INSURANCE COVERAGE UPDATE

Transcription

1 INSURANCE COVERAGE UPDATE Presented and Prepared by: Patrick D. Cloud Edwardsville, Illinois Heyl, Royster, Voelker & Allen PEORIA SPRINGFIELD URBANA ROCKFORD EDWARDSVILLE CHICAGO 2011 Heyl, Royster, Voelker & Allen C-1

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3 INSURANCE COVERAGE UPDATE I. WHO IS AN INSURED ADDITIONAL INSURED ENDORSEMENTS... C-4 A. Pekin Ins. Co. v. Roszak/ADC, LLC... C-4 B. Pekin Ins. Co. v. Pulte Home Corp.... C-5 II. INSURING AGREEMENTS AND LIMITS OF LIABILITY... C-6 A. Scope of Bodily Injury Coverage: Medmarc Cas. Ins. Co. v. Avent America, Inc.... C-6 B. Definition of Advertising Injury: Santa s Best Craft, LLC v. Zurich American Ins. Co.... C-7 C. Limits of Liability and Anti-Stacking Clauses: Progressive Premier Ins. Co. of Illinois v. Kocher... C-8 III. EXCLUSIONS... C-9 A. Intellectual Property Exclusion: Santa s Best Craft, LLC v. St. Paul Fire and Marine Ins. Co.... C-9 B. Intentional Acts Exclusion... C American Family Mut. Ins. Co. v. Guzik... C West Bend Mut. Ins. Co. v. State... C Pekin Ins. Co. v. Wilson... C-11 C. Reasonable Belief Exclusion: Founders Ins. Co. v. Munoz... C-12 IV. GENERAL PROVISIONS OF THE POLICY... C-12 A. Choice of Law: Liberty Mut. Fire Ins. Co. v. Woodfield Mall, LLC... C-12 B. Termination of Insurer/Insured Relationship... C Cancellation versus Non-Renewal: Yunker v. Farmers Auto. Management Corp.... C Cancellation of Policy Covering a Government Vehicle: American Home Assurance Co. v. Taylor... C-14 C. Duties of the Insured... C Lack of Notice: West American Ins. Co. v. Yorkville Nat. Bank... C Duty to Cooperate: Founders Ins. Co v. Shaikh... C-15 C-2

4 V. MUTUAL MISTAKE BY THE PARTIES... C-16 A. Mutual Mistake of Fact: Mid-Century Ins. Co. v. Founders Ins. Co.... C-16 B. Mutual Mistake of Law: Hartford Cas. Ins. Co. v. Moore... C-17 VI. AGENCY: APPARENT AGENCY: FIRST CHICAGO INS. CO. V. MOLDA... C-18 VII. VIII. DUTY TO DEFEND: DETERMINATION OF DUTY TO DEFEND: KONSTANT PRODUCTS, INC. V. LIBERTY MUT. FIRE INS. CO.... C-19 INTERPLEADERS AND THE DUTY TO DEFEND: AMERICAN SERVICE INS. CO. V. CHINA OCEAN SHIPPING CO.... C-20 The cases and materials presented here are in summary and outline form. To be certain of their applicability and use for specific claims, we recommend the entire opinions and statutes be read and counsel consulted. C-3

