‘Actual Notice’ For An Omnibus Insured

July 21, 2015 / Writing and Speaking

A federal court construing Illinois law recently held that the rule potentially obligating an insurer to defend its insured upon “actual notice” of the underlying lawsuit might apply even where the insurer provided coverage for an omnibus insured, as distinguished from a named insured or additional insured.

The plaintiff insurer in Lincoln General Insurance Co. v. Joseph T. Ryerson & Son Inc., 2015 U.S.Dist. Lexis 79273 (N.D. Ill., June 18), was represented by Ruberry, Stalmack & Garvey LLC. Cassiday, Schade LLP represented the defendant insurer Travelers. And Nicolaides, Fink, Thorpe, Michaelides, Sullivan LLP represented the defendant insurer Illinois National.

The underlying lawsuit involved a $27 million state court jury award against tractor-trailer driver Dorlan Crane and others. The jury specifically found that Crane was driving as an agent of a joint venture between Illinois State Motor Service Inc., 3pL Corp. and Joseph T. Ryerson & Son Inc., all of whom were defendants.

Lincoln General issued a liability policy to Illinois State and provided it and Crane a defense in the underlying case. Travelers and Illinois National provided coverage to Ryerson, and Illinois National covered another defendant in the case.

When the underlying case concluded, Lincoln General filed this action in U.S. District Court seeking a declaration that it was not obligated to indemnify Ryerson. Illinois National and Travelers answered and filed affirmative defenses and counterclaims taking the position that Ryerson was an omnibus insured under the Lincoln General policy, meaning an insured not specifically identified, such as a person driving a covered car with permission. They also raised defenses of actual notice, estoppel and subrogation.

Lincoln General moved to dismiss the affirmative defenses and counterclaims. It contended that Ryerson never tendered to Lincoln General, thereby absolving it of all responsibility. It also contended that, even though it had actual notice of the underlying lawsuit from the time it was filed, it received no notice of Ryerson’s potential coverage claim under its policy until 10 years later.

Actual Notice

In an opinion by Judge Harry D. Leinenweber, the court found fact issues that precluded dismissal. He began by distinguishing the existence of a duty to defend from the triggering of that duty. The existence of the duty, he said, is based on a comparison of the underlying complaint with the terms of the policy. The triggering of the duty, however, depends on when the insurer knew or should have known that it had an obligation to defend.

One way to trigger the duty is by the insured tendering the defense of the underlying action to the insurer, which did not occur here. Another way is for the insurer to receive “actual notice” of its obligations. According to Leinenweber, two conditions must be met for actual notice. The insurer must know that a cause of action has been filed against its insured, and it must know that the complaint falls within or potentially within coverage.

Lincoln General argued that, while the actual notice rule may apply to named insureds and additional insureds, it does not apply to omnibus insureds, such as Ryerson. Leinenweber disagreed, relying mainly on Home Insurance Co. v. U.S. Fidelity and Guaranty Co., 324 Ill.App.3d 981 (Ill. App. 2001).

In Home, an insurer made essentially the same argument as Lincoln General regarding an omnibus insured, and the appellate court found a fact issue requiring that the case be remanded. The insurer there had timely notice of the underlying lawsuit, but the fact issue that arose concerned when the insurer learned that one of the defendants in the underlying case might be covered under the insurer’s omnibus provision.

The Home court found that, if the omnibus insurer did not learn of the necessary facts until years after the underlying lawsuit commenced, then the omnibus insured’s direct insurer might be estopped from seeking satisfaction from the omnibus insurer. Estoppel could bar recovery because the omnibus insurer would have effectively been robbed of its opportunity to control the insured’s defense.

Similarly, here, Leinenweber said, Lincoln General’s mere knowledge of the underlying suit was not enough. It must also have had actual notice of Ryerson’s potential coverage under the Lincoln General policy. If it did not receive notice until 10 years later, as it claimed, then Illinois National and Travelers might be estopped from going after Lincoln General, because their delay robbed Lincoln General from controlling Ryerson’s defense.

Nevertheless, Leinenweber held that the timing of the actual notice could not be resolved on a dismissal motion.

Affirmative Defenses

Two other rulings of interest involved Travelers’ two affirmative defenses. One affirmative defense asserted generally that the complaint failed to state a claim. Leinenweber found that such a defense could be proper if it included a short, plain statement as to why the complaint was deficient. This one did not, however, so the defense was stricken.

The other defense was Travelers’ reservation of the right to assert more affirmative defenses at some unknown later time. Leinenweber found this type of reservation inappropriate because any amendment to pleading is governed by rule, and the court would not be held “hostage” to Travelers’ inclination to later amend. This defense thus was stricken, too.

The court therefore mostly denied Lincoln General’s dismissal motion because of the presence of fact issues.

Key Points

  • For an insurer’s “actual notice” of a claim against a purported insured to give rise to a duty to defend, the insurer must receive actual notice of facts establishing that the purported insured has potential rights as an actual insured.
  • An affirmative defense for “failure to state a claim” must be accompanied by a statement of how the complaint is deficient.
  • An insurer’s right to raise additional policy defenses in the future cannot be preserved by an affirmative defense purporting to reserve a right to assert additional defenses.
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