Reis v. Aetna Cas. and Sur. Co. of Illinois

• Citation: 25 Ill.Dec. 824,69 Ill.App.3d 777,387 N.E.2d 700
• Decision Date: 30 November 1978
• Docket Number: No. 77-984,77-984
• Parties: , 25 Ill.Dec. 824 Marilyn REIS, Plaintiff-Appellant, v. AETNA CASUALTY AND SURETY COMPANY OF ILLINOIS, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 700

387 N.E.2d 700

69 Ill.App.3d 777, 25 Ill.Dec. 824

Marilyn REIS, Plaintiff-Appellant, v. AETNA CASUALTY AND SURETY COMPANY OF ILLINOIS, Defendant-Appellee.

No. 77-984.

Appellate Court of Illinois, First District, Fourth Division.

Nov. 30, 1978.

Supplemental Opinion On Denial of Rehearing March 22, 1979.

Jerome H. Torshen, Ltd., Chicago (Jerome H. Torshen and Edward G. Wierzbicki, Chicago, of counsel), for plaintiff-appellant.

Baker & McKenzie, Chicago (Francis D. Morrissey, Thomas R. Nelson and Edward J. Zulkey, Chicago, of counsel), for defendant-appellee.

ROMITI, Justice:

The issue in this case is whether a homeowner's insurer can refuse to defend its insured merely because part of the conduct complained of in the tort complaint allegedly occurred on business property and the policy excludes liability for injuries arising out of business pursuits of any insured, except activities ordinarily incident to non- business activities. We hold that in light of the specific allegations of the tort complaint, the insurer was required to defend and, having failed to do so, cannot now deny coverage. We also hold that any ruling as to the insurer's liability for that amount of the judgment exceeding the policy limits was premature as the facts had not been fully developed. That issue may, however, now be moot. We remand for a determination of the amount of the damages.

On August 14, 1974 Ricky Wummel, as administrator of the estate of Clarence H. Wummel II, filed a suit against Harmony Machine Resource, Inc., Marilyn Reis, and Robert Aldal. The complaint alleged that Marilyn Reis was an officer and employee of Harmony, that Aldal was also an employee of Harmony, that Aldal was also Douglas Phillips' supervisor; that on October 7, 1970, prior to reporting to work at Harmony, Phillips consumed a quantity of alcoholic beverages and prescription medications at Marilyn Reis' home; that when Phillips reported to work, he was intoxicated and incapable of operating machinery or driving an automobile and that Aldal and Reis knew or ought to have known this and, that after Phillips arrived at Harmony's premises, Harmony, through Aldal and Reis:

1. Carelessly and negligently undertook to treat the said Douglas W. Phillips for his condition of intoxication;

2. Carelessly and negligently offered medication to the said Douglas W. Phillips;

3. Carelessly and negligently offered medication to the said Douglas W. Phillips, which medication aggravated the physical condition of the said Douglas W. Phillips;

4. Carelessly and negligently offered sleeping pills for which a prescription was necessary to the said Douglas W. Phillips;

5. Carelessly and negligently ordered the said Douglas W. Phillips to leave the premises of Harmony Machine and to drive his automobile back to his home;

6. Carelessly and negligently allowed the said Douglas W. Phillips to leave the premises in a condition of intoxication which was dangerous to other individuals in the area of the Harmony Machine premises and other individuals using the public thoroughfares in the areas of the Harmony Machine premises;

7. Carelessly and negligently ordered the said Douglas W. Phillips to return to his home, knowing that his condition of intoxication made his driving of his car a danger to other motorists and individuals;

8. Otherwise carelessly and negligently caused an accident in which the automobile driven by Douglas W. Phillips collided with an automobile driven by the plaintiff's decedent, Clarence H. Wummell II.

After Phillips left the premises, he had an automobile accident in which plaintiff's decedent was killed.

Harmony Machines Inc. was insured by Crum and Forster Insurance Companies which had issued a workmen's compensation and employers' liability policy providing $100,000 for each accident. It does not appear from the record whether this policy protected Marilyn Reis in her capacity as officer of Harmony. Certainly, it did not protect her in her individual capacity. Crum and Forster on September 13, 1974 filed an appearance in the suit on behalf of the corporation and Reis. On September 18, 1974 Richard B. Harty also filed an appearance on behalf of Reis and Aldal.

Marilyn Reis was personally insured under an apartment owner's policy issued by Aetna Casualty and Surety Company in the amount of $50,000 per occurrence. Shortly after suit was filed, Reis sent a copy of the complaint to Aetna; this apparently was the first notice of the accident given to that insurer. On October 4, 1974, Aetna answered, agreeing to file an appearance temporarily on her behalf as additional counsel, ¹ but reserving its right to deny coverage because (1) notice had not been promptly given as required by the policy (this contention has not been pursued); (2) it was questionable whether an "occurrence" as defined in the policy was alleged in the complaint (this contention also was later dropped) and (3) the policy did not provide coverage since it excluded bodily injury arising out of business pursuits. Aetna, in the letter, also pointed out that the Ad damnum was for $1,175,000 more than the policy coverage and that she had already retained Harty to represent her excess claim. No objection of any kind was made to the fact that Harty had entered an appearance on her behalf before Aetna was notified.

