Court: Decision To Defend Not Binding
September 09, 2008
As a matter of first impression, the 2d District Appellate Court recently held that the Illinois Insurance Guaranty Fund was not bound by a waiver of policy defenses arising from an insolvent insurer's defense of an insured without a reservation of rights. Illinois Insurance Guaranty Fund v. Santucci, 2008 WL 3318368 (2d Dist. Aug. 8).
IIGF was represented by Patti M. Deuel of Kiesler & Berman. Randy K. Johnson, Scott G. Richmond and Jane Craddock Ryan of Ariano, Hardy, Nyuli, Johnson, Richmond & Goettel P.C. in Elgin represented defendant Pat Santucci. State Farm Insurance Company was represented in the appeal by Harry Ray Chiles Jr., of Wheaton.
Santucci was president of a construction company, P.S. Coyote Inc., to which a commercial general liability policy had been issued by Statewide Insurance Company. He operated the construction company on the same premises where he owned and maintained several horses. In November 2001, two of the horses escaped from the property and collided with the vehicle of Linda Duff, causing damage to the vehicle. Duff was insured by State Farm, which paid the claim, and which then brought suit as subrogee against Santucci.
Statewide learned of State Farm's lawsuit against Santucci shortly thereafter, investigated the matter, and, in January 2004, agreed to defend Santucci without a reservation of rights. At about the same time Statewide was adjudged insolvent by a Cook County court and was ordered to liquidate, pursuant to the terms of the Illinois Insurance Code. A few months thereafter, IIGF took over the defense of Santucci pursuant to a reservation of rights.
In August 2005, IIGF filed a declaratory judgment complaint against Santucci alleging that it did not have a duty to defend him with regard to the State Farm action because Santucci was not an insured under the Statewide policy issued to Santucci's corporation, Coyote. In his answer to that complaint, Santucci alleged, among other things, that the horses escaped from his property because he inadvertently left open the gate. He further took the position that at the time he left open the gate, he was returning to his property in his corporate capacity as president of Coyote, and that Statewide therefore had a duty to defend him even though Coyote was not named in the State Farm complaint.
The IIGF filed a motion for summary judgment, and Santucci, which, for purposes of the IIGF lawsuit, was supported by State Farm, filed a cross motion. The trial court found in favor of coverage, and thus granted Santucci's motion and denied that of IIGF. IIGF then took this appeal.
In an opinion by Justice Robert D. McLaren, the 2d District reversed. He began by observing that IIGF's main argument on appeal was based on the language of section 534.3(a) of the Insurance Code, 215 ILCS 5/534.3(a), which limits IIGF's obligations to "covered claims." Under section 534.3(a) of the Code, moreover, a "covered claim" is defined as an unpaid claim for a loss made either by a person insured under a policy or by a person suffering injury for which a person insured is legally liable.
McLaren then examined the terms of the Statewide policy issued to Coyote. That policy defined an "insured" as the corporation itself and also its executive officers and directors with respect to their duties as officers or directors of the corporation. Under this definition, McLaren found that Santucci did not qualify as an insured for purposes of the State Farm lawsuit based principally on the fact that, even though he was an officer, the State Farm complaint named Santucci as a defendant individually, but did not name either Coyote or Santucci in his capacity as an officer or director of Coyote.
In addition, McLaren noted that the horses were owned by Santucci individually, and not by Coyote. Moreover, said McLaren, even if he was "wearing his corporate hat" when he left the gate open, thus allowing the horses to escape, that did not change the fact that neither Coyote nor Santucci as an officer or director thereof, was named in the State Farm complaint.
Santucci argued that under the broad rules applicable to duty-to-defend cases in Illinois, IIGF had a duty to defend because it was possible that Coyote would be named as a defendant by State Farm. McLaren rejected this argument on the ground that IIGF was not bound by the broad general rules but only by the terms of the Insurance Code which limited IIGF's obligations to covered claims.
Santucci further argued that IIGF's policy defenses were waived because Statewide accepted Santucci's tender without a reservation of rights and, moreover, IIGF defended Santucci for 15 months, albeit pursuant to a reservation of rights. McLaren noted that the question of IIGF's potential waiver of defenses was one of first impression. He also agreed that, in typical insurance coverage cases, in the absence of a reservation of rights, an insurer waives all questions of policy coverage when it assumes an insured's defense.
Nevertheless, said McLaren, IIGF is not an insurance company, and Statewide's decision to defend without a reservation of rights did not bind IIGF. Rather, by statute, IIGF assumed the policy obligations of Statewide only to the extent that those obligations were statutorily defined "covered claims."
Furthermore, McLaren looked to section 537.7(b) of the Code, which provides that IIGF is not bound by a settlement or waiver by an insurance company within 12 months prior to an order of liquidation. In this case, the IIGF could not be bound by an purported waiver by Statewide because the waiver occurred within 12 months of the time that IIGF assumed Santucci's defense. McLaren pointed to a Texas case, Lopez v. Texas Property & Casualty Ins. Guaranty Ass'n, 990 S.W.2d 504 (Tex App. 1999), which reached the same conclusion.
McLaren also rejected Santucci's position that IIGF's defense of Santucci for 15 months constituted a waiver of policy defenses, since the defense was pursuant to a reservation of rights.
Finally, Santucci argued that a conflict of interest had arisen between him and IIGF which estopped IIGF from abandoning its defense of him. He contended that, when IIGF filed its declaratory judgment action, it was obligated to advise him to file a contribution claim against Coyote. According to Santucci, a conflict arose because, although it was in his interest to file the contribution claim, doing so would have been averse to the interests of IIGF, which would have had to defend the claim. Santucci concluded that IIGF's failure to advise him of his rights now estopped it from denying coverage.
IIGF countered, however, that there was no proper basis for any such contribution claim. McLaren noted that Santucci did not contend otherwise, instead saying only that the propriety of any such claim was something to be decided by the trial court. In light of Santucci's failure to explain how the contribution claim would have been proper, McLaren found it unnecessary to address the point any further.
The court therefore reversed the trial court's order granting summary judgment for Santucci and denying the summary judgment motion of IIGF, thereby finding in favor of IIGF.
