No Complaint, No Duty to Defend: An Insurer’s Duty To Defend Does Not Arise from Unfiled Draft Complaints

In Philadelphia Indemnity Insurance Co. v. Pace Suburban Bus Service, 2016 IL App (1st) 151659, the Illinois Appellate Court provided keen insights into when the duty to defend is triggered and when an action for equitable contribution can be maintained.

As background, Pace Suburban Bus Services and Countryside Association for People with Disabilities entered into a leasing agreement whereby Pace would provide Countryside with a van, which would be driven by a Countryside employee, for the purposes of transporting disabled individuals to Countryside’s facility. The leasing agreement provided that Pace would cover Countryside for all bodily injury arising out of the transportation service provided by Pace within the scope of Pace’s self-insured retention. However, the leasing agreement stated it excluded coverage for wanton, reckless, or intentional conduct on by Countryside and its employees, agents, and contractors. Notably, Countryside also obtained automobile liability coverage through another insurer.

The dispute arose when a driver for Countryside left a disabled individual in a Pace van for over five hours in 90 degree weather which resulted in substantial injuries to the disabled individual. In an incident report prepared by a Countryside employee, the driver’s actions were described as “egregious neglect.” In addition, the driver was charged with a felony for reckless conduct to which he later plead guilty.

In connection with the events, counsel for the claimant sent a pre-suit settlement demand and a draft complaint to the auto insurer. When Pace became aware of the suit, it issued a letter to Countryside indicating that there was no coverage due to the driver’s willful, wanton, and reckless conduct. The auto insurer, however, insisted that Pace did have a duty to cover the claim. For its part, Countryside maintained that Pace had a duty to defend based upon the allegations of negligence contained in the unfiled draft complaint. Ultimately, the auto insurer paid $1.5 million on behalf of Countryside to the claimant. Pace was not involved in the settlement.

Shortly thereafter, the auto insurer brought a declaratory judgment action against Pace seeking recovery on the basis of equitable subrogation, equitable contribution, unjust enrichment, and assignment. Pace moved to dismiss the complaint arguing that as a self-insured municipality, as opposed to a commercial insurance carrier, the doctrines of equitable subrogation and contribution did not apply. In addition, Pace argued the exclusion warranted dismissal of the action. The circuit court granted Pace’s motion to dismiss, ruling that it was against Illinois public policy to require Pace, as a self-insured governmental entity, to pay for tort liability from public funds.

On appeal, the auto insurer claimed Illinois public policy cannot nullify its claim for equitable subrogation. The Appellate Court then reviewed the applicable precedent with respect to equitable subrogation claims. Importantly, in order for an equitable subrogation claim to succeed, it has to be established that the defendant is primarily liable to the insured for a loss under a “policy of insurance.” Although established precedent strongly indicated that a “self-insurance” was distinct from a “policy of insurance,” the Appellate Court instead based its holding on the leasing agreement provision which excluded coverage for reckless conduct. The Appellate Court concluded that there was no question of material fact regarding whether the claimant’s injuries stemmed from the reckless actions of the driver. The auto insurer’s argument that Pace had the duty to defend under the leasing agreement was rejected because, although the draft complaint contained theories of negligence, the duty to defend only arises when a lawsuit is filed. As a result, the unfiled draft complaint could not be construed as triggering Pace’s duty to defend.