Murphy v. Urso, s. 53425

CourtSupreme Court of Illinois
Citation88 Ill.2d 444,58 Ill.Dec. 828,430 N.E.2d 1079
Docket Number53547,Nos. 53425,s. 53425
Parties, 58 Ill.Dec. 828 Joyce Ann MURPHY, Appellee, v. Marilyn URSO et al., Appellants.
Decision Date18 December 1981

Page 1079

430 N.E.2d 1079
88 Ill.2d 444, 58 Ill.Dec. 828
Joyce Ann MURPHY, Appellee,
Marilyn URSO et al., Appellants.
Nos. 53425, 53547.
Supreme Court of Illinois.
Dec. 18, 1981.
Rehearing Denied Jan. 29, 1982.

[88 Ill.2d 448]

Page 1081

[58 Ill.Dec. 830] Raymond R. Cusack, of Johnson, Cusack & Bell, Ltd., Chicago (Thomas H. Fegan, Chicago, of counsel), for appellant Marilyn Urso d/b/a Edgewater Preschool and Edgewater Primary School, Inc.

Baker & McKenzie, Chicago (Francis D. Morrissey, Norman J. Barry, Jr., and Richard H. Donohue, Chicago, of counsel), for appellants The Travelers Indemnity Co. of Illinois and the Travelers Ins. Co.

George T. Murphy, Jr., Chicago (Sidney Z. Karasik, Chicago, of counsel), for appellee.

SIMON, Justice:

These consolidated cases arose from the same incident-a traffic accident in which Joyce Murphy was injured when the van in which she was riding and which was traveling at excessive speed struck several parked cars. In cause No. 53547, Murphy sued the driver, James Clancey, and the van's alleged owners, Marilyn Urso, operator of the Edgewater Pre-school, and Edgewater Primary School, Inc. She alleged that Clancey was negligent and that he was acting as the agent of the other defendants. Subsequently, Murphy amended her complaint by adding a second count against Urso and her schools alleging wilful and wanton or negligent entrustment of the van to Clancey. The plaintiff obtained a default judgment against Clancey, then brought a garnishment action (cause No. 53425) against the Travelers[88 Ill.2d 449] Indemnity Company of Illinois and the Travelers Insurance Company (Travelers), Urso's business insurer.

The circuit court of Cook County granted summary judgment against Murphy on the grounds that Clancey was not operating the van within the scope of his employment and that Urso had not entrusted the use of the van to him. In the garnishment action, the court found that Travelers was estopped from denying insurance coverage of Clancey under Urso's policy, because Travelers had refused to defend the suit against Clancey. The appellate court reversed Urso's summary judgment and remanded the accident case for trial but affirmed the judgment, with one judge dissenting, against the insurer. (83 Ill.App.3d 779, 38 Ill.Dec. 863, 404 N.E.2d 287.) This court granted leave to appeal under Rule 315 (73 Ill.2d R. 315).



Chronologically, the first issue the various parties in these cases reached was whether Travelers had to defend Clancey in the suit filed against him by Murphy. The resolution of that issue is tied to the allegations of Murphy's complaint and the potential liability it presented. To best examine the issue it is necessary to explore the procedural background of the two cases.

Clancey did not respond to the initial Murphy complaint, and after the appropriate length of time had passed a $750,095 default judgment was entered against him. Ms. Murphy then filed her garnishment suit against Travelers seeking payment from the business insurance policy issued to Ms. Urso's schools. Ms. Murphy claimed in the garnishment action that Clancey was covered by the policy as a permissive user of the preschool's bus. Travelers tried to deny coverage of Clancey on this ground, but Ms. Murphy urged that Travelers was estopped from denying coverage because it had failed to defend Clancey, its insured, in the [88 Ill.2d 450] underlying suit.

The garnishment suit lay dormant until the circuit court granted summary judgment

Page 1082

[58 Ill.Dec. 831] against Murphy in the underlying accident case. At that point both Ms. Murphy and Travelers moved for summary judgment in the garnishment action. Travelers argued that the judgment in the accident case settled the question of Clancey's authority to use the bus. But the circuit court held that Travelers was estopped from making any policy defenses and awarded the full amount of the default judgment, plus interest, to Ms. Murphy-a total of $854,000. This was in excess of the $100,000 policy limits.

