Federal Ins. Co. v. Economy Fire & Cas. Co.

• Decision Date: 29 September 1989
• Docket Number: 1-87-1275,Nos. 1-87-1218,s. 1-87-1218
• Citation: 136 Ill.Dec. 1017,189 Ill.App.3d 732,545 N.E.2d 541
• Parties: , 136 Ill.Dec. 1017 FEDERAL INSURANCE COMPANY, an insurance corporation, and Marirose Johnson, Plaintiffs-Appellants, v. ECONOMY FIRE & CASUALTY COMPANY, an insurance corporation, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 541

545 N.E.2d 541

189 Ill.App.3d 732, 136 Ill.Dec. 1017

FEDERAL INSURANCE COMPANY, an insurance corporation, and Marirose Johnson, Plaintiffs-Appellants, v. ECONOMY FIRE & CASUALTY COMPANY, an insurance corporation,

Defendant-Appellee.

Nos. 1-87-1218, 1-87-1275.

Appellate Court of Illinois,

First District, First Division.

Sept. 29, 1989.

Querrey, Harrow, Gulanick & Kennedy, Ltd., Chicago, for Federal Ins. Co.

Corboy & Demetrio, P.C., Chicago, for Marirose Johnson.

Williams & Montgomery, Ltd., Chicago, for Economy Fire & Cas. Co.

Presiding Justice MANNING delivered the opinion of the court:

Plaintiffs appeal from an order granting summary judgment to the defendant in a declaratory judgment action. For the reasons stated below, we affirm the judgment of the circuit court.

The record discloses the following. On October 6, 1979, Jay T. Michael, ("Jay") an employee of Michel Masonry Company, ("Michel Masonry") was involved in an accident while driving an automobile owned by Michel Masonry. A passenger in the car, Marirose Johnson, filed suit for personal injury against Jay, Michel Masonry and the drivers of the other two automobiles involved in the accident.

Jay's father, Elwood Michel, had a personal estate protector umbrella policy with Economy Fire and Casualty Company ("Economy") for excess coverage. In December 1980 Economy denied coverage to Jay. National Grange Insurance Company and Federal Insurance Company ("Federal") defended the claim against Jay and Michel Masonry and settled for the limits of their policies. Economy refused to participate in either the defense or the settlement of the suit. Pursuant to the settlement, Jay obtained a full release from the plaintiff and assigned to her any rights he may have against Economy for its failure to defend.

Johnson and Federal filed a declaratory action against Economy, alleging that it had breached a duty to defend and indemnify Jay pursuant to the insurance policy. Plaintiffs claim that the allegations of the original complaint triggered Economy's obligation to defend Jay and Michel Masonry and that Economy's refusal of coverage was wrongful.

The parties filed cross motions for summary judgment. Plaintiffs' motion alleged that Economy had a duty to defend Jay pursuant to his father's policy and that it wrongfully failed to defend or participate in the settlement. They claim that since Economy neither defended under a reservation of rights, nor sought a declaratory judgment as to coverage, it was estopped from denying coverage; and consequently, plaintiffs were entitled to summary judgment.

Economy based its motion for summary judgment on the fact that it had no duty to defend Jay because he was not an insured under the policy. The court denied plaintiffs' motion and granted Economy's motion for summary judgment.

The plaintiffs' appeals have been consolidated, and they argue that Economy should be estopped from denying coverage since: (1) it failed to defend under a reservation of rights or to file a declaratory action as to coverage, and (2) it improperly asserted the attorney-client privilege to the communication which formed the basis of its decision to deny coverage.

When reviewing a trial court's entry of summary judgment, the reviewing court's sole function is to determine whether the trial court properly concluded that there were no genuine issues of material fact; and if there were none, whether judgment for the movant was correct as a matter of law. Coomer v. Chicago & North Western Transportation Co. (1980), 91 Ill.App.3d 17, 46 Ill.Dec. 812, 414 N.E.2d 865; Van Vactor v. Blue Cross Ass'n (1977), 50 Ill App.3d 709, 8 Ill.Dec. 400, 365 N.E.2d 638; Ill.Rev.Stat.1987, ch. 110, par. 2-1005.

