Insurer Not Liable for Settlement Between Claimant and Insured

By Don R. Sampen, published, Chicago Daily Law Bulletin, July 8, 2025

The 1st District Appellate Court recently held that an insurer was not obligated to indemnify an insured under a settlement agreement reached independently between the insured and claimant because the settlement agreement removed any payment obligation for the insured and the insurer had not breached its duty to defend.

The case is ISMIE Mutual Insurance Co. v. Pergament, 2025 IL App (1st) 230787 (June 16). The insured and claimants were represented by Joel F. Handler of Chicago. Cunningham, Meyer & Vedrine P.C., and Stamos & Trucco LLP of Chicago represented ISMIE.

In 2011, the claimants, Taryn and Doug Kessel, brought suit against Dr. Eugene Pergament, Northwestern Reproductive Genetics (NRG) and Asper Biotech Ltd. for alleged failure to conduct a proper genetic screening prior to the birth of the Kessels’ child. They claimed the failure left their child with a disease which, had they known of it earlier, would have resulted in their terminating the pregnancy.

Pergament was insured under a professional liability insurance policy issued by ISMIE and having a $2 million limit. The policy obligated ISMIE to pay amounts that Pergament became “legally obligated to pay” if caused by his negligent professional services, but it excluded coverage for any of his management or entrepreneurial activities involving a business entity that was not an insured.

ISMIE notified Pergament that NRG was not an insured under the policy and further indicated that the allegations in the complaint involving his role as “medical director” for NRG also would not be covered. ISMIE nonetheless agreed to indemnify Pergament as a medical geneticist, further agreed to provide him a defense under a reservation of rights and appointed an attorney to represent him.

NRG retained its own separate counsel, Eugene Schoon. When the Kessels amended their complaint to add Pergament’s professional corporation, MDPC, as a defendant, Schoon also came to represent MDPC. Schoon later notified ISMIE that he was acting as Pergament’s personal counsel as well.

Subsequently, Schoon wrote to ISMIE stating that he disagreed with ISMIE’s coverage position that the management or entrepreneurial exclusion applied and asked ISMIE to assist in working out a settlement. ISMIE responded in late 2016 reiterating its coverage position. ISMIE also denied at that time that it had any indemnification obligation to Pergament, but stated that it would continue to defend him under a reservation of rights.

In 2018, Schoon on behalf of Pergament, MDPC and NRG worked out a settlement agreement with the Kessels without the participation of ISMIE. It essentially provided for a complete release of Pergament, MDPC and NRG in return for a settlement amount to be paid for by ISMIE through an assignment by Pergament of his rights under the policy to the Kessels.

Based on the settlement, the trial court dismissed the claims against Pergament and the two entities with prejudice. The Kessels then filed an amended complaint naming ISMIE as a defendant.

That case, however, was eventually stayed pending ISMIE’s commencement of the instant declaratory judgment action against Pergament, MDPC, NRG and the Kessels. ISMIE sought a determination that, among other things, it had no obligation to indemnify Pergament under the settlement agreement because he had been released from liability.

The defendants counterclaimed to enforce the settlement and for bad faith. Upon cross-motions for summary judgment, the trial court found in favor of ISMIE, and the defendants took this appeal.

No Breach of Policy

In an opinion by Justice Aurelia Pucinski, the 1st District affirmed. She noted that the defendants’ primary argument was that ISMIE breached its policy issued to Pergament by informing him in December 2016 that it would not indemnify him even though he was sued in his individual capacity.

She observed, however, that the defendants did not claim that ISMIE breached its duty to defend, and in fact it continued to provide a defense for Pergament. Under Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127 (1999), moreover, no estoppel could arise barring ISMIE from asserting policy defenses because it did not breach its defense obligation.

In addition, Pucinski wrote that the defendants cited no case suggesting that an insurer could be found in breach of a policy while defending the insured, simply by conveying its coverage position that it had no duty to indemnify. Preserving the right to deny coverage, in fact, is the purpose of a reservation of rights.

She further pointed out that, at the time of ISMIE’s 2016 letter, Pergament had not yet incurred any liability in the underlying lawsuit, which was a necessary prerequisite for a duty to indemnify. The question of whether the insurer has a duty to indemnify is thus only ripe for consideration if the insured has already incurred liability.

Effect of Release

Pucinski then turned to ISMIE’s argument that it had no indemnity obligation in connection with the settlement because Pergament had been released from liability.

The defendants relied on Guillen v. Potomac Insurance Co. of Illinois, 203 Ill. 2d 141 (2003), to argue that the language “legally obligated to pay” on behalf of an insured in a policy should be given liberal treatment, such as not to nullify ISMIE’s obligation to pay based on the settlement.

Pucinski observed, however, that Guillen applied that interpretation in the context of an insurer that had breached its contractual obligations, in that case, its duty to defend. In the instant case, by contrast, ISMIE did not breach its duty to defend or other obligations under the policy. Hence, liberal construction of the policy language was not warranted.

The settlement agreement was clear, moreover, that Pergament had been released of any liability. As a result, the Kessels, as his assignees, were not entitled to indemnity from ISMIE.

The 1st District therefore affirmed the judgment in favor of ISMIE.

Key Points

• An insurer does not breach its policy obligations when defending an insured under a reservation of rights and informing the insured that the insurer has no indemnity obligation.
  
• In the absence of a breach of the duty to defend, an insurer has no obligation to honor a settlement reached between a claimant and insured without the insurer’s participation, where the settlement effectively relieves the insured of any legal obligation to pay the claimant.