Insured's Counterclaim Is Relevant To Defense Duty
June 16, 2010
The Illinois Supreme Court recently held that, in determining whether an insurer has a duty to defend its insured in an underlying lawsuit, consideration should be given not just to the plaintiff's complaint against the insured in the underlying suit but also to the insured's counterclaim against the underlying plaintiff. Pekin Insurance Co. v. Wilson, 2010 WL 1999669 (Ill. May 20, 2010).
The insurer, Pekin, was represented by Scott L. Howie and Richard J. Siebert of Pretzel & Stouffer Chartered, Chicago. L. James Hanson of Neubauer, Hanson & Overstreet, Mount Vernon, represented Pekin's insured, Wilson.
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 2002. The complaint further alleged that Johnson eventually restrained Wilson from doing any further harm at that time, but that in January 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 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.
Wilson, to whom Pekin had issued a CGL policy, 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.
In an opinion by Justice Lloyd A. Karmeier, the Supreme Court affirmed the appellate court. He began by noting Pekin's main argument, based on Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2d 23 (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 Insurance and similar cases relied on by Pekin, however, Karmeier 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.
He pointed specifically to American Economy Insurance Co. v. Holabird & Root, 382 Ill. App. 3d 1017 (2008), 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. He also discussed Fidelity & Casualty Co. of New York v. Envirodyne Engineers, Inc., 122 Ill. App. 3d 301 (1983), where the court held 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, Karmeier said 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.
Karmeier suggested further that facts set forth in Wilson's memorandum in opposition to Pekin's motion in the coverage action might also be relevant. Karmeier 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.
Karmeier 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, Karmeier stated that the Court's 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 the appellate court's reversal of the dismissal of Wilson's counterclaim against Pekin.
