Gen. Agents Ins. v. Midwest Sporting Goods

• Decision Date: 24 March 2005
• Docket Number: No. 98814.,98814.
• Citation: 293 Ill.Dec. 594,215 Ill.2d 146,828 N.E.2d 1092
• Parties: GENERAL AGENTS INSURANCE COMPANY OF AMERICA, INC., Appellee, v. MIDWEST SPORTING GOODS COMPANY et al., Appellants.
• Court: Illinois Supreme Court

828 N.E.2d 1092

215 Ill.2d 146

293 Ill.Dec. 594

GENERAL AGENTS INSURANCE COMPANY OF AMERICA, INC., Appellee, v. MIDWEST SPORTING GOODS COMPANY et al., Appellants.

No. 98814.

Supreme Court of Illinois.

March 24, 2005.

Rehearing Denied May 23, 2005.

Gregory J. Abbott, Downers Grove, for appellant Midwest Sporting Goods Co.

Patrick M. Graber, Michael Bart Rinn, Veronica Nulman, of McCullough, Campbell & Lane, Chicago, for appellee.

Hugh C. Griffin, John B. Haarlow, Janette M. Forman, Daniel S. Lambert, of Lord, Bissell & Brook, L.L.P., Chicago, for amici curiae Certain Underwriters at Lloyd's London.

Justice THOMAS delivered the opinion of the court:

At issue in this case is whether, following a declaration that an insurer has no duty to defend its insured, the insurer is entitled to reimbursement of the amounts paid for the defense of its insured in the underlying lawsuit. The circuit and appellate courts held that the insurer was entitled to reimbursement. For the following reasons, we reverse the judgments of the circuit and appellate courts.

BACKGROUND

The City of Chicago and Cook County sued Midwest Sporting Goods Company (Midwest) and other defendants for creating a public nuisance by selling guns to inappropriate purchasers. Midwest tendered defense of the suit to General Agents Insurance Company of America (hereinafter Gainsco), its liability carrier. Gainsco denied coverage. The City of Chicago and Cook County then filed their first amended complaint against Midwest and other defendants. Midwest again tendered defense of the suit to Gainsco. On July 23, 1999, Gainsco responded to Midwest's independent counsel as follows:

"We wish to acknowledge and confirm our receipt and review of the First Amended Complaint that you forwarded to our office on behalf of your client and our Insured, Midwest Sporting Goods, Inc. by letter dated April 28, 1999. This letter will supplement Gainsco's letter of December 3, 1998 denying coverage with respect to the plaintiff's original complaint in this matter. We have had an opportunity to review the allegations of the First Amended Complaint, as well as the policy documentation, and without waiving the Company's rights or defenses under the Policy, would like to call the following points to your attention.

* * * [The letter then quotes certain policy language.]

The policy only applies to damages because of property damage or bodily injury caused by an occurrence. The First Amended Complaint does not seek damages because of property damages or bodily injury. As such, the claim is not covered under the Policy.

The First Amended Complaint alleges that the Insured is liable to the plaintiffs for various acts of intentional and/or willful conduct. As a consequence, and based upon the above-noted policy provisions, the claim may not be covered under the Policy.

Additionally, to the extent that the claim involves periods of time that fall outside of the periods of time to which the coverage afforded by the Company covers, the claim is not covered by the Policy.

Please note that to the extent that the claim seeks injunctive relief, the claim is not a claim for damages and, thus, is not afforded coverage under the Policy. Further, to the extent that the claim is for punitive or exemplary damages, the claim is not afforded coverage under the Policy.

Subject to the foregoing, and without waiving any of its rights and defenses, including the right to recoup any defense costs paid in the event that it is determined that the Company does not owe the Insured a defense in this matter, the Company agrees to provide the Insured a defense in the captioned suit. In light of the competing interests between the Company and the Insured in respect of the coverage for this matter, the Company agrees to the Insured's selection and use of your firm as its counsel in this matter. However, the Company notes its right to associate with the Insured and its counsel in the defense of the underlying litigation.

* * *

Please note that any acts taken by or on behalf of the Company are taken under and pursuant to a full reservation of its rights and defenses under the Policy. Likewise, we will understand that any acts taken by or on behalf of the Insured are taken pursuant to a reservation of rights as well." (Emphasis added.)

Based upon the record in this case, it does not appear that Midwest ever responded to Gainsco's reservation of rights letter. Midwest thereafter accepted Gainsco's payment of defense costs.

On October 28, 1999, Gainsco filed a declaratory judgment action seeking, inter alia, a declaration that it did not owe Midwest a defense in the underlying litigation. The declaratory judgment action also asserted a claim for recovery of all defense costs paid to Midwest's independent counsel on behalf of Midwest in the underlying litigation. On June 5, 2000, Gainsco filed its first amended complaint for declaratory judgment. Midwest responded with an answer and counterclaim.

