American Family v. W.H. McNaughton Builders

• Decision Date: 06 February 2006
• Docket Number: No. 2-05-0063.,2-05-0063.
• Citation: 843 N.E.2d 492
• Parties: AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. W.H. McNAUGHTON BUILDERS, INC., a/k/a W.H. McNaughton Builders, LLC, Defendant-Appellant.
• Court: United States Appellate Court of Illinois

843 N.E.2d 492

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. W.H. McNAUGHTON BUILDERS, INC., a/k/a W.H. McNaughton Builders, LLC, Defendant-Appellant.

No. 2-05-0063.

Appellate Court of Illinois, Second District.

February 6, 2006.

COPYRIGHT MATERIAL OMITTED

Hugh C. Griffin, Hugh S. Balsam, Gerald O. Sweeney, Ryan M. Henderson, Elsa Y. Trujillo, Lord, Bissell & Brook LLP, Chicago, for W.H. McNaughton Builders, Inc.

Joshua G. Vincent, Carol Proctor, Hinshaw & Culbertson LLP, Chicago, for Appellee.

Justice McLAREN delivered the opinion of the court:

In 2004, defendant, W.H. McNaughton Builders, Inc., a/k/a W.H. McNaughton Builders, LLC (McNaughton), was sued by Fred and Marianne Begy (the Begy Suit), whose home McNaughton had built in 1991. McNaughton turned the Begy Suit over to its insurer, plaintiff, American Family Mutual Insurance Company (American Family), which, pursuant to its policy with McNaughton, had a duty to defend the suit. American Family agreed to comply with its duty to defend, but reserved the right to later deny coverage if McNaughton were found liable for damage occurring before the inception of the policy in 1994. In response, McNaughton argued that American Family and McNaughton had a conflict of interest, because American Family's interests would be protected if McNaughton were found liable in the Begy Suit for damage occurring before 1994.

Because American Family's interests would be protected if McNaughton were found liable, McNaughton argued that it should not be forced to defend the Begy Suit with an attorney retained by American Family. Rather, McNaughton argued that it should be permitted to select its own attorney at American Family's expense in accordance with well-settled law. American Family disagreed. It filed a declaratory judgment action in which it argued that there was no conflict and sought a determination that it had the right to select McNaughton's attorney. The trial court found that there was no current conflict, and accordingly it granted declaratory judgment for American Family. McNaughton appeals, and we reverse and remand.

I. BACKGROUND

American Family issued a commercial general liability policy (the Policy) to McNaughton in 1994. As part of the Policy, American Family agreed that, in exchange for McNaughton's payment of annual premiums, American Family would cover expenses for which McNaughton became liable because of "property damage" covered by the Policy. According to the Policy, covered property damage was damage that, among other restrictions, occurred during the Policy period and of which the insured was unaware prior to the Policy's inception. Additionally, in order to be covered by the Policy, the damage had to come within the Policy's definition of "property damage," which, in relevant part, was as follows:

"a. Physical Injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the `occurrence' that caused it."

In turn, the Policy defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

American Family added another policy exclusion, effective December 31, 2002. Specifically, as of that time, the Policy excluded from coverage, among other things, "direct or indirect losses resulting from" "property damage * * * includ[ing] any claim for diminution of value of real or personal property due to its contamination with `mold' in any form." The Policy remained current through 2004.

In July of that year, the Begys sued McNaughton. In their two-count complaint, the Begys alleged breach of implied warranty and breach of implied warranty of habitability. Count I alleged that, in building the Begys' home, McNaughton breached an implied warranty requiring it to install in a good and workmanlike manner an exterior insulation and finish system (EIFS).¹ Count II alleged, among other things, that, as a result of McNaughton's failings, the Begys' home suffered mold damage. Although the complaint did not allege any dates, the agreement between the Begys and McNaughton was attached to it, and, according to that agreement, construction of the home was to begin in September 1991 and be "substantial[ly]" completed by June 1992.

