No Defense Based on Evidence Offered During Declaratory Action

By Don R. Sampen, published, Chicago Daily Law Bulletin, September 22, 2020

The 2nd District Appellate Court recently held that facts asserted by an insured in response to a coverage action initiated by an insurer could not be used by the insured to establish a duty to defend, when the allegations of the underlying complaint did not give rise to coverage.

The case is Pekin Insurance Co. v. McKeown Classic Homes, Inc., 2020 IL App (2d) 190631 (July 29). The insurer, Pekin, was represented by Pretzel & Stouffer Chtd. of Chicago. Barone Law Group P.C. of Oakbrook Terrace represented the insured, McKeown.

Underlying claimants brought suit against McKeown in connection with construction work on the claimants’ property, alleging breach of contract and conversion. The conversion count involved certain wood planks and other materials the claimants wanted to be used in the construction but which, they alleged, McKeown improperly removed from their property.

McKeown tendered the defense of the lawsuit to Pekin, contending that the conversion count gave rise to a duty to defend even though the claimants alleged that the removal of the property was malicious and willful.

Pekin declined to defend based on the terms of the insuring agreement in the liability policy it issued to McKeown. The insuring agreement provided coverage for property damage only if caused by an “occurrence” or accident. It brought this declaratory action for a determination of its coverage obligations.

McKeown filed an answer to Pekin’s complaint, in which it took the position that the conversion count was covered because the materials at issue were mistakenly removed from the claimants’ property by a subcontractor. The mistaken removal, according to McKeown, amounted to “property damage” under the definition of that term in the policy, because it resulted in a “loss of use.”

Pekin moved for summary judgment, and McKeown filed a cross-motion. In the cross-motion McKeown again argued that the conversion count involved alleged “property damage,” and further argued that, as pleaded, the count gave rise to fact issues regarding liability. McKeown also attached to its cross-motion an interrogatory answer by the claimants in the underlying case, which explained some of the circumstances of the materials allegedly converted.

The trial court granted Pekin’s summary judgment motion, finding no duty to defend, and denied McKeown’s motion. Following the denial of a further motion to reconsider, McKeown took this appeal.

Analysis

In an opinion by Justice Susan Fayette Hutchinson, the 2nd District affirmed. She initially addressed McKeown’s argument that the trial court incorrectly made its decision solely on the allegations in the underlying complaint and without consideration of the facts pleaded by McKeown in its counterclaim for declaratory judgment.

McKeown relied principally on Pekin Insurance Co. v. Wilson, 237 Ill.2d 446 (2010), where the Supreme Court held that an insured could rely, for purposes of invoking coverage, on facts raised in a counterclaim against the claimant in the underlying litigation that triggered an exception to an exclusion.

According to Hutchinson, Wilson did not support McKeown’s position here because the pleadings considered in that case were a part of the underlying litigation. By contrast, the explanation that the allegedly converted items were mistakenly removed by a subcontractor did not appear in the court record until McKeown made the argument in the subsequent declaratory action.

Hutchinson further observed that an insurer’s knowledge of true facts not pleaded in the underlying case may be relevant to an insurer’s duty to defend. But, she said, typically the extraneous facts come to the insurer during the course of its own investigation.

In addition, where the only extraneous facts the insurer possesses are supplied the by insured, the insurer has no way of knowing whether they are true, absent its conducting its own investigation. And where the fact in question does not become known to the insurer until the insured, as here, includes it in a counterclaim as part of the declaratory judgment proceeding, the fact may not be considered in determining the duty to defend.

The allegations in the underlying complaint here, moreover, contained no facts giving rise to the possibility of any liability not rooted in McKeown’s intentional conversion. Hutchinson thus rejected McKeown’s argument that the underlying allegations were ambiguous and gave rise to fact issues concerning the intentional nature of its conduct.

The court thus affirmed the summary judgment in favor of Pekin, finding no duty to defend.

Key point

Facts extraneous to an underlying complaint, brought to an insurer’s attention by the insured for the first time as part of a declaratory judgment action to determine coverage, may not be used by the insured to establish coverage.