5 INSURANCE COVERAGE UPDATE I. WHO IS AN INSURED ADDITIONAL INSURED ENDORSEMENTS A. Pekin Ins. Co. v. Roszak/ADC, LLC In Pekin Ins. Co. v. Roszak/ADC, LLC, 402 Ill. App. 3d 1055, 931 N.E.2d 799, 341 Ill. Dec. 902 (1st. Dist. 2010), a subcontractor added a general contractor to its CGL policy as an additional insured. The additional insured endorsement contained the following provisions: Who Is An Insured (Section II) is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability incurred solely as a result of some act or omission of the named insured and not for its own independent negligence or statutory violation. Pekin Ins. Co., 402 Ill. App. 3d at A worker was injured at the jobsite and sued the general contractor and the subcontractor. The complaint against the general contractor contained two counts: 1) negligence and 2) premises liability. The counts against the general contractor made various assertions of negligence, including assertions that the general contractor [f]ailed to reasonably inspect, supervise and control the work site and the work being done thereon, [f]ailed to follow it[s] own safety rules, and [f]ailed to follow OSHA safety rules and procedures. Id. at Each count against the general contractor ended with an assertion: That as a direct and proximate result of the negligence of [the general contractor], [the injured worker] was struck by a load of structural steel, suffering serious and permanent personal and pecuniary injuries. Id. at The complaint made no allegations about the relationship between the general contractor and subcontractor. The general contractor tendered its defense to the subcontractor s insurer pursuant to the additional insured endorsement. The insurer denied the defense, and a declaratory judgment action ensued. On appeal, the Illinois Appellate Court found that no duty to defend existed under the additional insured endorsement. In doing so, the Appellate Court compared the allegation of the complaint to the terms of the additional insured endorsement. The Appellate Court noted that general contractor was only an additional insured under the subcontractor s policy if the general contractor was being held liable solely as a result of some act or omission of the subcontractor and not for its own independent negligence or statutory violation. Id. at The Appellate Court found that nothing in the injured party s complaint suggested that the general contractor would be held vicariously liable for the subcontractor s negligence. Rather, the complaint sought recovery for the general contractor s own negligence. As a C-4

6 consequence, the Appellate Court read the injured worker s complaint as alleging direct liability against [the general contractor], which is not liability incurred solely as a result of some act or omission of the named insured as required for coverage. Id. at Thus, the additional insured endorsement did not apply. B. Pekin Ins. Co. v. Pulte Home Corp. In Pekin Ins. Co. v. Pulte Home Corp., 404 Ill. App. 3d 336, 935 N.E.2d 1058, 343 Ill. Dec. 830 (1st Dist. 2010), a general contractor was an additional insured under its subcontractor s CGL policy. The additional insured endorsement stated as follows: Who is an Insured (Section II) is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability incurred solely as a result of some act or omission of the named insured and not for its own independent negligence or statutory violation. Pekin Ins. Co., 404 Ill. App. 3d at 338. A worker at the jobsite was injured and sued the general contractor and the subcontractor, alleging that he was injured when he fell through an unguarded sewer manhole. The injured worker sued both the general contractor and subcontractor asserting that their negligence caused his injuries. The allegations of the complaint asserted theories of direct negligence. It did not explicitly assert a theory of vicarious liability. That said, in response to requests for admission, the injured worker admitted that he anticipated contending at the time of trial that [the general contractor s] liability in the underlying litigation is vicarious to or imputed from acts or omissions of the subcontractor. Furthermore, the subcontractor made several admissions that raise the possibility that it will be found solely liable to [the injured worker] in the underlying litigation. Id. at 342. The general contractor tendered its defense to the subcontractor s insurer pursuant to the above-referenced additional insured endorsement, and the subcontractor s insurer denied the claim. In the ensuing coverage litigation, the Appellate Court ruled in favor of the general contractor and found that the subcontractor s insurer had a duty to defend under the endorsement. According to the Appellate Court, when determining the existence of a duty to defend, it is not restricted to a review of the underlying complaint but can consider matters that fall outside the pleadings. As such, although, pursuant to the allegations in the underlying complaint, [the general contractor] might be found independently liable to [the injured worker], Id. Consideration of the above-referenced admissions by the injured worker and the subcontractor suggested that it would be possible, if not likely, that any liability attributed to the general contractor would be vicarious in nature. Therefore, the additional insured endorsement was triggered. C-5