McNaughton informed American Family of the Begy Suit, and American Family retained counsel to defend McNaughton. Shortly after doing so, however, American Family advised McNaughton that American Family would be defending the Begy Suit under a complete reservation of rights to later deny coverage. In reserving its rights, American Family pointed out that: (1) the Policy did not cover property damage occurring prior to the Policy's inception in 1994; (2) the Policy did not cover property damage that resulted from mold and occurred after December 31, 2002; and (3) the Policy did not cover property damage that McNaughton knew about before the Policy's inception in 1994.

After receiving notice of American Family's reservation of rights, McNaughton advised American Family that, due to a conflict of interest, McNaughton was entitled to hire independent counsel to represent it in the Begy Suit. According to McNaughton, a conflict existed because, although both McNaughton and American Family had a mutual interest in McNaughton's being found not liable in the Begy Suit, American Family's interests would be equally protected if McNaughton were found liable for damages not covered by the Policy. McNaughton noted that the Policy did not cover damage that occurred before 1994 or damage that McNaughton knew about before 1994 or damage that was due to mold and that occurred after 2002. McNaughton also noted that the Begys' claims dealt both with mold damage and with breaches of warranties occurring prior to 1994, that is, when the Begys' home was built in 1991 and 1992. Finally, McNaughton noted that issues as to the timing of the alleged damage—issues, that is, that McNaughton said would be resolved in the Begy Suit—could determine whether McNaughton had coverage under its policy with American Family. For these reasons, McNaughton argued, a conflict of interest existed between McNaughton and American Family, and, therefore, it was improper for American Family to control McNaughton's defense in the Begy Suit. McNaughton asked American Family to allow McNaughton to retain independent counsel to defend it against the Begys' allegations.

American Family responded to McNaughton's request by filing a declaratory judgment action against McNaughton. In its complaint, American Family asked the trial court to declare that there was no conflict and that, accordingly, American Family should be permitted to select the attorney to control McNaughton's defense in the Begy Suit.

The parties filed cross-motions for judgment on the pleadings. In support of its motion, American Family argued, inter alia, that there was no conflict because there would be no opportunity in the Begy Suit for counsel retained by American Family to shift facts to lay the basis for American Family to later deny coverage to McNaughton. To this end, American Family pointed out that it had reserved the right to deny coverage on the basis of, among other things, the timing of the damage to the Begys' home. American Family also pointed out that the Begys claimed that McNaughton had failed to properly construct their home and that, as a result, their home had suffered mold damage. This being the case, American Family argued that the Begys' claims did not raise an issue of when the damage occurred. Thus, American Family argued that there was no conflict, and, consequently, it should be permitted to appoint its own attorney to defend McNaughton in the Begy Suit.

In response, McNaughton argued that the Begys' claims did raise an issue of timing, which would be the subject of discovery in the Begy Suit. McNaughton argued that, if American Family were permitted to control the defense of the Begy Suit, then this discovery would be controlled by attorneys retained by American Family—attorneys, that is, with a long-standing financial relationship with American Family. Because, depending on what the discovery revealed as to timing, McNaughton could lose coverage under the Policy, McNaughton argued that there was a conflict. Consequently, McNaughton argued, American Family should not be allowed to use its own attorneys to control McNaughton's defense in the Begy Suit.

The trial court rejected McNaughton's argument. Specifically, at a hearing on the parties' motions, the trial court found that there was no "clear conflict of interest," only a "possible or potential conflict of interest depending on what the discovery shows." The trial court explained:

"[A]t this point in time, it is clearly within the mutual interest of both W.H. McNaughton and American Family to find that * * * there was no property damage of the type that is alleged; only if that question is * * * answered in the affirmative would it possibly come into * * * the issue of when the damage took place * * *.

But at this point in time, [the court] do[es]n't think that there is a conflict of interest which would require or even permit the court to allow the appointment of independent counsel * * *."

Having concluded that there was no present conflict, the trial court granted American Family's motion for judgment on the pleadings. McNaughton appeals.

II. ANALYSIS

We begin with the standard of review. A motion for judgment on the pleadings is properly granted only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Gillen v. State Farm Mutual Automobile Insurance Co., 215 Ill.2d 381, 385, 294 Ill.Dec. 163, 830 N.E.2d 575 (2005). Our...