Court Says Intentional Acts Exclusion Properly Raised
February 01, 2012
The 4th District Appellate Court recently held that an insurer properly provided a defense to an insured under a reservation based on the intentional acts exclusion, where the underlying complaint against the insured alleged only negligence. American Family Mutual Insurance Co. v. Westfield Insurance Co., 2011 IL App (4th) 110,088 (4th Dist. Nov. 16, 2011).
The insurer, American Family Mutual Insurance Co, was represented by Chapin & Long P.C. in Champaign. The insured parent and his minor child, Shannon D., were represented by Vanek, Vickers & Masini P.C. The subrogee of the underlying claimant, Westfield Insurance Co., was represented by Leahy, Eisenberg & Fraenkel Ltd.
Thirteen-year-old Shannon was convicted of criminal damage to property as the result of playing with matches and starting a fire at the Central Supply Co. in Bloomington. She had liability coverage under a homeowner policy issued by American Family to her paternal grandparents with whom she was living.
Westfield provided property coverage for Central Supply, paid the loss and provided to American Family a copy of a complaint that it planned to file as subrogee of Central Supply against Shannon's father and guardian. The draft complaint alleged only negligence. Following its receipt, American Family sent a reservation-of-rights letter to Shannon's father raising the intentional act exclusion in the policy.
The reservation-of-rights letter was sent at the end of September 2006, Westfield filed the suit about a month later and Shannon's father was served with process about seven weeks after. American Family retained counsel and provided a defense in the lawsuit. In May 2009, a jury found that Shannon negligently caused the fire and awarded Westfield about $465,000 plus costs.
American Family subsequently denied indemnity coverage and filed a declaratory judgment action seeking a determination that it had no indemnification obligation. In response, Shannon's counsel raised various affirmative defenses, including one based on collateral estoppel and one based on an improper reservation of rights and filed a summary judgment motion based on these defenses. Westfield joined the motion and the trial court granted it. American Family took this appeal.
In an opinion by Justice Robert W. Cook, the 4th District reversed. He initially addressed the collateral estoppel defense, which raised the question whether American Family was bound by the jury's determination of negligence and was precluded from raising the intentional acts exclusion.
Cook reviewed the parameters of collateral estoppel, which included the requirement that the issue decided in the prior adjudication - here, the jury's finding of negligence in the underlying case - be identical to the one presented in the suit in question. The jury's finding of negligence was not identical to the issue now presented because the only count the jury had before it was a negligence count. It therefore was impossible for the jury to find that Shannon's acts were intentional and American Family was not precluded from raising the exclusion.
Reservation of Rights
Cook then turned to the reservation-of-rights argument, which partly was based on the position that American Family sent its letter considerable in advance of service of the Westfield's lawsuit that Shannon and her father could not properly assess conflicts of interest. Cook rejected the argument finding generally that it was better for American Family to have sent its letter earlier rather than later.
In the process Cook reviewed some of the criteria for an adequate reservation-of-rights letter, noting that it must inform the insured of the potential policy defense on which the insurer intended to rely and to adequately inform the insured of the existence of a potential conflict of interest. If there is a conflict, the insurer must permit the insured to be represented by counsel of its own choosing, the reasonable costs of which are to be reimbursed by the insurer.
Cook discussed Royal Insurance Co. v. Process Design Associates, Inc., 221 Ill. App. 3d 966, 582 N.E.2d 1234 (1991), where the insurer created a conflict of interest when it undertook to defend its insured while attempting to show that the insured was liable for professional negligence, which was not covered under the policy. In other words, the insurer would have benefited in Royal from a finding adverse to its insured, namely, a finding of professional negligence.
In contrast, the basis for American Family's reservation, intentional conduct, was not at issue in the underlying trial here and Shannon's conduct could not have been found intentional. Both American Family and Shannon, in addition, would have benefited from a finding that she was not negligent. Cook, therefore, suggested that no conflict of interest existed.
Westfield and Shannon's father also argued that the settlement communications between the American Family-appointed trial counsel and American Family reflected a conflict of interest. The communications indicated that trial counsel recommended against accepting a Westfield offer to settle for $400,000, because American Family would be better off taking its chances at trial. The offer, in fact, was rejected.
Cook said, however, that rejection of the offer was in Shannon's interest, because an agreement to settle would not have prevented American Family from denying coverage. American Family could have abandoned its reservation and possibly have negotiated a settlement for an amount less than $400,000, but it was not obligated to do so.
Cook acknowledged that an insurer has a duty to act in good faith in responding to settlement offers, but said that duty only exists where there is coverage under the policy. Where an insured settles, in addition, it must demonstrate that it settled an otherwise covered loss to recover the settlement from the insurer.
The court therefore reversed and remanded.
(a) Collateral estoppel does not bar an insurer from raising a coverage defense in a coverage action that was not litigated in the prior underlying action.
(b) A conflict of interest does not arise where defeating a claimant's only cause of action benefits both the insurer and insured.(c) An insurer has no obligation to abandon a reservation of rights for purposes of settling on behalf of an insured.