Absent Claimant Not Bound by Coverage Judgment in Prior Suit

By Don R. Sampen, published, Chicago Daily Law Bulletin August 13, 2019

The 1st District Appellate Court recently held that res judicata could not be used by an insurer to support its no-coverage position against a claimant where the claimant was not a party to the earlier lawsuit from which the res judicata argument arose.

The insurer in Direct Auto Insurance Co. v. Bahena, 2019 IL App (1st) 172918 (June 13, 2019), was represented by Newman Ransom LLC. Keely Hillison with Parrillo Weiss LLC represented the claimant, Noel Hernandez, who had brought suit against Direct Auto’s insureds, Erica and Jessica Bahena.

In 2012, Jessica Bahena was the driver of an automobile that collided with a vehicle in which Hernandez was a passenger. He was injured in the collision. Bahena was an additional insured on an automobile policy Direct Auto issued to Erica Bahena.

Direct Auto, thereafter, filed a declaratory judgment action against the two Bahenas and occupants of the other vehicle, but not Hernandez. It sought a determination of no coverage based on Erica Bahena’s alleged failure to disclose on her insurance application all the residents in her household over the age of 15.

The court in that action eventually entered summary judgment in favor of Direct Auto but without providing the basis for its ruling.

Two weeks later, Direct Auto filed the instant declaratory action against Hernandez, again seeking a determination of no coverage.

It alleged that it did not include Hernandez in its earlier action because he had not asserted a claim against the Bahenas at the time of its filing. However, Direct Auto learned that Hernandez filed suit against the Bahenas five months before obtaining judgment in the earlier action. This came after the insurer did not seek to amend its earlier complaint.

Direct Auto filed a motion for summary judgment in the instant action based on several theories, including res judicata. It claimed that Hernandez was bound by the earlier judgment in Direct Auto’s favor, because even though he was not a party, his interests had been represented. That motion was denied.

In the meantime, Hernandez filed a counterclaim against Direct Auto and filed a motion to compel discovery. Direct Auto moved to dismiss the counterclaim, arguing that it was already defending its insureds in the underlying lawsuit Hernandez brought against them and that the question of the duty to indemnify was premature.

The trial court denied the motion to dismiss, whereupon Direct Auto advised the court that it was “declining to participate further in the case” and invited the court to enter a default judgment against it.

The trial court did so, noting in the process that Hernandez had withdrawn his motion to compel discovery. Direct Auto then took this appeal.

Default judgment, motion to dismiss

In an opinion by Justice Robert E. Gordon, the 1st District affirmed. At the outset, Gordon addressed the default judgment entered against Direct Auto and found it was proper. He reasoned that Direct Auto had invited the trial court to enter the default judgment, and the insurer was not now in a position to claim error.

He observed as part of the discussion that one alternative means for Direct Auto to take an appeal would have been through seeking a friendly contempt order on an order compelling discovery. But Direct Auto did not pursue that approach.

Gordon then addressed the trial court’s denial of Direct Auto’s motion to dismiss the counterclaim. Initially, he observed that the denial of a motion to dismiss is not ordinarily appealable. Here, however, the denial was a necessary step in the procedural progression to the default judgment and, therefore, could be reviewed.

Direct Auto had argued for dismissal in part based on the theory that any ruling on coverage would be premature and because Hernandez lacked standing to seek coverage on behalf of Direct Auto’s insureds. Gordon pointed out that a claimant has standing to seek coverage when it has become the real party in interest under an insurance policy, even though it is not a party to the contract.

In addition, while direct actions by a claimant against an insurer ordinarily are not permitted by Illinois policy, such policy is not violated where the issue of coverage has been effectively separated from any question of liability. In addition, Gordon said the issue of ripeness can be waived and that Direct Auto waived it by filing the declaratory action against Hernandez. His counterclaim, therefore, was not premature.

According to Gordon, Direct Auto also should have, but failed, to name Hernandez as a defendant in its first declaratory action where the issue of coverage was decided. It could not use its failure to do so to foreclose Hernandez’s right to litigate coverage.

Res judicata

Finally, Gordon took up the question of res judicata, based on Direct Auto’s argument that Hernandez should be bound by the judgment of no coverage in its first declaratory action.

He observed that included within the doctrine of res judicata is the principle that a party cannot later seek relief on the basis of issues that “might have been raised in the prior action,” but were not.

Especially this is the case where the party chose to split a single cause of action into more than one proceeding. Here, Direct Auto could have litigated its no-coverage claim against Hernandez in its first declaratory action. Because it failed to do so, Gordon said, Direct Auto itself would be barred by res judicata from pursuing its present claim against Hernandez.

In addition, Direct Auto could not use the doctrine in its favor because it failed to meet at least one of the requirements for res judicata to apply, namely, the requirement of an identity of parties between the former and latter cases, or an identity of their privies.

In this case, Gordon found that Direct Auto had not identified specifically with whom it claimed that Hernandez was in privity. Although other passengers were named defendants in the earlier lawsuit, the record was unclear concerning their insurance coverage and what injuries they had. No finding was ever made concerning the similarity of interests they may have had with Hernandez.

According to Gordon, it would inequitable, in any event, that one who violates the requirement of naming a claimant as a necessary party in a coverage action should turn around and use res judicata as a sword against the very party that it failed to add.

The 1st District, therefore, affirmed the default judgment against Direct Auto.

Key points

• A party cannot be heard to complain on appeal that the trial court erred by taking action requested by that party.
• A denial of a motion to dismiss is not ordinarily appealable, but it may be if such denial is a necessary step in the procedural progression to the order or judgment being reviewed on appeal.
• A claimant’s direct action against an insurance company is ordinarily contrary to Illinois public policy, but such action may be permissible where the issue of coverage has been separated from the question of liability as well as where the insurer has waived the prematurity of the coverage determination by filing suit on the question of coverage.
• The res judicata doctrine prevents a party from later seeking relief on the basis of issues that might have been raised, but were not, in a prior action; it thus prevents a litigant from splitting a single cause of action.
• A party may not make affirmative use of the res judicata doctrine by failing to add a necessary party in a prior lawsuit and then argue that such party is bound by the prior judgment.