7 II. INSURING AGREEMENTS AND LIMITS OF LIABILITY A. Scope of Bodily Injury Coverage: Medmarc Cas. Ins. Co. v. Avent America, Inc. In Medmarc Cas. Ins. Co. v. Avent America, Inc., 612 F.3d 607 (7th Cir. 2010), a manufacturer was insured under a CGL policy obligating the insurer to: pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage included within the productscompleted operations hazard to which this insurance applies.... However, we will have no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which this insurance does not apply. Medmarc, 612 F.3d at 612. The policy defined bodily injury as bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time. Id. The manufacturer was sued in a number of class actions for manufacturing plastic baby bottles containing Bisphenol-A (BPA). According to one of the complaints: Id. at 610. This action arises out of Defendants misrepresentations and/or omissions and failures to warn of and/or otherwise disclose that their Baby Products are manufactured using a dangerous chemical recognized to be toxic in several respects for years and which poses serious risks to an individual s health as the fact that it leaches into food and beverages in the course of normal, everyday use. While the complaints discussed the alleged negative health effects of BPA in some detail, the complaints never alleged that any of the plaintiffs suffered any physical harm. Instead, the complaint sought recovery for economic harm and asserted many causes of action, including consumer fraud, breach of express and implied warranties, intentional misrepresentation, negligent misrepresentation, and unjust enrichment. The manufacturer submitted these complaints to its CGL carrier for a defense, and the CGL carrier denied the claim. In the ensuing coverage litigation, the Seventh Circuit Court of Appeals ruled that the carrier had no duty to defend under the CGL policy because the underlying complaints did not assert liability because of bodily injury. The Seventh Circuit noted that: [T]he complaints in the underlying suits do not reach the level of asserting claims because of bodily injury. Implicit in [the manufacturer s] argument is that the damages claimed are somehow, at least tangentially, tied to a bodily injury C-6

8 Id. at 616. caused by BPA. As discussed above, that simply is not the case here. The theory of relief in the underlying complaint is that the plaintiffs would not have purchased the products had [the manufacturer] made certain information known to the consumers and therefore the plaintiffs have been economically injured. The theory of the relief is not that a bodily injury occurred and the damages sought flow from that bodily injury. B. Definition of Advertising Injury: Santa s Best Craft, LLC v. Zurich American Ins. Co. In Santa s Best Craft, LLC v. Zurich American Ins. Co., Ill. App. 3d, 941 N.E.2d 291, 346 Ill. Dec. 733 (1st Dist. 2010), the insureds were insured under a CGL policy that provided coverage for personal and advertising injury. The policy defined personal and advertising injury as an injury arising out of one or more of the following offenses:... f. The use of another s advertising idea in your advertisement ; or g. Infringing upon another s copyright, trade dress or slogan in your advertisement. The policy defined advertisement as a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers and supporters. Santa s Best Craft, 941 N.E.2d at 302. The insureds were manufacturers of Christmas lights. Every year, the insureds and its competitors would invite retailers who were the primary purchasers of Christmas decorations to their showrooms to display their products. These appointments would occur approximately 18 months before the Christmas season in which their products would appear on the retailers store shelves. No purchases were made during these appointments, but the retailers would purchase items that the retailers viewed in the showrooms as the Christmas season approached. The insureds manufactured Christmas lights named Stay On which allegedly stayed on when one light went off. One of the insureds competitors made a similar product called Stay Lit. The competitor sued the insureds, alleging that, during these presentations to the retailers, the insureds copied its packaging and slogans and put them on the products and packages that the insureds put into their showroom. The competitor sued the insureds alleging a number of causes of action, including (1) trademark infringement; (2) false designation of origin and trade dress infringement; (3) false advertising; (4) trademark dilution; [and] (5) deceptive trade practices. Id. at 296. After the insureds submitted the lawsuit to its CGL carrier asserting that the lawsuit qualified for coverage as a personal and advertising injury, the insureds and the CGL carrier disputed whether the case involved injuries arising out of an advertisement. As such, the ensuing coverage litigation focused on the definition of advertisement. When interpreting the policy s definition of advertisement, the Seventh Circuit Court of Appeals noted that the dictionary defined broadcast as meaning to make widely known: disseminate or distribute widely or at random and publish as meaning to declare publicly: make generally known: disclose, C-7

