Western Cas. & Sur. Co. v. Brochu

• Decision Date: 22 February 1985
• Docket Number: Nos. 59865,59930,s. 59865
• Citation: 475 N.E.2d 872,105 Ill.2d 486,86 Ill.Dec. 493
• Court: Illinois Supreme Court
• Parties: , 86 Ill.Dec. 493 The WESTERN CASUALTY & SURETY COMPANY, Appellee, v. Richard BROCHU et al., Appellants.

Page 872

475 N.E.2d 872

105 Ill.2d 486, 86 Ill.Dec. 493

The WESTERN CASUALTY & SURETY COMPANY, Appellee, v. Richard BROCHU et al., Appellants.

Nos. 59865, 59930.

Supreme Court of Illinois.

Feb. 22, 1985.

Rehearing Denied March 29, 1985.

Herbert I. Rothbart, Chicago, for appellants Sig L. Bjerga and Mark III Development Co.

James J. Desanto, P.C., Waukegan, for appellants Richard Brochu and Marita Brochu.

Jacobs, Williams & Montgomery, Ltd., Chicago, for appellee Western Cas. & Sur. Co.; Barry L. Kroll, Nunzio C. Radogno, C. Barry Montgomery, Chicago, of counsel.

THOMAS J. MORAN, Justice:

This declaratory judgment action involves the construction of a general comprehensive liability insurance policy issued by the Western Casualty & Surety Company (Western) to the insured, Mark III Development Company, a corporation (Mark III). Western filed a two-count complaint for declaratory judgment in the circuit court of Lake County alleging that the policy in question did not apply to a property damage claim brought against the insured by Richard and Marita Brochu (Brochus). The complaint, which named the Brochus, Mark III's president, Sig L. Bjerga, and Mark III as defendants, alleged that the insurance policy was not applicable to the Brochus' claim by virtue of exclusions (n) and (o ) of the policy. In response, the Brochus filed a motion for summary judgment arguing that Western's policy did provide coverage. Mark III joined in this motion and, in a memorandum in support thereof, additionally argued that Western had waived any policy defenses by accepting defense of the claim in a letter dated October 28, 1980, and by the subsequent acts of counsel for Western.

Based on the pleadings, exhibits, contractual recitals, applications for insurance, and actual insurance contracts, the trial court concluded that no genuine issue as to any material fact existed and that the defendants were entitled to judgment in their favor as a matter of law. The court, found that, when read in its entirety, the policy was ambiguous and, therefore, construed it against the insurer. The court also found that Western had waived its opportunity to assert a policy defense.

On appeal, the appellate court reversed the decision of the circuit court in part and remanded the cause. (122 Ill.App.3d 125, 77 Ill.Dec. 528, 460 N.E.2d 832.) It found that the Brochus' claim was not covered under the Western policy. It further found that the trial court had erred in regard to its finding that Western had waived its right to assert a policy defense. Nevertheless, since a question of fact remained as to the issue of estoppel, it remanded the cause for determination of that issue. We granted the Brochus leave to appeal (No. 59865). Bjerga's and Mark III's petition for leave to appeal was also granted (No. 59930), and the causes have been consolidated for the purpose of review.

Three questions are raised: (1) Under the terms of the policy, must Western defend and, upon a finding of liability, indemnify Mark III for the property damage claim brought against the insured by the Brochus? (2) Should Western be precluded from asserting a defense of noncoverage by virtue of its conduct? and (3) Did Western's attorney's transmittal of a reservation of rights letter give rise to a conflict of interest?

The record reveals that on May 1, 1976, Sig Bjerga, who was then doing business as Bjerga and Son Construction Company purchased a comprehensive liability policy from Western for which he paid a premium of $643 per year.

In September of 1976, Bjerga, who had begun operating as Mark III, entered into a written home-purchase agreement whereby Mark III agreed to construct a home for the Brochus. The agreement expressly provided that "[t]he house shall be completed in a good and workmanlike manner substantially in accordance with the plans prepared by Mark III." The plans, which were incorporated by reference into the contract, provided for soil bearing pressure of "3000 P.S.F. min," which was to be verified at the site. The purchase price of the home was $100,300.

