Court Finds Duty To Defend Despite Tender
December 02, 2008
The U.S. District Court for the Southern District of Illinois recently held that an auto dealer/garage's targeted tender of the defense of a lawsuit arising from an accident, allegedly caused by the dealer's employee while driving a customer's car, to the customer's insurer was not effective as potentially violating Illinois public policy recognized by legislation requiring the dealer to maintain its own liability coverage. Shelter General Insurance Co. v. Zurich Direct, 2008 WL 4449873 (Sept. 30).
The target of the tender, Shelter, was represented by Michael J. Bedesky of Reed, Armstrong, Gorman, Mudge & Morrissey, in Edwardsville. Brian McGovern and Bryan Kaemmerer, both with McCarthy Leonard of Chesterfield, Mo., and Raymond Lawler of Lawler & Lawler in Marion represented the defendants.
An employee of the auto dealer, Foley Sweitzer Motor Sales, while driving the car of customer Kathy McLaughlin, became involved in an accident, following which both he and Foley Sweitzer were sued by underlying plaintiffs. Shelter provided liability coverage for McLaughlin and her auto. Universal Underwriters Group provided liability coverage for Foley Sweitzer.
Shelter retained counsel to defend the employee and Foley Sweitzer. Universal, however, declined to defend, relying on a ''targeted tender letter'' signed by both the employee and Foley Sweitzer directed to Shelter, advising that they had accepted the decision of Universal to ''delegate the defense … to Shelter.''
In July of 2007, Shelter filed this coverage action seeking a declaration that Universal had an obligation to share in both the defense and indemnity for the employee and Foley Sweitzer, and the parties filed cross motions for summary judgment.
In a decision by Chief Judge David R. Herndon, the court granted the motion of Shelter and denied that of Universal. Herndon characterized the principal issue as whether the targeted tender doctrine in Illinois effectively absolved Universal of its duty to defend.
Herndon reviewed some of the history of the targeted tender doctrine in Illinois, noting that while actual notice of an underlying suit generally triggers an insurer's duty to defend its insured, courts in Illinois allow an insured covered by multiple concurrent policies to designate which of its insurers will provide defense coverage. Illinois courts also allow an insured to ''deselect'' an insurer previously selected for coverage, but the doctrine does not allow the vertical exhaustion of primary and excess limits before all primary insurance available to the insured has been exhausted.
Herndon then discussed Pekin Ins. Co. v. Fidelity & Guaranty Ins. Co., 357 Ill.App.3d 891, 830 N.E.2d 10 (4th Dist. 2005). The court there refused to allow a tow truck company to ''deselect'' its own liability insurance and tender the underlying litigation to the insurer for the vehicle it was towing at the time of the accident, after the towed vehicle broke loose from the tow truck and caused injury.
The Pekin court did so despite the fact that the tow truck driver was considered a permissive user of the towed vehicle, and despite the fact that certain other Illinois case law suggests that the insurance of the vehicle's owner is primary. The Pekin court reasoned that allowing the tow truck insurance to become secondary would violate Illinois public policy requiring tow truck operators to maintain minimum liability insurance.
Shelter here relied on Pekin in contending that allowing the employee and Foley Sweitzer to deselect their own coverage through Universal would violate Illinois public policy, which requires garage and dealer owners to maintain their own liability coverage. Shelter further contended that the instant case is distinguishable from the targeted tender line of cases that took place in a construction setting and in which the tendering party was an additional insured on the target insurer's policy by contract with the target's named insured. In addition, Shelter argued that the tender here was not valid because it was prompted by Universal.
In response, Universal took the position that the Illinois targeted tender doctrine is not limited to construction contracts, that Shelter's interpretation of Pekin was too broad, and that the tender to Shelter was legitimate.
Herndon agreed with Universal as to the latter point. He acknowledged that the employee and Foley Sweitzer had not expressed any intent to target Shelter before being contacted that Universal's counsel, and that Universal's ''hands may seem less than clean.'' Nevertheless the employee and Foley Sweitzer both signed the target letter of their own free will, and nothing Universal did would make the tender inoperable.
Otherwise, however, Herndon found that the rationale of Pekin, given the absence of case law to the contrary, was persuasive and binding. He agreed that Foley Sweitzer was required by the Illinois Vehicle Code to maintain liability coverage, and that allowing it and the employee to deselect Universal would operate against Illinois public policy. He also noted that this case, like Pekin, did not involve general and subcontractors and that there was no prior contract between McLaughlin and Foley Sweitzer requiring additional insureds on McLaughlin's policy.
Accordingly, the court found that Universal had a duty to defend and that it would violate public policy to allow either the employee or Foley Sweitzer to deselect Universal in favor of Shelter. Universal and Shelter therefore were ''co-primary'' insurers for the underlying suit, and Universal was required to contribute on a pro rata basis for the defense of the employee and Foley Sweitzer. The court also noted that, to the extent Shelter sought a declaration with respect to Universal's indemnification obligation, such a declaration would be premature because the underlying lawsuit had not yet been resolved.
The court thus otherwise granted Shelter's motion for summary judgment and denied that of Universal.