9 circulate. Consequently, according to the Court, under the terms of the CGL policy, an advertisement must be widely disseminated to its intended audience, regardless of whether the audience is the general public or a specific market segment thereof. Id. at 303. Applying this definition to the facts of the case, the Circuit Court of Appeals determined that the underlying lawsuit did not satisfy the definition of advertisement. The Court reasoned: Id. at 305. [The insureds] invited each of their 75 to 100 potential customers to their showroom to view their products. The retailers made individual appointments to view the products and received personal presentations about the products displayed. Additionally, as [insureds] admit, they did not send out any mailers or fliers or conduct any Internet-based advertising to attract potential customers.... [W]e do not regard [insureds ] in-person form of promotion as a broadcast or publication of the type required of an advertisement under the terms of the CGL policy. C. Limits of Liability and Anti-Stacking Clauses: Progressive Premier Ins. Co. of Illinois v. Kocher In Progressive Premier Ins. Co. of Illinois v. Kocher, 402 Ill. App. 3d 756, 932 N.E.2d 1094, 342 Ill. Dec. 633 (5th Dist. 2010), the insurer issued a policy that listed both an ATV and a motorcycle as insured vehicles. The declarations of the policy listed each vehicle separately and separately listed a limit of liability for liability coverage for each vehicle of $100,000 per person. The policy also contained the following provision: The limit of liability shown on the Declarations Page is the most we will pay regardless of the number of: 1. claims made; 2. covered vehicles; 3. trailers shown on the Declarations Page; 4. insured persons; 5. lawsuits brought; 6. vehicles involved in the accident; or 7. premiums paid. Progressive Premier, 402 Ill. App. 3d at 757. The declarations page also stated that, The policy limits shown for a vehicle may not be combined with the limits for the same coverage on another vehicle. Id. A child was riding as a passenger in the ATV vehicle when the ATV collided with the motorcycle insured by the policy. The child submitted a claim against the policy under its liability provisions, C-8

10 asserting that he was entitled to $200,000. The insurer objected to this interpretation, asserting that the above-referenced anti-stacking provisions limited liability to $100,000. During the following coverage litigation, the Illinois Appellate Court found that the policy was ambiguous given the facts of the claim. The Appellate Court first noted that this was not the traditional stacking scenario. According to the Court, [s]tacking ordinarily involves combining or aggregating the policy limits applicable to more than one vehicle where the other vehicles are not involved in the accident. Id. at 760. Then, the Court stated that the layout of the declarations page created an ambiguity, reasoning: Id. at 764. [T]he declarations page contains separate headings for each vehicle and an additional heading for the general policy coverage. Significantly, uninsured- and underinsured-motorist protection is provided under the general policy provision section and appears to be applicable to any or all of the vehicles with a single limit. By contrast, the other types of coverage including the bodily injury liability coverage, which is what is at issue here are listed separately for each vehicle under a heading that indicates the vehicle for which the coverage is provided. The most logical implication of this layout is that if any vehicle is involved in an accident, the limit of bodily injury liability coverage available is the limit listed under that vehicle, whether or not any of the other covered vehicles are involved. Therefore, the Illinois Appellate Court permitted the stacking of the two limits of liability and permitted a recovery of $200,000. III. EXCLUSIONS A. Intellectual Property Exclusion: Santa s Best Craft, LLC v. St. Paul Fire and Marine Ins. Co. In Santa s Best Craft, LLC v. St. Paul Fire and Marine Ins. Co., 611 F.3d 339 (7th Cir. 2010), insureds who manufactured Christmas lights with the name Stay On were sued by a competitor who manufactured Christmas lights with the name Stay Lit. According to the lawsuit, the insureds copied the Stay Lit lights packaging design and sold Stay On lights using false and deceptive language. The competitors sued the insured for Lanham Act trademark infringement, false designation of origin, false advertising, trademark dilution, and deceptive trade practices. The insureds policy provided coverage for a claim for [u]nauthorized use of... any slogan... of others in your advertising. The policy, however, excluded coverage for injury or damage... that results from any actual or alleged infringement or violation of any of the following rights or laws:... trade dress,... trademark, other intellectual property rights or laws. This exclusion, however, had an exception for unauthorized use of... trademarked slogan... of others in your advertising. Santa s Best, 611 F.3d at C-9

