Insurer Bound By Judgment In Case It Was Not A Party To

By Don R. Sampen, published, Chicago Daily Law Bulletin, July 29, 2021

The 1st District Appellate Court recently held that an automobile insurer was collaterally estopped from contesting a judgment in another case, to which the insurer was not a party, rescinding a tortfeasor’s liability coverage and thereby triggering the uninsured motorist coverage under the insurer’s policy.

The case is American Freedom Insurance Co. v. Garcia, 2021 IL App (1st) 200231 (June 25). The insurer seeking to avoid the rescission judgment, American, was represented by Keely Hillison Law LLC, of Chicago. Beermann LLP of Chicago represented the rescinding insurer, Direct Auto Insurance Company.

Ramon Garcia, an insured of American, was involved in an automobile collision in 2013 with Nancy Benitez-Yanez, who was an insured under a policy issued by Direct Auto. Garcia made a claim against Direct Auto as a result of the accident.

In 2014, however, Direct Auto brought a declaratory judgment action against Benitez-Yanez, another insured on the policy, and Garcia claiming that the application for coverage under the Direct Auto policy contained misrepresentations. Direct Auto sought a judgment of rescission based on the misrepresentations, which judgment was granted. American was not a party to the rescission action.

Subsequently, Garcia sought recovery of uninsured motorist benefits under the American policy. As a result, American brought the instant action against Garcia, the Direct Auto insureds, and Direct Auto itself, seeking a determination that it owed no UM benefits to Garcia. American contended that, as a non-party, it was not bound by the rescission judgment, that it had a right to be heard on the rescission issue, that it was a necessary party to the earlier action, and that Benitez-Yanez in fact was covered by Direct Auto at the time of the accident, such that UM benefits under the American policy were not available.

Direct Auto took the position that American was, in fact, bound by the rescission judgment by collateral estoppel and moved to dismiss. American countered with a motion for summary judgment. The trial court found in favor of Direct Auto and dismissed the action. American took this appeal.

Analysis

In an opinion by Justice Sheldon A. Harris, the 1st District affirmed. On the necessary party issue, he observed that Garcia was a necessary party in the rescission action because he was seeking recovery directly from Direct Auto. American’s interest in that action, however, was strictly contingent. Direct Auto, moreover, had no reason to include American in the action because it had no relationship with American and neither insurer owed the other any duty. American therefore was not a necessary party.

Harris then turned to the issue of collateral estoppel. He noted that one can be collaterally estopped from relitigating an issue where the elements for collateral estoppel are met. Those elements are that the issue decided in the prior suit is identical to the issue in the current suit, the prior suit resulted in a final judgment on the merits, and the party against whom estoppel is asserted was party to the prior suit or in privity with such a party.

In this case Harris said there was a common issue key to both the earlier rescission action and the instant action, namely, whether Direct Auto owed coverage to Benitez-Yanez on the day of the 2013 accident. The judgment of rescission in the earlier action made a final adjudication that no coverage was owed. Thus the first two elements for collateral estoppel were met.

As to privity, Harris observed that Garcia had filed a claim against Direct Auto’s policy and therefore had an interest in that insurer not obtaining a judgment of rescission. The fact that Garcia opposed American in the instant action regarding his UM claim did not change that their interests were aligned at the time of the rescission action.

Harris thus concluded that the trial court did not err in finding American to be in privity with Garcia and thus did not err in granting Direct Auto’s motion to dismiss.

Such a resolution, Harris continued, was also the only fair resolution for Garcia. Harris indicated that Garcia, having been a party to the rescission action, was bound by that judgment. Yet if the appellate court were to remand the instant case to the trial court to re-try the rescission issue for the benefit of American, and if the trial court on remand were to determine Direct Auto was not entitled to rescind, Garcia might end up with no insurance coverage of any kind.

The court therefore affirmed in favor of Direct Auto.

Key Point

A UM insurer, with only an indirect interest in the availability of coverage under a tortfeasor’s liability coverage, is not a necessary party to a coverage dispute between the tortfeasor and its liability insurer, and may be estopped from disputing the outcome of the dispute.