On October 2, 1976, Bjerga amended his insurance policy with Western to reflect the incorporation of Mark III. He also increased his coverage under the policy to include both independent contractors and completed-operations coverage. The policy's premium, as amended, was $2,080 per year. This amended policy was renewed every May 1 thereafter up to and including May 1, 1980.

On January 5, 1977, the Brochus took possession of the house. However, due to the rate of settlement, it wasn't until sometime thereafter that they realized the house was sinking into the ground. As a result, on August 8, 1980, the Brochus filed a two-count complaint against Bjerga and Mark III for breach of contract. The first count of the complaint alleged that Bjerga had breached an express warranty that the home be built in a good and workmanlike fashion and that Bjerga had also breached a specific provision of the contract requiring an on-site soil test. The second count alleged fraud in the inducement. Under this count, the Brochus claimed that they had relied upon the contractual representations concerning the performance of soil tests and that such representations were false.

The Brochus' complaint sought recovery for property damages to the house. Specifically, it alleged that the sinking had caused the foundation to crack, the support beams to sag, the doors and frames to be out of synch, and the interior fixtures to separate from the walls.

Upon receiving notice of the suit, Mark III retained private counsel and also forwarded the complaint to Western. Western sent the complaint to its local attorney, Leo Sullivan. In a letter addressed to Sullivan and dated October 28, 1980, Western stated:

"We were denying coverage because of exclusion (n) and (o) in our policy * * *. After further discussion with the insured and his attorney, the company has decided that we will go ahead and accept the defense * * *. Our policy provides products and completed operations coverage and there doesn't appear to be any further question concerning coverage at this time."

A copy of this letter was sent to the insured's private attorney, with a notation informing him that Western had accepted the defense and requesting that he forward any relevant material to Sullivan.

Fifteen days later, on November 12, 1980, Sullivan notified Mark III and its attorney, by letter, that Western had communicated directions to him regarding the defense of the claim. According to Sullivan, the defense was being undertaken with a full reservation of Western's rights. The letter referred specifically to exclusions (n) and (o ) as two of the bases upon which Western was reserving its right to deny liability under the policy. This letter also informed Mark III that it was free to take over the complete management of the defense and reject Western's tender of a defense under the reservations stated. Neither Mark III nor its attorney rejected Sullivan's handling of the defense. Therefore, Sullivan continued to represent the defendants until October 20, 1981, when Western filed its complaint for declaratory judgment.

The insurance policy in question initially provides broad coverage to the insured. It states:

"The Western will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

A. bodily injury or

B. property damage to which this insurance applies * * *."

Resolution of the first issue requires this court to determine whether the policy of insurance applies to the property damage claim brought against the insured by the Brochus. Considered alone, the above portion of the policy would appear to grant coverage for all property damage claims brought against the insured. However, an insurance contract is to be interpreted from an examination of the complete document and not an isolated part. United States Fire Insurance Co. v. Schnackenberg (1981), 88 Ill.2d 1, 5, 57 Ill.Dec. 840, 429 N.E.2d 1203; Weiss v. Bituminous Casualty Corp. (1974), 59 Ill.2d 165, 171, 319 N.E.2d 491; Cobbins v. General Accident Fire & Life Assurance Corp., Ltd. (1972), 53 Ill.2d 285, 290, 290 N.E.2d 873.

Immediately following the coverage portion of the policy, there is a list of 19 separate exclusions. These exclusions define the limits of coverage actually provided. If any one of the exclusions applies there is no coverage. Thus, they are an integral part of the policy which must be considered in determining the scope of coverage. The exclusions relevant to this case provide:

"This insurance does not apply:

(a) to liability assumed by the insured under any contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner;

* * *

* * *

(n) to property damage to the named insured's products or any part of such products;

* * *

* * *

(o ) to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith." (Emphasis added.)

Western maintains that its policy does not provide coverage because the damage claimed by the Brochus, in their complaint against Mark III, is specifically excluded under exclusions (n) and (o ) quoted above. According to Western, the policy in question was never intended to protect the insured from economic loss sustained as a result of inadequacies in the insured's own work or product.

The Brochus and Mark III contend that there is coverage under the terms of the policy. They point out that the Brochus' complaint alleged breach of an express warranty, that the work would be performed in a good and workmanlike manner. As such, they argue that the Brochus' claim...