Oakley Transport, Inc. v. Zurich Ins. Co.

• Decision Date: 31 March 1995
• Docket Number: No. 1-94-1798,1-94-1798
• Parties: , 208 Ill.Dec. 177 OAKLEY TRANSPORT, INC., and Planet Insurance Company, Plaintiffs-Appellants, v. ZURICH INSURANCE COMPANY, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 1099

648 N.E.2d 1099

271 Ill.App.3d 716, 208 Ill.Dec. 177

OAKLEY TRANSPORT, INC., and Planet Insurance Company Plaintiffs-Appellants, v. ZURICH INSURANCE COMPANY, Defendant-Appellee.

No. 1-94-1798.

Appellate Court of Illinois First District, Fifth Division.

March 31, 1995.

James K. Horstman, Thomas H. Neuckranz, Lloyd E. Williams, Jr., Williams & Montgomery, Ltd., Chicago, for appellants.

Marlene A. Kurilla (Robert Marc Chemers, Scott L. Howie, of counsel), Pretzel & Stouffer Chartered, Chicago, for appellee.

Justice THOMAS J. O'BRIEN delivered the opinion of the court:

Plaintiffs appeal from an order of the circuit court which dismissed with prejudice their four count amended complaint for declaratory judgment and other relief. The trial court held that defendant Zurich Insurance Co. (Zurich) did not owe a duty to defend or indemnify plaintiff Oakley Transport, Inc. (Oakley) in connection with a motor vehicle accident involving one of Oakley's employees. We affirm.

Because the trial court dismissed each of the counts in question pursuant to § 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1992)), the factual allegations in the complaint are taken as true.

Oakley is a Florida corporation engaged in the interstate trucking business. On September 21, 1991, an employee of Oakley was involved in a motor vehicle accident that resulted in bodily injury and property damage. The accident occurred while the employee was operating a semi-tractor during the course of his employment. The employee allegedly drove the truck off the road and into a number of homes.

The injured parties and persons on their behalf filed four separate lawsuits against Oakley and its employee. As to Oakley, each of the complaints asserted several theories of liability, including negligent entrustment and negligent supervision. Oakley in turn tendered the defense of each of the suits to co-plaintiff Planet Insurance Co. (Planet). Planet accepted the tender in accordance with a Trucker's Liability Policy and ultimately contributed funds in settlement of the tort claims.

Oakley also tendered the defense of the underlying litigation to Zurich pursuant to a Commercial General Liability Policy (CGL). Zurich, however, rejected coverage in a letter dated September 21, 1992. The rejection letter indicated that an exclusion in the CGL policy precluded coverage for bodily injury and property damage arising out of the "entrustment" of an "auto" as defined in the policy. The exclusion provided in pertinent part:

"This insurance does not apply to:

* * * * * *

g. 'Bodily injury' or 'property damage' arising out of the ownership, maintenance, use or entrustment to others of any aircraft, 'auto', or watercraft owned or operated by or rented or loaned to any insured."

On December 29, 1992, Oakley and Planet filed a complaint for declaratory judgment against Zurich, seeking among other things reimbursement for the costs incurred in defending and settling the underlying litigation. In Count I, plaintiffs requested a declaration that Zurich was estopped from denying coverage based upon Zurich's purportedly improper rejection of Oakley's tender of defense. Counts II and III sounded in "bad faith" and breach of contract, respectively, and Count IV sought statutory sanctions for vexatious and unreasonable refusal to pay. 215 ILCS 5/155 (West 1992).

Zurich responded with a motion to dismiss the complaint under § 2-615 for failure to state a cause of action. (735 ILCS 5/2-615 (West 1992).) Zurich's motion was based primarily upon the "auto" exclusion which was cited in its letter of rejection. The trial court granted the motion without prejudice.

Plaintiffs thereafter filed an amended complaint for declaratory relief on July 20, 1993. Zurich again moved to dismiss the complaint under § 2-615 for failure to state a cause of action, repeating its contention that the "auto" exclusion precluded coverage. The trial court agreed and granted the motion to dismiss. The court held that Zurich's insurance policy excluded coverage for any claims of negligent entrustment or negligent supervision as alleged in the underlying complaints, and therefore dismissed the declaratory action with prejudice. Plaintiffs then filed this appeal.

On appeal, plaintiffs initially contend that the trial court erred in looking beyond the allegations of the underlying complaints by "engag(ing) counsel in a lengthy inquiry regarding the background facts and theories of the underlying litigation." Specifically, plaintiffs refer to the fact that during the hearing on Zurich's motion to dismiss the amended complaint, the trial judge discussed with counsel an order of partial summary judgment entered in one of the underlying litigations. ¹ The order itself incorporated a recitation of certain testimony considered by the trial court in the tort action in ruling on the issue of negligent entrustment.

