Royal Ins. Co. v. Process Design Associates, Inc.

• Decision Date: 29 October 1991
• Docket Number: No. 1-90-2549,1-90-2549
• Citation: 221 Ill.App.3d 966,164 Ill.Dec. 290,582 N.E.2d 1234
• Parties: , 164 Ill.Dec. 290 ROYAL INSURANCE COMPANY, Plaintiff-Appellee, v. PROCESS DESIGN ASSOCIATES, INC., and General Accident Insurance Company of America, et al., Defendants-Appellants.
• Court: United States Appellate Court of Illinois

Page 1234

582 N.E.2d 1234

221 Ill.App.3d 966, 164 Ill.Dec. 290

ROYAL INSURANCE COMPANY, Plaintiff-Appellee, v. PROCESS DESIGN ASSOCIATES, INC., and General Accident

Insurance Company of America, et al., Defendants-Appellants.

No. 1-90-2549.

Appellate Court of Illinois,

First District, Second Division.

Oct. 29, 1991.

Kiesler & Berman, Chicago (Robert L. Kiesler and Patti M. Deuel, of counsel), for plaintiff-appellee.

Hinshaw & Culbertson, Chicago (D. Kendall Griffith, Kevin R. Sido and Terrence K. McGrath, of counsel), for defendants-appellants Process Design Associates, Inc. and Gen. Acc. Ins. Co. of America.

Schiff, Hardin & Waite, Chicago (Mark C. Friedlander and Brent J. Graber, of counsel), for defendant-appellant Process Design Associates, Inc.

Justice DiVITO delivered the opinion of the court:

Plaintiff Royal Insurance Company (Royal) brought suit against defendants Process Design Associates, Inc. (Process) and General Accident Insurance Company of America (GA), seeking a declaratory judgment that it was not contractually obligated to provide a defense or insurance coverage to Process. All parties moved for summary judgment; the circuit court granted Royal's motion.

Process and GA appeal the court's award of summary judgment on behalf of Royal and the court's denial of their motions for summary judgment and their motion to reconsider raising in issue (1) whether Royal failed to make a timely reservation of rights or file a timely declaratory judgment action; (2) whether Royal is estopped from asserting the professional liability exclusion in its policy because it failed to adequately inform Process of an alleged conflict of interest in its defense of Process; and (3) whether Royal owed primary insurance coverage to Process. Royal cross-appeals from that part of the court's judgment ordering that Royal share defense costs.

In February 1981, Process, an engineering firm, entered into a contract with Domtar Industries, Inc., in which it agreed "to provide design engineering services" at one of Domtar's construction sites. During the course of construction, two employees of Diamond Contractors, which furnished tools and labor at the construction site, were injured in two separate incidents at the site and each subsequently brought a separate personal injury lawsuit against Process.

On the dates of the injuries, Process was insured by both Royal and GA. Process' policy with Royal, a comprehensive general liability insurance policy, provided $1 million coverage for each occurrence and provided for all expenses incurred by Royal in its legal defense of Process. The policy also stated,

"The insurance afforded by this policy is primary insurance, except when stated to apply in excess of or contingent upon the absence of other insurance. * * *

* * * * * *

It is agreed that the insurance does not apply to bodily injury or property damage arising out of the rendering or of the failure to render any professional services by or for the named insured, including

(1) the preparation of or approval of maps, plans, opinions, reports, surveys, designs or specifications and

(2) supervisory, inspection or engineering services." (Emphasis in original.)

In addition to its comprehensive general liability insurance with Royal, Process was insured by GA with an "architects and engineers professional liability insurance" policy, providing coverage of damage claims arising from Process' professional services. This policy included a $50,000 deductible applicable to each claim, and further stated,

"This insurance shall be excess insurance over any other valid and collectible insurance available to the Insured whether such other insurance is stated to be primary, contributing, excess, contingent or otherwise, unless such other insurance specifically applies as excess insurance over the Limits of Liability provided in this Policy."

In December 1983, the two Diamond employees, Nick Babich and Robert Boskovich, each filed separate complaints against Process and others to recover for their injuries, alleging violations of the Illinois Structural Work Act (Ill.Rev.Stat.1989, ch. 48, par. 60) and common law negligence.

