No Estoppel Without Prejudice to the Insured

By Don R. Sampen, published, Chicago Daily Law Bulletin 

July 10, 2018

The 1st District Appellate Court recently held that the Illinois Insurance Guarantee Fund was not estopped to assert a coverage defense under the policy of the insurer whose obligations it had assumed, despite a delay of 11 months between the fund’s assumption of those obligations and the time it raised the coverage defense.

The insurer in Illinois Insurance Guarantee Fund v. Nwidor, 2018 IL App (1st) 171378 (May 23), IIGF, was represented by Lewis Brisbois Bisgaard & Smith LLP. Daley Mohan Groble P.C. represented the insured, Chicago Carriage Cab Corp.

In 2011, a Chicago Carriage Cab employee, Israel Nwidor, while driving a taxi, collided with a motorcycle being driven by James Carrington. Carrington’s father, as guardian, brought suit against the cab company and Nwidor for negligent operation of the taxi.

The cab company tendered its defense to its insurer, Ullico Casualty Co., which retained defense counsel. Ullico went into liquidation in 2013. A week later, on June 7, guarantee fund informed the cab company that it was assuming Ullico’s obligations.

By its June 7 letter, the fund appears to have agreed to continue to fund Chicago Carriage Cab’s defense. The letter, however, contained a general reservation of rights, including the right to recover defense costs if information developed that coverage was lacking.

The fund issued two additional general reservations. Then on May 6, 2014, in a fourth letter, the fund informed the cab company that the fund had determined that under an endorsement to the Ullico policy, the vehicle being driven by Nwidor had been removed from coverage effective five days before the accident and replaced with a different vehicle with the same medallion.

The fund took the position that no coverage therefore existed for the accident, although the fund agreed to continue to pay for the defense subject to a reservation. At the time, the underlying Carrington lawsuit had been stayed.

About two weeks later, the fund filed the instant declaratory action. In 2016, it filed a motion for summary judgment. In response, Chicago Carriage Cab argued that, notwithstanding the effective date of the endorsement, and consistent with custom and practice, the city of Chicago taxicab medallion license card was not issued to the replacement vehicle until two days after the accident and that coverage should therefore have remained in place.

The cab company also argued that the fund had waived, and was estopped to assert, its rights under the endorsement because of the delay between the time it assumed Ullico’s obligations and the time it raised the endorsement defense.

The trial court found in favor of the fund. The cab company took this appeal.

Analysis

In an opinion by Justice Cynthia Y. Cobbs, the 1st District affirmed.

She initially addressed the waiver and estoppel issue based on the 11-month delay between the fund’s assumption of Ullico’s obligations in June 2013 and its assertion of noncoverage based on the endorsement in May 2014.

Cobbs observed that a waiver is an intentional relinquishment of a known right. She also found that the fund was unaware of the facts pertaining to policy coverage when it issued its initial June 7, 2013, letter. Its May 6, 2014, letter, moreover, reflected that the fund had only “recently” been provided with a copy of the relevant endorsement. Under these circumstances, Cobbs concluded that the fund had not knowingly relinquished any rights. As a result, no waiver therefore occurred.

She then turned to estoppel and drew a distinction between two different forms of estoppel. One form occurs when an insurer, faced with an underlying complaint asserting facts potentially within coverage but believing that coverage may be lacking, neither defends under a reservation nor seeks a declaration of rights. Under those circumstances, if coverage is later found, the insurer is estopped from raising coverage defenses, without any need for the insured to establish prejudice.

A second form of estoppel may arise when the insurer undertakes a defense of an insured without reserving rights and only later asserts a reservation or files a declaratory action seeking to deny coverage.

In these circumstances, Cobbs said, an estoppel may arise but only if the insured establishes actual prejudice.

This case fell into the second category where a showing of prejudice was necessary. Cobbs found, however, that the cab company had not offered any evidence of prejudice. And Cobbs said that in any event she could not see how it might have been prejudiced, especially since the underlying case had been stayed. She, therefore, held that neither a waiver nor estoppel had been established.

As for Chicago Carriage Cab’s defense based on custom and practice relating to the city of Chicago delay in issuing the taxicab medallion license, Cobbs observed that the policy endorsement unambiguously identified the “change effective” date as five days before the accident.

Evidence of custom and usage, moreover, would only be admissible to explain ambiguous contract terms and such evidence could not, in any event, be used to add terms to the contract inconsistent with the agreement itself. Thus, according to Cobbs, invocation of custom and usage was unavailing.

The court therefore affirmed in favor of the fund.

Key points

• An insurer, or the Illinois Insurance Guarantee Fund in the stead of an insurer, that undertakes the defense of an insured without informing the insured of the specific rights that the insurer intends to reserve, will not be estopped from later raising a coverage defense in the absence of a showing of actual prejudice to the insured.
• Evidence of custom and usage is only admissible to explain uncertain or ambiguous terms of a contract.