Illinois Appellate Court Applies Broad and Harsh Interpretation of Estoppel Doctrine

In Mt. Hawley Insurance Co v. Certain Underwriters at Lloyd’s, London, 2014 IL App (1st) 133931 (Sept. 9, 2014), the Illinois Appellate Court broadly applied the estoppel doctrine against Underwriters. The trial court had entered summary judgment against Underwriters, finding that it had breached its duty to defend the putative additional insureds. Underwriters did not challenge that finding on appeal. Instead, Underwriters appealed the finding that it was estopped from asserting certain defenses to indemnification because it was conclusively established in the underlying action that the named insured was not liable for the claimant’s injuries.

The underlying personal injury lawsuit arose out of an injury to Hillesheim at a construction site.  Hillesheim brought suit against two entities (the 311 entities).  Toji Engineering, Ltd. (Toji) was a subcontractor hired by the 311 entities to perform work at the construction site.  Underwriters issued a CGL policy to Toji.  The 311 entities were named as “additional insureds.”  The 311 entities tendered coverage for the personal injury suit to Underwriters, which refused to defend or indemnify them because the underlying compliantly purportedly did not allege that the 311 entities were vicariously liable for Toji’s conduct.  Mt. Hawley undertook the defense of the 311 entities.  Toji subsequently filed a motion for summary judgment in the personal injury suit.  The court ruled in favor of Toji, finding that it had no involvement in creating the condition that caused Hillesheim’s injury. Later, the 311 entities asked Underwriters to reconsider its decision to deny them coverage as additional insureds and Underwriters again denied the tender.

Mt. Hawley Insurance Company (Mt. Hawley) brought the instant action and prevailed before the trial court on a motion for summary judgment. The trial court ultimately decided that Underwriters was estopped from raising a policy defense to coverage after it refused “to defend its additional insureds under a reservation of rights or to seek a declaratory judgment on coverage.”

The Illinois Appellate Court affirmed. Most significant, it considered whether Underwriters’ defense that it owed no duty to defend because Toji was “awarded summary judgment and found not liable in the [Underlying] Lawsuit, constitutes a ‘policy defense’ that triggers the estoppel doctrine.” Underwriters argued that the trial court incorrectly characterized its noncoverage defense as a “policy defense” since it was based on judicial findings in the underlying personal injury suit, not policy limitations or exclusions. Underwriters argued that its defense was akin to a challenge to the reasonableness of a settlement between the insured and the claimant. The Appellate Court disagreed because Underwriters’ “defense” and other “policy defenses” all have the same effect of denying coverage based on the terms of the policy.

This case serves as a reminder to insurers that Illinois courts are generally unsympathetic to insurers that disclaim coverage entirely and do not file a declaratory judgment action.  Even if it may seem there should be no coverage for a claim, the more prudent action may, indeed, be to file a declaratory judgment action to confirm as much.