Country Mutual Insurance Company v. Livorsi Marine, Inc., No. 1-03-2832 (IL 11/30/2004), 1-03-2832

• Decision Date: 30 November 2004
• Docket Number: No. 1-03-2912, Consolidated,No. 1-03-2832,1-03-2832,1-03-2912, Consolidated
• Parties: COUNTRY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee v. LIVORSI MARINE, INC. and GAFFRIG PERFORMANCE INDUSTRIES, Defendants-Appellants.
• Court: Illinois Supreme Court

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COUNTRY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee
v.
LIVORSI MARINE, INC. and GAFFRIG PERFORMANCE INDUSTRIES, Defendants-Appellants. No. 1-03-2832 No. 1-03-2912, Consolidated Appellate Court of Illinois, First District, Second Division. November 30, 2004.

Appeal from the Circuit Court of Cook County. Honorable Stephen A. Schiller, Judge Presiding.

JUSTICE WOLFSON delivered the opinion of the court:

This insurance coverage case raises a question that has not been squarely answered in this State: When an insured is required by its contract with its insurer to give timely notice of a lawsuit against it, but does not do so and has no excuse for not doing it, does the insurer have to prove prejudice before it can avoid coverage? We conclude this insurer did not have to prove it was prejudiced by an unreasonably late notice of a lawsuit. We affirm the trial court's judgment for the insurer.

FACTS

Country Mutual Insurance Company (Country Mutual) brought this declaratory judgment action to establish whether the insurance policies it had with Livorsi Marine, Incorporated (Livorsi) and Gaffrig Performance Industries (Gaffrig) required Country Mutual to indemnify and defend them in an underlying trademark dispute.

Both Gaffrig and Livorsi purchased general liability policies from Country Mutual. The policies stated:

"[Country Mutual] will pay those sums that the insured becomes legally obligated to pay as damages because of *** "advertising injury" to which this coverage part applies. [Country Mutual] will have the right and duty to defend any "suit" seeking those damages. [Country Mutual] may at [its] discretion investigate any "occurrence" or offense and settle any claim or "suit" that may result."

The policies' definition of "advertising injury" included injury arising from the "infringement of copyright, title, or slogan." The policies also listed conditions for the coverage, including a duty to notify Country Mutual "as soon as practicable" in the event of an occurrence, offense, claim or suit and to "immediately send" the insurer copies of any demands, notices, summonses, or legal papers in connection with a claim or suit.

On December 1, 1999, Livorsi filed a complaint against Gaffrig for trademark infringement, dilution, and consumer fraud. That same day, Gaffrig filed its countercomplaint against Livorsi alleging trademark infringement and unfair competition. Trial commenced in March 2002.¹

On November 20, 2001, Country Mutual filed its complaint for declaratory judgment, alleging its policies with Livorsi and Gaffrig did not provide coverage for the trademark lawsuits for two reasons: (1) the lawsuits did not fall under the definition of "advertising injury"; and (2) both Livorsi and Gaffrig failed to provide timely notice of the lawsuits, thereby breaching a condition of the policies' coverage. The parties stipulated that County Mutual did not receive actual notice of the trademark lawsuits until August 2001, 21 months after the lawsuits were filed.

The trial court entered a declaratory judgment in favor of Country Mutual based on the failure of Livorsi and Gaffrig to provide timely notice of the trademark lawsuits. Whether the claims fell within the coverage of the policies is not an issue in this appeal by Livorsi and Gaffrig.

DECISION

The issues are framed by the parties' briefs and we will hold the parties to them despite efforts to slip away during oral argument. That means the appellants agree the notice of lawsuit given Country Mutual was unreasonably and inexcusably late. It also means Country Mutual was caught in a conflict of interest because it insured both appellants, leaving it in a position where it could not prove it was prejudiced by the late notice. Where a conflict exists, the insurer must decline to participate in the defense and must pay the costs of independent counsel for the insured.² Murphy v. Urso, 88 Ill. 2d 444, 451-52, 430 N.E.2d 1079 (1981).

That leaves us with a single issue, one of law: Given the circumstances presented to us, did Country Mutual have to prove prejudice? Because it is a legal issue, we will approach it on a de novo basis. People v. Johnson, 206 Ill. 2d 348, 359, 794 N.E.2d 294 (2002).

This is a contract case. The insurance contract controls the insured's duties. Northern Insurance Co. of New York v. City of Chicago, 325 Ill. App. 3d 1086, 1091, 759 N.E.2d 144 (2001). When the contract includes a provision requiring the insured to notify the insurer of a suit against it, the notice provision is a "condition precedent to...