Bituminous Cas. Corp. v. Fulkerson

• Decision Date: 03 May 1991
• Docket Number: No. 5-89-0790,5-89-0790
• Citation: 212 Ill.App.3d 556,571 N.E.2d 256,156 Ill.Dec. 669
• Parties: , 156 Ill.Dec. 669 BITUMINOUS CASUALTY CORPORATION, Plaintiff-Appellee, v. Leland FULKERSON, Sr., M.L. Fulkerson and Paul Puntney, Defendants-Appellants. Fifth District
• Court: United States Appellate Court of Illinois

Page 256

571 N.E.2d 256

212 Ill.App.3d 556, 156 Ill.Dec. 669

BITUMINOUS CASUALTY CORPORATION, Plaintiff-Appellee, v. Leland FULKERSON, Sr., M.L. Fulkerson and Paul Puntney Defendants-Appellants.

No. 5-89-0790.

Appellate Court of Illinois,

Fifth District.

May 3, 1991.

Rehearing Denied May 3, 1991.

James R. Conley, Jr., Carmi, for Paul Puntney.

James L. Van Winkle, Van Winkle & Van Winkle, McLeansboro, for Leland Fulkerson, Sr. and M.L. Fulkerson.

Douglas A. Enloe, Gosnell, Benecki, Borden & Enloe, Ltd., Lawrenceville, for Bituminous Casualty Corp.

Justice HARRISON delivered the opinion of the court:

Plaintiff, Bituminous Casualty Corporation (Bituminous), sold a comprehensive general liability insurance policy to Paul Puntney, an oil well service contractor. When Puntney was subsequently sued by Leland and M.L. Fulkerson, Bituminous brought this action against both Puntney and the Fulkersons to obtain a declaratory judgment that the damages sought by the Fulkersons in their lawsuit were excluded from coverage under Puntney's insurance policy and that Bituminous therefore had no obligation to either defend Puntney or to pay any judgment which might be rendered against him in that litigation. After filing his answer to Bituminous' complaint, Puntney sought leave to assert as an affirmative defense that Bituminous was estopped from denying coverage. Following a hearing, the circuit court issued an order denying Puntney's request to raise his proposed affirmative defense. Thereafter, the court entered summary judgment in favor of Bituminous on its declaratory judgment action. Puntney and the Fulkersons now appeal. On this appeal both Puntney and the Fulkersons contend that the circuit court erred in granting summary judgment to Bituminous. Puntney alone further contends that the circuit court abused its discretion in denying him leave to assert his affirmative defense. For the reasons which follow, we reverse and remand with directions.

The litigation underlying Bituminous' declaratory judgment action commenced in May of 1987, when Leland and M.L. Fulkerson filed suit against Paul Puntney in the circuit court of White County. In their complaint, the Fulkersons alleged that they had hired Puntney to set a "Guiberson packer" in an oil well they were constructing. Although the record is not entirely clear on this point, we understand that a packer is essentially a cylindrical plug which can be inserted into the casing which lines oil well bores. Its purpose is to enable sections of the well to be isolated so that work can be performed on limited or specific areas of the oil-bearing formation. When installed properly, packers are supposed to be readily removable from the well's casing.

The well for which Puntney was employed to set the packer was known as the Tom Ramsey # 1. The well was evidently several thousand feet deep. The Fulkersons alleged that at a depth of 2062 feet there was a collar in the well's casing where two sections of the casing joined. They further alleged that Leland Fulkerson warned Puntney of the collar's location so that Puntney would not set the packer there. According to count I of the Fulkersons' complaint, however, Puntney acted negligently in setting the packer, as a result of which it became lodged in the collar and, despite repeated efforts, could not be removed. With the well blocked in this way, it could not be used and had to be abandoned. The Fulkersons averred that they were ultimately forced to drill a second well to tap into the oil formation, and that the new well was inferior to the original.

Count II of the Fulkersons' complaint contained the same basic factual allegations as count I, but was premised on breach of implied warranty rather than negligence. In both counts, the Fulkersons sought damages for the amounts they had expended in drilling and operating the Tom Ramsey # 1 well, for the losses they had incurred in attempting to retrieve the packer and repair the well after the packer became stuck, for the expenses they had incurred in drilling the replacement well, and for the loss of oil production they allegedly sustained as a result of having to drill the replacement well.

