Standard Mut. Ins. Co. v. Lay

• Decision Date: 23 May 2013
• Docket Number: Docket No. 114617.
• Citation: 2013 IL 114617,989 N.E.2d 591,371 Ill.Dec. 1
• Parties: STANDARD MUTUAL INSURANCE COMPANY, Appellee, v. Norma LAY, Indiv. and as Ex'r of the Estate of Theodore W. Lay, d/b/a Ted Lay Real Estate Agency, et al., Appellants.
• Court: Illinois Supreme Court

2013 IL 114617

989 N.E.2d 591

371 Ill.Dec. 1

STANDARD MUTUAL INSURANCE COMPANY, Appellee,

v.Norma LAY, Indiv. and as Ex'r of the Estate of Theodore W. Lay, d/b/a Ted Lay Real Estate Agency, et al., Appellants.

Docket No. 114617.

Supreme Court of Illinois.

May 23, 2013.

Michael T. Reagan, of Ottawa, Brian J. Wanca and David Oppenheim, of Anderson + Wanca, of Rolling Meadows, and Phillip A. Bock and Robert M. Hatch, of Bock & Hatch, LLC, of Chicago, appellants.

Robert Marc Chemers and Peter G. Syregelas, of Pretzel & Stouffer, Chrtd., of Chicago, for appellee.

OPINION

Justice FREEMAN delivered the judgment of the court, with opinion.

[371 Ill.Dec. 3]¶ 1 Locklear Electric, Inc. (Locklear), brought an action against Ted Lay Real Estate Agency (Lay) pursuant to the Telephone Consumer Protection Act of 1991 (TCPA) (47 U.S.C. § 227(b)(3) (2006)), which resulted in a court-approved settlement. Lay's insurer, Standard Mutual Insurance Company (Standard), filed a complaint for declaratory relief against Lay and Locklear in the circuit court of Macoupin County. Standard sought a determination of Lay's insurance coverage for the underlying lawsuit and settlement. Finding that Lay was not covered, the circuit court granted summary judgment in favor of Standard.

¶ 2 The appellate court affirmed. 2012 IL App (4th) 110527, 363 Ill.Dec. 790, 975 N.E.2d 1099. This court allowed Locklear's petition for leave to appeal. Ill. S.Ct. R. 315 (eff. Feb. 26, 2010). We now affirm the judgment of the appellate court in part and reverse in part, and remand the cause to the appellate court for further proceedings.

¶ 3 I. BACKGROUND

¶ 4 In 2006, Lay was a real estate agency located in Girard, Macoupin County, Illinois. Lay contacted Business to Business Solutions (Business to Business) regarding facsimile message (fax) advertising. Business to Business offered a “blast fax” service, in which it sends fax advertisements to thousands of fax machines cheaply. Business to Business represented to Lay that it had a list of people and entities who wished to receive information by fax. Lay hired Business to Business, and together they created an advertisement for the sale of a car wash, which included Lay's contact information. During June 2006, Business to Business transmitted the advertisement to approximately 5,000 fax numbers with Illinois area codes 217 and 618. Unbeknownst to Lay, the people and entities on Business to Business' fax list did not consent to receive fax advertisements. On June 13, 2006, Locklear received one of these unsolicited faxes.

[371 Ill.Dec. 4]¶ 5 A. Underlying Class Action and Settlement

¶ 6 In June 2009, Locklear brought a class action against Lay in the circuit court of Madison County alleging violations of the TCPA.¹ Locklear represented a putative class of 3,478 people and entities to whom Lay faxed the advertisement. Locklear and the other plaintiffs sought the TCPA-prescribed damages of $500 per violation and injunctive relief (see 47 U.S.C. § 227(b)(3) (2006)).

¶ 7 Lay tendered its defense to its insurer, Standard, which had issued to Lay a commercial general liability insurance policy and a primary business owners liability insurance policy. In a letter dated July 13, 2009, Standard informed Lay that the insurance policies may not cover the conduct alleged in the class action complaint. For example, according to Standard, the TCPA “may constitute a penal statute,” and the policies excluded coverage for willful violations of penal statutes. Also, according to Standard, the policies excluded coverage for the allegations of the complaint based on the specific language of several policy provisions. For these and several other reasons, Standard agreed to defend Lay in the underlying action subject to a reservation of rights. Standard concluded that a conflict of interest existed for any attorney that Standard would retain to represent Lay. Due to this conflict, Standard advised that Lay could: (1) choose its own defense attorney at Standard's expense; or (2) waive the conflict of interest and Standard's possible coverage defenses, and accept counsel provided by Standard. On that same date, Lay signed a waiver agreeing to accept the attorney hired by Standard, James Mendillo, to defend Lay in the underlying action.