It is true, as plaintiffs point out, that the "declaratory" court must ordinarily confine its inquiry to a comparison of the allegations of the underlying complaint and the relevant provisions of the insurance policy in determining a duty to defend. With few recognized exceptions not applicable here, an insurer's duty to defend arises if the complaint alleges facts that fall within, or potentially within, the policy's coverage. ² (Dixon Distributing Co. v. Hanover Insurance Co. (1994), 161 Ill.2d 433, 204 Ill.Dec. 171, 641 N.E.2d 395.) It is settled law that the allegations in the complaint are dispositive of the insurer's duty to defend, and not the findings of the underlying litigation. Such findings may be relevant to an insurer's duty to indemnify, but they have no bearing on an insurer's separate and broader duty to defend. A trial court, therefore, should not expand its inquiry beyond the allegations set forth in the underlying complaint.

To be sure, the fact that the court in the tort action may have decided certain facts relevant to the issue of coverage does not necessarily afford an insurer the luxury of denying its duty to defend based upon those facts. The insurance policy, which contractually obligates the insurer to provide a defense based upon the operative allegations in the tort complaint, contemplates that an insurer undertake the insured's defense when given proper notice of a potential claim and not after the claim has been adjudicated. Indeed, the duty to defend is to be determined at the time the insured makes a tender of defense. An insurer who has received such a tender simply cannot wait until the resolution of the underlying case, or some portion thereof, in the hope that there may be some finding of fact which negates the duty to defend.

Nevertheless, nothing in the record in this case to suggests that the trial court actually relied upon any of the findings in the underlying litigation in granting Zurich's motion to dismiss. The trial court's purportedly "lengthy inquiry" into certain background facts occurred in the course of an extended hearing on February 10, 1994. The court took the matter under advisement and eventually issued its ruling on April 25, 1994. During the ruling, the court unequivocally stated, "I analyzed this action in terms of the original underlying complaint and I can find no conceivable theory on the underlying complaint which justifies coverage." (Emphasis added.) At this latter hearing, the court did not refer to, let alone rely upon, any of the findings of court in the tort litigation.

Furthermore, any perceived error on the part of the trial court in discussing the terms of the order of summary judgment is cured by our independent review of the allegations in the underlying action. On appeal from a dismissal of a complaint for failure to state a cause of action, our sole task is to determine whether the allegations in the complaint are sufficient to set forth a cause of action for which relief may be granted. (Baker v. Miller (1994), 159 Ill.2d 249, 255, 201 Ill.Dec. 119, 636 N.E.2d 551.) The issue before us in this case involves the interpretation of an insurance policy and is therefore a question of law subject to de novo review. Accordingly, we summarily disregard any extrinsic facts that the trial court may have considered, and by so doing eradicate any error in this case.

Plaintiffs also argue that, procedurally, "the trial court's disposition of the substantive coverage issue pursuant to Zurich's § 2-615 motion was improper and unfair to the plaintiffs." They suggest that "had the court properly confined itself to the question of the sufficiency of the pleadings, it would not have reached the merits of the substantive issue * * *." We disagree.

A dismissal under § 2-615 for failure to state a cause of action is warranted where an otherwise factually sufficient complaint presents only a question of law. Here, when ascertaining whether an insurance company must defend its insured in a suit filed against it, the trial court merely looks to the factual allegations of the underlying complaint and the provisions of the insurance policy. If a review of those allegations discloses that all of the claims are beyond coverage, an insurer is justified in refusing to defend. The court may then properly dismiss the action under § 2-615 for failure to state a cause of action, and such dismissal may be with prejudice because an insured cannot alter the terms of the policy or disavow the allegations in the underlying complaint in a subsequent pleading.

Plaintiffs next submit that "the 'arising out of' clause that is used in the Zurich exclusion has repeatedly been held to be ambiguous in insurance coverage cases." (Dash Messenger Service, Inc. v. Hartford Insurance Co. of Illinois (1991), 221 Ill.App.3d 1007, 164 Ill.Dec. 313, 582 N.E.2d 1257, appeal denied 143 Ill.2d 637, 167 Ill.Dec. 398, 587 N.E.2d 1013; Burlington Northern Railroad Co. v. Illinois Emasco Insurance Co. (1987), 158 Ill.App.3d 783, 110 Ill.Dec....