During the period relevant to the Fulkersons' complaint, Puntney held a comprehensive general liability insurance policy issued by Bituminous. Puntney had purchased this policy specifically for his business as an oil well service contractor, and when the Fulkersons filed suit against him, Bituminous retained counsel to represent him in that action. Approximately two months after the Fulkersons brought their complaint, however, Bituminous filed a separate declaratory judgment action in the circuit court of White County pursuant to section 2-701 of the Code of Civil Procedure (Ill.Rev.Stat.1987, ch. 110, par. 2-701) against both the Fulkersons and Puntney. In this action, Bituminous contended that the insurance policy it had issued to Puntney did not cover any of the damages at issue in the litigation filed by the Fulkersons. The basis for Bituminous' claim was an exclusion in the policy which stated that the insurance did not apply to damage to "property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control * * *."

The insurance policy containing this exclusion and a copy of the complaint filed against Puntney by the Fulkersons in the underlying action were attached to Bituminous' complaint as exhibits. Based upon these exhibits and the allegations in its own complaint, Bituminous asked the circuit court to declare that it had no duty to defend Puntney in the action brought against him by the Fulkersons and that it had no obligation under the policy to pay any judgment which might be rendered against Puntney in that action.

The Fulkersons and Puntney each opposed Bituminous' action on the merits. After discovery was initiated, Puntney also sought leave to raise as an affirmative defense that Bituminous was estopped by its conduct from denying that its insurance policy provided coverage. As grounds for his estoppel claim, Puntney alleged that when the Fulkersons first sued him, Bituminous retained a law firm to defend him in that case. Puntney further contended that under the express terms of the insurance policy, he had a contractual obligation to cooperate with the company in the conduct of the litigation and to provide it with all relevant documentation in his possession as soon as practicable. Pursuant to this contractual obligation, Puntney collected up all of the documents he had which were relevant to the Fulkersons' claim and turned them over to the law firm.

After Puntney allegedly surrendered the documents to the law firm, Bituminous filed its declaratory judgment action seeking to avoid coverage under the policy. That Bituminous had a right to challenge coverage by way of a declaratory judgment action was not disputed. What Puntney complained of in his proposed affirmative defense was that after he turned over all his records to the lawyers selected by Bituminous and after Bituminous made a decision to contest coverage, the lawyers lost the documents. According to Puntney, the documents were necessary and essential to the defense of the action brought against him by the Fulkersons. He therefore argued that Bituminous should now be estopped from denying coverage because at the same time Bituminous decided to contest coverage, it had made it impossible for him to adequately contest his liability.

The circuit court evidently found Puntney's arguments unpersuasive, and in an order entered on July 3, 1989, it denied his motion for leave to raise his affirmative defense. Two days later, Bituminous filed its motion for summary judgment on its action for declaratory judgment. Following a hearing, the circuit court entered an order on October 31, 1989, in which it granted summary judgment in favor of Bituminous and against Puntney and the Fulkersons. In reaching this judgment, the circuit court expressly found that the insurance policy issued to Puntney by Bituminous excluded from coverage the type of damage for which Puntney had been sued by the Fulkersons in the underlying action. From this judgment, both the Fulkersons and Puntney now appeal.

There is no dispute that the circuit court's judgment had the effect of holding that Bituminous had no duty, as a matter of law, to either indemnify Puntney or to provide him with a defense. Insofar as the circuit court's judgment declared that Bituminous had no duty to indemnify Puntney, that judgment cannot stand. The duty to indemnify arises only when an insured becomes legally obligated to pay damages in the underlying action. (Zurich Insurance Co. v. Raymark Industries, Inc. (1987), 118 Ill.2d 23, 52, 112 Ill.Dec. 684, 693, 514 N.E.2d 150, 163.) Accordingly, it has been held that "[a] declaratory judgment action to determine an insurer's duty to indemnify its insured, brought prior to a determination of the insured's liability, is premature since the question to be determined is not ripe before adjudication." United States Fidelity & Guaranty Co. v. Wilkin Insulation Co. (1989), 193 Ill.App.3d 1087, 1101, 140 Ill.Dec. 907, 916, 550 N.E.2d 1032, 1041, appeal allowed (1990), 132 Ill.2d 555, 144 Ill.Dec. 267, 555 N.E.2d 386; Maryland Casualty Co. v. Chicago & Northwestern Transportation Co. (1984), 126 Ill.App.3d 150, 156, 81 Ill.Dec. 289, 293-94, 466 N.E.2d 1091, 1095-96.

Although our supreme court has carved out an exception to this rule for declaratory judgment actions brought to determine insurance coverage where the issues involved in the declaratory judgment action are separable from those in the underlying action (see Murphy v. Urso (1981), 88 Ill.2d 444, 455-57, 58 Ill.Dec. 828, 833-34, 430 N.E.2d 1079, 1084-85), this is not such a case, as will be discussed more fully below. Because there has been no adjudication of liability on the underlying action...