In determining whether an insurer owes a duty to defend the insured, courts look to the four corners of the complaint brought against the insured. (Maryland Casualty Co. v. Peppers (1976), 64 Ill.2d 187, 193, 355 N.E.2d 24.) When an insurer contracts to defend its insured, it must do so unless it is clear from the face of the complaint that the allegations fail to state facts which bring the case within, or potentially within, the policy's coverage. Conway v. Country Casualty Ins. Co. (1982), 92 Ill.2d 388, 393, 65 Ill.Dec. 934, 442 N.E.2d 245; Clemmons v. Travelers Ins. Co. (1981), 88 Ill.2d 469, 475, 58 Ill.Dec. 853, 430 N.E.2d 1104. See also Zurich Ins. v. Raymark Industries (1987), 118 Ill.2d 23, 52, 112 Ill.Dec. 684, 514 N.E.2d 150.

Pursuant to these principles, two requirements must be satisfied before an insurer's duty to defend arises: (1) the action must be brought against an insured, and (2) the allegations of the complaint must disclose the potential of policy coverage. (Murphy v. Peterson (1984), 129 Ill.App.3d 952, 957, 85 Ill.Dec. 112, 473 N.E.2d 480.) If the allegations of the complaint reveal that the action was not brought against an insured and that there was no potential for coverage under the policy, there is no duty to defend the underlying action (M.F.A. Mutual Insurance Co. v. Crowther Inc. (1983), 120 Ill.App.3d 387, 390, 75 Ill.Dec. 903, 458 N.E.2d 71), and the insurer can justifiably refuse to defend. LaRotunda v. Royal Globe Ins. Co. (1980), 87 Ill.App.3d 446, 451, 42 Ill.Dec. 219, 408 N.E.2d 928.

Plaintiffs contend that Jay was potentially insured as: (1) any person using an automobile owned by, loaned to or hired for use in behalf of the named insured (paragraph III(b)(1) of Economy's Insuring Agreement), or (2) with respect to a non-owned automobile, any relative, provided the actual use thereof is with the permission of the owner. (paragraph III(b)(2) of the Insuring Agreement). Defendant, on the other hand, asserts it had no duty to defend Jay because (1) he was not an insured under the policy, and (2) it did not have a duty to defend an insured until the insured's liability exceeded the coverage provided by the underlying insurance. Economy maintains that it is clear from the face of the complaint that Jay was not an insured, and consequently, that there was no potential for coverage.

In the instant case, neither of the foregoing requirements are satisfied. First, no person or entity insured by Economy was named as a defendant in the complaint filed by Marirose Johnson. Marirose sued Jay and the other defendants individually. She sued Michel Masonry in its corporate name. Elwood Michel, the named insured under Economy's policy, was never named as a defendant in the underlying action. No third party action was ever filed against Elwood Michel.

Second, all of the allegations in the underlying action were directed against Jay as the operator of an automobile involved in an accident which was owned by Michel Masonry. The complaint alleges that Jay was acting as an agent and authorized employee of Michel Masonry at the time of the occurrence. The complaint does not allege that the automobile had been loaned to or hired for the father's use. Moreover, there was never any allegation in Marirose Johnson's complaint that Jay was in any manner connected with or acting on behalf of his father, Elwood Michel. Hence, the allegations of Marirose Johnson's complaint reveal that the action was not brought against Elwood Michel, the insured, and that there was no potential for coverage pursuant to paragraph III(b)(1) of the Economy policy.

For Jay to be an insured pursuant to paragraph III(b)(2), he must have been a "relative" using a "non-owned automobile," with the owner(s) permission. "Relative" was defined by the policy as a relative of the named insured who is a resident of the same household. A "non-owned automobile" was defined by the Economy policy as any automobile not owned by or furnished for the regular use of either the named insured or any relative, other than a temporary substitute automobile.

The record discloses that the underlying complaint did not allege that Jay was a relative of Elwood Michel or that the automobile in question was a non-owned automobile, as defined in Economy's policy. Consequently, there was similarly no potential for coverage under this provision of the Insuring Agreement. Under these circumstances, the potential for "coverage cannot be inferred merely because the son of the insured is named in a lawsuit." Murphy v. Peterson (1984), 129 Ill.App.3d 952, 958, 85 Ill.Dec. 112, 473 N.E.2d 480.

We briefly discuss Economy's argument that an excess carrier has no duty to defend an insured until the insured's liability exceeds the coverage provided by the underlying insurance(s). Economy's policy contains separate provisions concerning liability and defense. The liability section provides that the company agrees to...