11 After the insurer denied the insureds request for a defense, the insureds sued the insurer in an action for declaratory judgment. In determining whether a duty to defend existed under the Policy, the Seventh Circuit Court of Appeals compared the allegations of the complaint to the terms of the policy. According to the Court, a duty to defend was triggered because the policy provided coverage for claims related to the unauthorized use of a slogan and the complaint alleged that the insureds copied its competitor s slogans. Furthermore, the Seventh Circuit found that the intellectual property exclusion did not exclude coverage because, even if the intellectual property exclusion applied, the exception to the intellectual property exclusion would have been triggered as well. B. Intentional Acts Exclusion 1. American Family Mut. Ins. Co. v. Guzik In American Family Mut. Ins. Co. v. Guzik, 406 Ill. App. 3d 245, 941 N.E.2d 936, 347 Ill. Dec. 67 (3d Dist. 2010), the insured was covered by a liability insurance within a homeowners policy that excluded: [b]odily injury or property damage caused intentionally by or at the direction of any insured even if the actual bodily injury or property damage is different than that which was expected or intended from the standpoint of any insured. (Emphasis in original.) American Family, 406 Ill. App. 3d at 247. After the insured lost his job and had attempted to sell his home, he set fire to his house. The fire caused the insured s home to explode, and the explosion damaged the homes of the insureds neighbors. The neighbors submitted claims against the insured s policy. After the insurer denied the claim, it filed a complaint for declaratory judgment. During the declaratory judgment action, the Illinois Appellate Court found that the intentional acts exclusion within the insured s policy excluded his neighbors claims. The Court reasoned that the insured intentionally caused the explosion and fire on his premises, and [t]he fire spreading to the neighbors properties was expected in that it was a rational and probable consequence of the explosion and fire. Consequently, the damage to the neighboring homes falls within the parameters of the exclusionary clause even if it was different than that which [the insured] expected or intended. Id. at West Bend Mut. Ins. Co. v. State In West Bend Mut. Ins. Co. v. State, 401 Ill. App. 3d 857, 929 N.E.2d 606, 340 Ill. Dec. 955 (1st Dist. 2010), a general contractor was insured under a CGL policy that contained an exclusion for intended or expected injury. The contractor was sued for fraud in a number of lawsuits alleging that the contractor defrauded its customers. The insurer filed for declaratory judgment asserting that no coverage existed under the Policy, and the Illinois Appellate Court concurred on various C-10

