Delay in Seeking Declaratory Judgment Triggers Estoppel

By Don R. Sampen, published, Chicago Daily Law Bulletin, November 19, 2024

The U.S. District Court for the Northern District of Illinois recently held that an insurer’s failure to either defend an insured under a reservation or file a declaratory action to determine coverage after its denial of coverage, gave rise to an estoppel requiring the insurer to cover a settlement.

The case is Collins Engineers, Inc. v. Travelers Property Casualty Company of America, No. 19-cv-10203, 2024 U.S. Dist. Lexis 176267 (Sept. 28). The insured, Collins, was represented by Troutman Pepper Hamilton Sanders LLP of Washington, D.C. Karbal Cohen Economou Silk & Dunne of Chicago represented the insurer, Travelers.

The Metropolitan Water Reclamation District of Greater Chicago hired Walsh Construction Co. to work on a project involving the construction of ultraviolet disinfection facilities at a water reclamation plant in Skokie. Walsh in turn hired Collins as a subcontractor. As the result of excavation work close to the Chicago Transit Authority’s Yellow Line tracks in 2015, a portion of the embankment supporting the tracks collapsed, causing damage to the line.

A few days later Collins gave notice to Travelers, which had issued it a commercial general liability policy. Travelers responded by issuing a reservation of rights in advance of a claim being made and stating that, based on the professional services exclusion in the policy, coverage would be unlikely.

The CTA filed suit in Illinois state court against Walsh and Collins in 2018, alleging a breach of duty and various negligent acts. A few months later Walsh filed a separate suit in state court against Collins and Ground Engineering Inc. (GEI), another subcontractor on the project, essentially seeking contribution. GEI also filed a counterclaim against Collins seeking much the same.

Shortly after the CTA commenced its action, Collins notified Travelers, which denied coverage. The letter of denial, however, also requested Collins to withdraw its tender or else Travelers would file a declaratory judgment action to preserve its right to rely on its policy terms.

Travelers did not file a declaratory action, but some seven months later in early 2019, Collins filed the instant action seeking a determination of coverage. Travelers counterclaimed.

In 2020, upon cross-motions for summary judgment, the court found that Travelers did not have a duty to defend Collins in the Walsh action but did have a duty to defend in the CTA action. As to the latter, the court observed that the CTA’s complaint contained both a count for professional negligence against Collins and a separate count for general negligence, thus triggering a duty to defend.

Subsequently, Collins filed an amended complaint in this declaratory judgment action calling attention to developments in the case since the briefing of the cross-motions for summary judgment. One development was GEI’s filing of an amended counterclaim in the Walsh action, which Collins alleged gave rise to Travelers’ duty to defend. The other development was the settlement of the CTA action.

Collins thus moved for partial summary judgment based on the new developments. The motion again asked that the court find that Travelers had a duty to defend Collins in the Walsh action, and it further asked for a finding that Travelers had a duty to indemnify Collins in connection with the CTA settlement.

Counterclaim

In an opinion by Judge Andrea R. Wood, the court granted Collins’ motion. She began by rejecting Travelers’ two arguments opposing a finding of a defense obligation in the Walsh action, neither of which went to the merits of the issues raised. One was that Collins had waived the opportunity to use the GEI amended counterclaim as a basis for coverage.

Travelers thus contended that the evidence GEI relied on in its amended counterclaim was not newly discovered and should have been raised by Collins in its earlier motion leading to the court’s 2020 ruling.

Wood wrote that Collins was not asking for reconsideration. Rather, it raised a new legal theory for coverage that was developed during the pendency of the prior motions. She further stated that Federal Rule of Civil Procedure 56(a) allows for partial summary judgment motions directed to discrete parts of a case, it does not prohibit successive motions, and no waiver occurred.

Travelers’ second argument regarding its defense obligation had to do with the authenticity of GEI’s amended counterclaim as attached to Collins’ summary judgment submissions. Wood rejected the argument because Collins had cleared up any issue regarding authenticity by submitting file-stamped copies.

Because those were the only arguments Travelers raised, Wood said the court could stop there and grant Collins’ motion. She nonetheless went on to find that, while GEI’s amended counterclaim did not contain all the allegations the court had found sufficient to give rise to coverage in the CTA case, a number of the allegations were similar. The counterclaim therefore alleged at least some conduct of a physical or manual nature falling outside the scope of the professional services exclusion, giving rise to the duty to defend.

Settlement

Regarding the CTA settlement, Wood observed that an insurer under Illinois law that believes coverage is lacking must generally either defend under a reservation of rights or file a timely declaratory action regarding coverage. If it does neither and is found to have coverage obligation, it can be estopped from raising policy defenses.

No bright line exists for determining what is timely. Nonetheless, an insurer’s filing within four months of the insured’s tender is usually considered timely, while 12 months is often found to be unreasonable. The filing of a declaratory action by the insured, as Collins did here, instead of the insurer, can suffice to meet the insurer’s obligation.

In this case Collins requested a defense in the CTA case in 2018, and the Collins declaratory action was not filed until some seven months later. Wood pointed out, however, that Travelers had notice of the occurrence in 2015. Plus, it was aware early on that it would likely deny coverage, and when it did deny coverage in 2018, Travelers explicitly acknowledged its own obligation to file a declaratory action.

Under these circumstances, Wood found that the declaratory action was not timely and that Travelers would be estopped from raising coverage defenses. Travelers therefore had a duty to indemnify Collins in connection with the CTA settlement, and Collins’ motion was granted.

Key Points

• Under Federal Rule of Civil Procedure 56(a), multiple motions for partial summary judgment by a party raising different aspects of a case or different legal theories, are permissible.
  
• Depending on the circumstances, a delay of seven months between an insurer’s denial of coverage and the filing of a declaratory action to determine coverage, can be unreasonable under Illinois estoppel rules.