Conflict Arose Despite Coverage Denial
June 30, 2009
The 1st District Appellate Court recently held that an insurer may have engaged in a conflict of interest with respect to two insureds, where the insurer provided a defense on behalf of one insured but denied coverage for the other. Country Mutual Insurance Co. v. Olsak, 2009 WL 1361596 (1st Dist. May 13, 2009).
Norman J. Lerum and James M. Messineo, Inverness, represented one of the insured and his assignee. Keith G. Carlson and Brian A. Schroeder, of Cassiday, Schade LLP, represented the insurer, Country Mutual.
Thomas Olsak, the 17-year-old step son of the named insured, Ed Pudlo, punched his hockey coach, Joseph Pecoraro, in the head, resulting in severe head injuries. Pecoraro brought suit alleging that the circumstances of the altercation were that Olsak had missed practice in violation of hockey team rules, that he was not going to be allowed to play in a game on the night of the altercation, and that he struck Pecoraro in retaliation and without provocation.
Count I of Pecoraro's complaint sought recovery against Olsak for assault and battery. Count II was brought against members of the hockey club's board of governors, including Olsak's step father Pudlo, who was a member. This count alleged essentially that the board members had failed to put into place various rules and procedures that would have prevented Pecoraro's injuries. Count III was brought against Pudlo individually, alleging that he was a manager of the team, that he knew that Olsak was prone to fighting, and that he negligently supervised Olsak.
Olsak filed an answer to Count I, contending that he had been provoked and that he acted in self defense. The hockey club and individual board members filed a cross claim against Olsak seeking contribution. Thereafter, Count II was dismissed as to the individual defendants, apparently on the ground that they had no duty to protect Pecoraro from the unforeseeable, criminal attack by Olsak.
Country Mutual issued a homeowner's policy to Pudlo on an occurrence basis and a personal umbrella liability policy to him and Olsak's mother. Both policies extended coverage to Olsak as a member of the household under the age 21. Both policies excluded coverage for intentional injuries caused by "the insured."
Country Mutual provided a defense on behalf of Pudlo for both Counts II and III. It denied coverage to Olsak on Count I, however, on the ground that the allegations of the complaint did not allege an "occurrence" and on the further ground that the intentional acts exclusion applied.
Nearly five years later in 2005, Country Mutual filed this declaratory judgment action seeking a declaration that it was not required to defend or indemnify Olsak in the underlying lawsuit. Among other allegations in the coverage action, Country Mutual claimed that the cross claim by the hockey club members had never been tendered to it and that it only recently had obtained a copy.
Pecoraro settled his assault and battery claim against Olsak in June of 2006. The settlement provided that Olsak would pay Pecoraro $5,000 and assign him all of Olsak's rights under the two Country Mutual policies. Pecoraro's counsel thereafter assumed the representation of Olsak in the coverage action, filed new affirmative defenses, and filed a counterclaim against Country Mutual for bad-faith refusal to defend and for sanctions under 215 ILCS 5/155.
The trial court subsequently granted Country Mutual's motion for summary judgment, and this appeal followed based on Pecoraro's assigned rights of Olsak.
In an opinion by Justice Michael J. Murphy, the 1st District reversed. He began by noting that the main argument on appeal was that Country Mutual engaged in a conflict of interest when it participated in the defense on behalf of Pudlo but denied a defense to Olsak. Murphy observed that where a conflict of interest exists, the insurer, instead of participating in the defense, must decline to defend and pay the costs of independent counsel for the insured.
Murphy further noted that, under Murphy v. Urso, 88 Ill.2d 4444 (1981), where two insureds of the insurer have adverse interests, the insurer will have a conflict preventing it from defending under a reservation of rights where it tries to control both defenses. A similar issue was presented in Williams v. American Country Ins. Co., 359 Ill.App.3d 128 (1st Dist. 2005), which prevented the insurer from controlling the defense of both a cab company and its driver that had potentially adverse interests.
Country Mutual, however, argued that these cases were not applicable because it did not defend both Olsak and Pudlo. Murphy disagreed, saying that Country Mutual was charged with providing a defense to both Pudlo and Olsak. Moreover, said Murphy, it was in Pudlo's best interests to argue that Olsak's acts were the sole proximate cause of Pecoraro's injuries, and that the board bore no responsibility.
On the other hand, said Murphy, it was in Olsak's best interest to argue that he did not receive adequate discipline or management from Pudlo and other members of the board. The interests of the two were thus diametrically opposed, and Country Mutual could not choose a defense strategy without harming one or the other. The evidence, moreover, indicated that Country Mutual failed to disclose this conflict to Olsak and obtain his consent.
Country Mutual pressed its point that there could be no conflict because it had no duty to defend Olsak in the first place. Murphy rejected this argument based in part on Cowan v. Ins. Co. of North America, 22 Ill.App.3d 883 (1st Dist. 1974), where the court found a duty to defend based on the possible reckless conduct of the insured. Murphy also cited a series of other cases, including Allstate Ins. Co. v. Kovar, 363 Ill.App.3d 493 (2d Dist. 2006), which appeared to involve allegations of some intentional conduct but in which the courts nevertheless found a duty to defend, and which Murphy interpreted as providing support for the proposition that the underlying allegations against Olsak at least involved the "potential" for coverage.
Based on this analysis, Murphy concluded that a conflict of interest may have existed between Olsak and Pudlo, that the case should be remanded for final determination by the trial court, and that if such a conflict did exist, the trial court should further determine if Olsak had been prejudiced by Country Mutual's failure to retain independent counsel to represent him.