On February 28, 1975, after participating in certain depositions and in the defense of the case up until that point, Aetna sent Reis a letter denying all liability on the sole ground that the business pursuit exclusion precluded any coverage for the lawsuit. Aetna in that letter stated that its denial was based on the complaint filed by plaintiff and that if the complaint was thereafter amended Aetna would reconsider the question. The attorney retained by Aetna then withdrew from the case. Aetna did not, however, file a declaratory judgment action to determine the question of coverage. Crum and Forster's attorney and Harty continued as defense attorneys. A judgment was rendered against all three defendants for $350,000. This was reduced by the trial court to $250,000 because of a $100,000 payment by Phillips. At that point Reis filed the present suit for declaratory judgment, contending that coverage did exist under the policy, and demanding, in Count I, that Aetna pay the expenses of defense including those on appeal, post an appeal bond for the appeal of the tort judgment, pay the attorneys' fees incurred in the declaratory judgment action, and pay the full amount of the judgment, including costs and interest. The trial court, finding no coverage, granted summary judgment to Aetna and found there was no reason to delay appeal.

Reis appealed the adverse judgment in the instant case. All three defendants had also appealed the adverse judgment in the underlying tort action. After oral argument was heard by the court in the instant case, the Appellate Court for the Second District, by a Rule 23 Order (Ill.Rev.Stat.1977, ch. 110A, par. 23), reversed the judgment for Wummel in the tort action, finding, as a matter of law, that none of the defendants breached any duty owed to the deceased. The second district's action, however, does not render the present action moot, both because that decision is still subject to review by the Supreme Court and because, even if there is no appeal or that decision is affirmed, if Aetna was required to defend Reis, then, as discussed later in this opinion, it is liable for the cost of defense.

I.

In Illinois, a liability insurer in doubt over whether it has a duty to defend its insured, cannot simply stand on the sidelines and wait until the tort action is completed before contesting the question of coverage. In a case where there is potential coverage so that the insurer has a duty to defend, but the insurer believes that it has a valid exclusionary defense, it must either (1) secure a declaratory judgment as to its rights and obligations before or pending trial of the original tort action or (2) defend the tort action under a reservation of rights. (Thornton v. Paul (1977), 51 Ill.App.3d 337, 9 Ill.Dec. 537, 366 N.E.2d 1048; Aetna Casualty and Surety Co. v. Coronet Insurance Co. (1976), 44 Ill.App.3d 744, 3 Ill.Dec. 371, 358 N.E.2d 914; Elas v. State Farm Mutual Automobile Insurance Co. (1976), 39 Ill.App.3d 944, 352 N.E.2d 60, Leave to appeal denied; Fragman Construction Company v. Preston Construction Co. (1971), 1 Ill.App.3d 1002, 274 N.E.2d 614, Leave to appeal denied; Palmer v. Sunberg (1966), 71 Ill.App.2d 22, 217 N.E.2d 463, Leave to appeal denied; Sims v. Illinois National Casualty Co. (1963), 43 Ill.App.2d 184, 193 N.E.2d 123.) Where a duty to defend exists, but the insurer fails to take either course of action, its failure to defend is unjustified, and in a subsequent action by the insured against it, it is barred from disputing the questions of coverage. (Associated Indemnity Company v. Insurance Co. of North America (1978), Ill.App., 25 Ill.Dec. 258, 386 N.E.2d 529; Thornton v. Paul (1977), 51 Ill.App.3d 337, 9 Ill.Dec. 537, 366 N.E.2d 1048; Aetna Casualty and Surety Co. v. Coronet Insurance Co. (1976), 44 Ill.App.3d 744, 3 Ill.Dec. 371, 358 N.E.2d 914; Elas v. State Farm Mutual Automobile Insurance Co. (1976), 39 Ill.App.3d 944, 352 N.E.2d 60, Leave to appeal denied; Cowan v. Insurance Company of North America (1974), 22 Ill.App.3d 883, 318 N.E.2d 315; Fragman Construction Co. v. Preston Construction Co. (1971), 1 Ill.App.3d 1002, 274 N.E.2d 614, Leave to appeal denied; Palmer v. Sunberg (1966), 71 Ill.App.2d 22, 217 N.E.2d 463, Leave to appeal denied; Sims v. Illinois National Casualty Co. (1963), 43 Ill.App.2d 184, 193 N.E.2d 123.) This is not a collateral estoppel resulting from the prior adjudication against the insured, since that doctrine only applies where the issue was necessarily ruled upon in the first adjudication. (Apex Mutual Insurance Company v. Christner (1968), 99 Ill.App.2d 153, 240 N.E.2d 742; ...