Gainsco then filed a motion for summary judgment in its declaratory judgment action, and Midwest filed a cross-motion for summary judgment. Following a hearing, the circuit court of Cook County entered summary judgment in favor of Gainsco, declaring that Gainsco had no duty to defend Midwest in the underlying litigation. The trial court denied Midwest's cross-motion for summary judgment. In ruling on Gainsco's motion for summary judgment, the trial court noted that the issue before it was whether the plaintiffs in the underlying complaint were seeking damages in the nature of economic loss or bodily injury. The trial court held that based upon case law, the damages sought by the plaintiffs in the underlying case amounted only to economic loss, and therefore held that Gainsco was entitled to summary judgment on its declaratory judgment action.

Gainsco then filed a motion for entry of judgment for recovery of defense costs, seeking to recover the defense costs that it had paid to Midwest's independent counsel for Midwest's defense of the underlying litigation. The motion for defense costs included the affidavit of Rita Beck, a senior claims examiner for Gainsco, stating that Gainsco had paid $40,517.34 for the defense of Midwest in the underlying litigation. The trial court stayed consideration of Gainsco's motion for defense costs pending Midwest's appeal of the trial court's finding that Gainsco was not obligated to defend Midwest.

On appeal, the appellate court affirmed the trial court's judgment, holding that Gainsco had no duty to defend or indemnify Midwest against the underlying claim. General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 328 Ill.App.3d 482, 262 Ill.Dec. 544, 765 N.E.2d 1152 (2002). Midwest did not seek further review of the appellate court's decision.

Thereafter, the trial court considered Gainsco's motion for entry of judgment for recovery of defense costs. Following briefing and oral argument, the trial court held that Gainsco had reserved its right to recoup its costs for defending Midwest and therefore granted Gainsco's motion. The trial court ordered Midwest to pay Gainsco $40,517.34. Midwest then appealed the trial court's ruling on the motion for recovery of defense costs.

The appellate court, with one justice dissenting, again affirmed the trial court's judgment. 349 Ill.App.3d 529, 285 Ill.Dec. 800, 812 N.E.2d 620. On appeal, Midwest argued that Gainsco had paid the defense costs pursuant to the insurance contract, which made no provision for the recovery sought by Gainsco. In addition, because the relationship between the parties was governed by contract, Gainsco could not recover defense costs under a theory of unjust enrichment. 349 Ill.App.3d at 530-31, 285 Ill.Dec. 800, 812 N.E.2d 620.

The appellate court rejected Midwest's argument, stating that Midwest misconstrued the payments made by Gainsco. 349 Ill.App.3d at 531, 285 Ill.Dec. 800, 812 N.E.2d 620. The appellate court found the arrangement in this case similar to the arrangement made between the parties in City of Chicago v. McKechney, 205 Ill. 372, 68 N.E. 954 (1903). The appellate court noted that in McKechney, the City of Chicago had agreed in 1895 to pay McKechney to construct a tunnel. However, in 1897, McKechney demanded increased payments due to difficulties encountered in the construction. When the City thereafter paid McKechney at its regular rate of pay, McKechney stopped work and sued the City, claiming the payment violated an 1897 revision to the original contract. In 1898, the City and McKechney entered into a new arrangement for the resumption of work pending a determination of the parties' rights in the lawsuit. Under the 1898 agreement, the City agreed to pay McKechney a rate higher than that agreed to in the 1895 contract, but stated that its agreement was without prejudice to its right to recover any overpayment if the court determined that the 1895 contract applied. This court found that the 1898 agreement was an accommodation pending litigation that preserved the City's rights under the 1895 contract.

The appellate court characterized the parties' actions in this case, like that of the parties in McKechney, as an "accommodation pending litigation to determine whether Gainsco owed Midwest the cost of defending the lawsuit the City of Chicago brought against Midwest." 349 Ill.App.3d at 532, 285 Ill.Dec. 800, 812 N.E.2d 620. The appellate court stated that, "[l]ike the 1898 arrangement in McKechney, the accommodation proposed in Gainsco's letter reserved rights to litigate the question of whether Gainsco owed the payments sought, and the right to recover any amounts the court later determined Gainsco did not owe." 349 Ill.App.3d at 532, 285 Ill.Dec. 800, 812 N.E.2d 620. The appellate court stated that it saw "no reason to invalidate the accommodation pending litigation here." 349 Ill.App.3d at 532, 285 Ill.Dec. 800, 812 N.E.2d 620.

The appellate court then noted that courts in...