¶ 8 In July 2009, Mendillo removed the underlying action to the United States District Court for the Southern District of Illinois. Lay subsequently retained Edmond H. Rees as its own chosen counsel.² In a letter dated October 30, 2009, Rees detailed the conflict of interest between Standard and Lay, and asked Mendillo to withdraw from the case. On December 3, 2009, Lay and Rees signed a proposed settlement of the class action. Rees thereafter informed Mendillo that Lay had decided to dismiss Mendillo and settle the case. Rees subsequently entered his appearance on behalf of Lay. Nevertheless, Mendillo continued to attend all subsequent court hearings. Mendillo recognized Rees as Lay's “personal counsel,” and acknowledged that he was protecting the interests of Standard.

¶ 9 On September 18, 2010, the federal district court entered a final order approving the class certification and settlement. The judgment against Lay was for $1,737,500 plus costs.³ Pursuant to the settlement agreement, Locklear would seek satisfaction of the judgment only from Lay's insurance policies; Locklear would not now or ever execute against Lay's noninsurance assets, even if a determination is made that Lay's insurer did not owe coverage. This provision was expressly referenced and incorporated into the final order. Lay assigned to Locklear all of Lay's claims against, and rights to payment from, Standard.

¶ 10 B. Instant Declaratory Judgment Action

¶ 11 When Lay accepted Standard's representation in the underlying action, subject to Standard's reservation of rights, Standard filed a complaint for declaratory relief against Lay and Locklear in the circuit court of Macoupin County. In July 2010, Standard filed the instant second amended complaint. The eight-count complaint sought a declaration that Standard had no duty to defend or indemnify Lay. Several counts alleged that Lay was not covered pursuant to various specific insurance policy provisions. In count V, Standard alleged that TCPA-prescribed damages of $500 per violation constitute punitive damages, which “are not insurable as a matter of Illinois law and public policy.” In counts VI and VII, Standard alleged that it had no duty to indemnify Lay because, inter alia, Lay did not cooperate with Standard, but rather entered into the settlement agreement with Locklear without Standard's consent. In count VIII, Standard sought damages in the amount of the underlying judgment, which Standard characterized as “insurance coverage to which [Lay and Locklear] were not entitled.”

¶ 12 In October 2010, Locklear filed an answer and amended counterclaim. Locklear sought a declaration that the insurance policies required Standard to defend and indemnify Lay for its alleged conduct in the underlying action, and that the insurance policies covered Lay for the damages awarded in the underlying action.

¶ 13 Standard and Locklear filed cross-motions for summary judgment. Finding that Lay was not entitled to coverage, the circuit court granted summary judgment on Standard's complaint, and denied summary judgment on Locklear's counterclaim. The appellate court affirmed. 2012 IL App (4th) 110527, 363 Ill.Dec. 790, 975 N.E.2d 1099. Locklear appeals to this court.

¶ 14 II. ANALYSIS

¶ 15 This matter is before us on the grant of summary judgment in favor of Standard. Summary judgment is appropriate only where “the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” 735 ILCS 5/2–1005(c) (West 2010). A circuit court's entry of summary judgment is reviewed de novo. Progressive Universal Insurance Co. of Illinois v. Liberty Mutual Fire Insurance Co., 215 Ill.2d 121, 128, 293 Ill.Dec. 677, 828 N.E.2d 1175 (2005); Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 102, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992).

¶ 16 The appellate court addressed only two issues. First, the court concluded that Standard was not estopped from raising policy coverage defenses. 2012 IL App (4th) 110527, ¶ 26, 363 Ill.Dec. 790, 975 N.E.2d 1099. Second, the court concluded that the TCPA-prescribed damages of $500 per violation constitute punitive damages, which “are not insurable as a matter of Illinois law and public policy and are not recoverable from Standard.” Id. ¶ 37. The court did not address Locklear's additional arguments pertaining to coverage under Lay's insurance policies. Id. ¶ 28. Locklear assigns error to both of these conclusions.

¶ 17 A. Estoppel

¶ 18 Locklear contends that Standard is estopped from asserting defenses to its insurance policy coverage. Locklear specifically argues that Standard's July 13, 2009, reservation-of-rights letter did not adequately inform Lay of potential coverage defenses and conflicts of interest. According to Locklear, a sufficient letter would have enabled Lay to have made a fully informed decision at the outset of the underlying case as to whether to hire independent counsel. We disagree.

¶ 19 Generally, where a complaint against an insured alleges facts within or potentially within the coverage of the insurance policy, and when the insurer takes the position that the policy does not cover the complaint, the insurer must: (1) defend the suit under a reservation of rights; or (2) seek a declaratory judgment that there is no coverage. If the insurer fails to take either of these actions, it will be estopped from later raising policy defenses to coverage. State Farm Fire & Casualty Co. v. Martin, 186 Ill.2d 367, 371, 238 Ill.Dec. 126, 710 N.E.2d 1228 (1999); Clemmons v. Travelers...