therefore denied both their summary judgment motions.
As to Statewide, however, the court granted summary judgment in its favor and held that it was entitled to recover from Houston: the $840,000 it paid in the McCartin settlement; Statewide's underlying defense costs in the amount of $37,000; prejudgment interest on the amount of settlement it paid to McCartin in the amount of $152,000; and fees and costs of $262,000 which Statewide incurred in prosecuting the declaratory judgment action, pursuant to section 155 of the Insurance Code, 215 ILCS 5/155. Houston took this appeal, and Westfield and Statewide cross-appealed.
In an opinion by Justice Bertina E. Lampkin, the 1st District affirmed in part and reversed in part. Lampkin first addressed Houston's argument that its policy was not in effect at the time of the underlying accident, based on evidence that Dryden had cancelled a portion of the policy. She determined that, while Dryden may have given notice of a partial cancellation of the Houston policy, the cancellation either never actually took effect or the relevant portion of the policy had been effectively reinstated.
She also rejected Houston's argument that Statewide had not properly preserved its right to equitable subrogation of its defense costs against Houston, and Houston's claim that the award of prejudgment interest on Statewide's indemnity payment to McCartin was improper.
With respect to the award of fees and costs in favor of Statewide in connection with its declaratory judgment action, Houston argued that an award of fees and costs for vexatious and unreasonable action by an insurance company under section 155, ran only in favor of an insured, and that that section was not intended to give insurance companies the means to recover costs incurred in securing coverage for its insured against another insurer.
Lampkin acknowledged that the remedy under section 155 typically extends only to insureds and not to third parties. In this case, however, Statewide pursued coverage against Houston as JCC's assignee, and as assignee, Lampkin said that Statewide succeeded to the same position as JCC. It therefore was entitled to recover attorney fees if Houston's actions were vexatious and unreasonable. Permitting assignments between an insured and insurer, moreover, according to Lampkin, encourages early settlements.
Here, Lampkin found that Houston did not have a bona fide coverage dispute, and the award of section 155 sanctions was justifiable. She further found that Houston's conduct supported an award of fees incurred by Statewide in defending the instant appeal. The court therefore awarded fees and costs in connection with the appeal, and remanded for a determination of a reasonable amount.
As to the cross appeal, Lampkin observed that the issue was whether JCC deactivated its tender to Westfield so that Westfield did not have a concurrent duty to defend and indemnify JCC and was damaged by Houston's conduct. Although JCC had not deactivated its tender to Westfield earlier, Lampkin found that it did so in connection with the settlement of the Westfield declaratory judgment action in October 2003.
The agreement reached at that time indicated that Westfield's duty was then only to provide standby coverage because Houston had refused to defend and indemnify. The parties' subsequent actions were consistent with the deactivation, for Westfield was added to Statewide's declaratory judgment action as a plaintiff in April 2004.
Lampkin therefore said that summary judgment should have been granted in favor of Westfield because it did not have a concurrent obligation to defend and indemnify JCC. Because Westfield was damaged when it was forced to participate in the McCartin lawsuit and help fund the settlement, the case would be remanded for a determination of Westfield's damages.
Accordingly, the court affirmed the judgment in favor of Statewide and reversed the judgment against Westfield.
Justice Rodolfo Garcia dissented in part, primarily arguing that sanctions under section 155 should not have been awarded.