In January 1984, Process tendered its defense of both underlying lawsuits to Royal, and Royal accepted. On March 26, 1984, Royal sent a letter to Process stating that Royal was defending Process because the two complaints were based upon negligence. Royal further advised Process, though, that should the complaints be amended to include allegations of professional negligence or should a third party action be filed, "there may be a question whether or not [Royal] would continue" Process' defense due to the professional liability exclusion in its policy. Royal advised Process to contact its present professional liability insurance carrier about the "possibility" that that carrier would become involved.

On March 29, 1984, GA's agent sent a letter to Process confirming that Royal was properly defending the lawsuits because neither complaint contained allegations of professional negligence.

On May 25, 1984, a handwritten note by a Royal claim representative stated that he told the attorney representing Process "to file a bill of particulars or narrow down allegations so we can tender to" the professional liability carrier.

Royal's claim manager wrote to Process' attorney on February 27, 1985, stating that a substantial amount of discovery needed to be done in conjunction with the lawsuits, and further, its "policy contains a professional liability exclusion, however, by virtue of this contract it would appear that our burden would be that of negligence as opposed to any professional negligence."

On April 16, 1986, another handwritten note by a Royal claim representative stated that the professional liability exclusion was not applicable because the Structural Work Act was involved.

On May 7, 1987, a Royal territorial claims specialist wrote an office memorandum stating that he found it proper, based upon the deposition of Philip Rockenbach, Process' site construction manager, to involve Process' professional liability carrier. The memo stated,

"I find it proper * * * to involve the Professional Liability Carrier. The facts as stated by Rockenbach put us 50/50. * * * He also relates to his basic responsibility of seeing that the contractors complied with the specifications as drawn up by [Process]. It is my feeling that this relates directly to the wording of the exclusion.

The purchase order to our insured for services covers 'To ensure work done according to drawing and specifications.' This may be a fine line but why not try to involve the other carrier."

Royal again wrote to Process on August 24, 1987, concerning the personal injury lawsuits. In that letter, Royal referred to its March 26, 1984 letter and stated,

"On March 26, 1984, [a Royal employee] wrote to you regarding potential allegations regarding professional services rendered by your company in the course of its operations at Domtar. At that time he requested that you place your professional liability carrier on notice of this incident. * * *

Discovery in this case has developed to a point where it becomes clear that there is evidence that the role played by Process Design Associates and Phil Rockenbach appears to come clearly within the exclusion cited by [Royal's employee] in his original letter of March 26, 1984.

We, therefore, request that you once again place your professional liability carriers on notice and request that they undertake and assume the defense of Process Design Associates * * *. Recent court decisions lead us to believe that this litigation should be more properly handled and defended by your professional liability carrier."

In response to Royal's August 24, 1987 letter, GA's agent wrote to Royal stating that it had never received a copy of Royal's letter of March 26, 1984. GA's agent requested a copy of both the letter and the insurance policy issued to Process in order that GA could review the matter.

On April 15, 1988, GA's agent again wrote to Royal; GA refused Royal's tender of the defense of the personal injury lawsuits against Process, stating that,

"we believe you are estopped from asserting any policy defenses due to your failure to issue a timely reservation of rights letter or initiate a timely declaratory judgment action. Since you have already defended Process Design for approximately three years, we believe that Process Design would be prejudiced by your withdrawing your defense at this time."

Thereafter, on September 15, 1988, Royal filed its original complaint for declaratory judgment, requesting a finding that Royal afforded no coverage to Process in either of the pending personal injury lawsuits; that Royal be excused from further defense of Process; that GA be estopped from denying coverage for both indemnity and defense; and that GA reimburse Royal for the costs incurred by Royal in defending the underlying lawsuits. Royal's complaint alleged that the work performed by Process at Domtar's site was professional in nature; thus, by virtue of the professional liability exclusion in its policy, Royal provided no coverage to Process in the underlying lawsuits. Royal's complaint further averred that GA wrongfully declined coverage of Process and was therefore estopped from asserting any policy defenses. Additionally, the complaint alleged that GA was the primary carrier for Process.

In response, GA and Process filed motions for summary judgment, arguing that Royal was estopped from asserting any policy defenses because it failed to make a timely reservation of rights. Specifically, Process maintained that Royal's March 26, 1984 letter did not constitute a proper reservation of rights because it did not contain an express disclaimer of liability; it did not inform Process of Royal's intention to defend the lawsuits under a reservation of rights; and the contingencies addressed by the letter ...