The issue presented in this part of the appeal is whether Travelers was estopped from denying policy coverage. A guide to the levels of contention would be helpful in understanding the arguments and responses of Ms. Murphy and Travelers. First, she claimed that Travelers should pay the judgment against Clancey because, as the driver of the vehicle, he fell under its policy of insurance. Travelers responded that Clancey was not covered because he had no permission to use the bus at the time of the accident. Second, Ms. Murphy retorted that Travelers could not raise that defense because it had failed to provide Clancey with a defense in the accident case. It was therefore estopped from raising the question of permission and denying coverage. Travelers answered that it was not estopped because it had a conflict of interest with Clancey. Under existing Illinois law, such a conflict excused it from taking on Clancey's defense itself. Third, Ms. Murphy claimed that the conflict of interest did not prevent Travelers from determining whether there was permission and thus policy coverage in a declaratory judgment action, and that Travelers should have taken that route rather than simply declining to give Clancey a defense. Travelers answered that such an action was inappropriate for a case like this, because of the procedural shifts that would occur and [88 Ill.2d 451] because of the effect of collateral estoppel. Fourth, Ms. Murphy countered that she did not mind the procedural shifts and that collateral estoppel would not have operated in any event. Travelers disagreed. Such are the four levels of argument involved in this segment of the appeal, although skirmishes occur in addition on every level.

The first level of argument is quickly disposed of. If the policy extended to Clancey, Travelers would be liable; the reason is Clancey's negligence could not be realistically contested. Ms. Murphy, who stood in Clancey's shoes for purposes of the garnishment action, conceded that the accident occurred when Clancey slammed into parked cars while rounding a corner too wide and too fast. No other factor was involved in the accident except perhaps Clancey's sobriety-he and Ms. Murphy had spent 21/2 hours in a bar just before the accident. Here, therefore, the only question was policy coverage, and the parties clashed over whether Travelers would be permitted to raise its policy defense that Clancey was using the van without permission.

We thus move to the second level and begin our analysis of the case with the familiar general rule of estoppel. An insurer taking the position that a complaint potentially alleging coverage is not covered by a policy which provides that the insurer has the right and duty to defend any claims brought against the insured cannot simply refuse to defend the insured. It must defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage. If the insurer fails to do this, it is estopped from later raising policy defenses to coverage and is liable for the award against the insured and the costs of the suit, because the duty to defend is broader than the duty to pay. (Sims v. Illinois National Casualty Co. (1963), 43 Ill.App.2d 184, 199, 193 N.E.2d 123.) But, this case turns on an exception to the general rule. An insurer must decline to defend where there is a conflict of interest between it and the insured. (Thornton v. Paul (1978), 74 Ill.2d 132, 152, 23 Ill.Dec. 541, 384 N.E.2d 335; Maryland Casualty Co. v. Peppers [88 Ill.2d 452] (1976), 64 Ill.2d 187, 198-99, 355 N.E.2d 24.) Instead of participating in the defense itself, the insurer must pay the costs of independent counsel for the insured. (74 Ill.2d 132, 162, 23 Ill.Dec. 541, 384 N.E.2d 335; 64 Ill.2d 187, 199, 355

Page 1083

[58 Ill.Dec. 832] N.E.2d 24.) And, had Clancey requested a defense, Travelers would have been obligated to pay the costs. The starting point of analysis under either the general rule of estoppel or the exception is the same-the allegations of the complaint and the policy issued by the insurer. To these we turn.

Travelers issued a comprehensive insurance policy, including both general liability and automobile insurance sections, to the schools. The policy obligated the insurer to pay on behalf of the insured all damages due to bodily injury arising out of the use of, among other things, the van involved in the accident. The policy's coverage extended to persons using the van with permission of the named insured. Travelers was given the right and duty to defend any suits against the insureds.

Ms. Murphy filed her initial complaint on August 10, 1972. Characterizing Clancey as the agent of Ms. Urso and the preschool, she charged the defendants, including Clancey, with wilful and wanton or negligent conduct, primarily due to Clancey's driving. The default judgment against Clancey, who was served through the Secretary of State, was entered when he made no appearance.

Although an amended complaint was later filed which for the first time added a count alleging negligent entrustment, it was the first complaint that was on file when the failure to present any defense resulted in the default against Clancey. Thus it is that complaint alone to which we turn our attention. (La Rotunda v. Royal Globe Insurance Co. (1980), 87 Ill.App.3d 446, 452, 42 Ill.Dec. 219, 408 N.E.2d 928.) It alleged that Murphy's injury was caused by faulty driving of the preschool's bus by an agent-therefore one with permission-of the named insured. The complaint presented the issues of negligence, causation, and the relationship between Clancey and Urso. Of these, the relationship between Clancey and Urso-[88 Ill.2d 453] raising the question of whether Clancy had permission to use the van-was the principal contested issue. The complaint presented a case of potential coverage, and the...

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