12 grounds, including the fact that the policy s intentional acts exclusion applied to this case. According to the Appellate Court, The four underlying complaints that are the subject of this declaratory judgment action similarly allege intentional misconduct designed to defraud customers of [the contractor]. The four underlying plaintiffs complaints do not allege that [the contractor] acted negligently. Instead, the four plaintiffs complaints allege that [the contractor] knowingly performed improper home repair and remodeling. Thus, the exclusion for expected or intended injury bars coverage for the acts alleged in all four of the underlying complaints. West Bend, 401 Ill. App. 3d at Pekin Ins. Co. v. Wilson In Pekin Ins. Co. v. Wilson, 237 Ill. 2d 446, 930 N.E.2d 1011, 341 Ill. Dec. 497 (2010), an insurer issued a policy with an intentional acts exclusion precluding coverage for Bodily injury or property damage expected or intended from the stand point of the insured. The intentional acts exclusion contained an exception, however, stating that the intentional acts exclusion did not apply to bodily injury resulting from the use of reasonable force to protect persons or property. A plaintiff filed a personal injury lawsuit against the insured, alleging that the insured assaulted him. The insured responded to the complaint by asserting that he acted in selfdefense. In the following complaint for declaratory judgment, the trial court found that the insurer had no duty to defend because the plaintiff s complaint fell within the scope of the policy s intentional acts exclusion. On appeal, the Illinois Appellate Court reversed, stating that the selfdefense exception created a duty to defend. The Illinois Supreme Court then affirmed the Illinois Appellate Court s reversal of the trial court, concurring with the Appellate Court s analysis and permitting the consideration of insured s counter-claim to trigger the duty to defend. According to the Supreme Court, [C]onsideration of a third-party complaint in determining a duty to defend is in line with the general rule that a trial court may consider evidence beyond the underlying complaint if in doing so the trial court does not determine an issue critical to the underlying action. The trial court should be able to consider all the relevant facts contained in the pleadings, including a third-party complaint, to determine whether there is a duty to defend. (Emphasis in original.) Pekin Ins. Co., 237 Ill. 2d at 460. The Supreme Court also determined that, in light of the broad scope of [insurer s] policy, and the clear language of the self-defense exception, the policy requires the defense of the insured C-11

13 where a genuine issue of material fact exists as to whether the intentional acts of the insured were committed in self-defense. Id. at 466. C. Reasonable Belief Exclusion: Founders Ins. Co. v. Munoz In Founders Ins. Co. v. Munoz, 237 Ill. 2d 424, 930 N.E.2d 999, 341 Ill. Dec. 485 (2010), the insurer issued personal auto policies including as persons insured the named insured and any other person using such automobile with the permission of the named insured, provided the actual use thereof is within the scope of such permission. The personal auto policies also excluded coverage for bodily injury or property damage arising out of the use by any person of a vehicle without a reasonable belief that the person is entitled to do so. Founders Ins., 237 Ill. 2d at 428. A number of claims were submitted to the insurer alleging that permissive users of vehicles belonging to one of the insurer s named insureds injured an underlying plaintiff. These permissive users, however, did not have a valid driver s license they either never had one or the license had been suspended. The insurer denied the claims on the basis of the abovereferenced exclusion stating that the permissive users without a valid license did not have a reasonable belief that they were entitled to operate the named insured s vehicle. In the ensuing coverage litigation, the Illinois Supreme Court concurred. The Illinois Supreme Court interpreted the word entitle to mean to give a right or legal title to: qualify (one) for something: furnish with proper grounds for seeking or claiming something. Founders Ins., 237 Ill. 2d at 436. According to the Supreme Court, [w]ithout a valid license, a person has not been given the right to drive; has not been qualified to drive; has not been furnished with proper grounds for doing so. Id. at 439. As such, a permissive user without a valid driver s license does not have a reasonable belief that he is entitled to operate a motor vehicle. IV. GENERAL PROVISIONS OF THE POLICY A. Choice of Law: Liberty Mut. Fire Ins. Co. v. Woodfield Mall, LLC In Liberty Mut. Fire Ins. Co. v. Woodfield Mall, LLC, Ill. App. 3d, 941 N.E.2d 209, 346 Ill. Dec. 651 (1st Dist. 2010), the named insureds included a New York parent corporation and at least 33 subsidiary corporations. One of these subsidiary corporations was located in Ohio and was headquartered in Ohio. The insurer, a Massachusetts corporation, issued a CGL policy for the named insureds. The CGL policy was negotiated by a broker located in New York and representatives of the named insureds located in Ohio. The policy was delivered to the named insureds in Ohio. The named insured that was located in Ohio operated an extensive, nationwide chain of hundreds of retail eyeglass stores. The CGL policy provided coverage for the named insureds, including the Ohio subsidiary, on a nationwide basis. The CGL did not contain a choice of law provision. The Ohio subsidiary corporation operated a retail chain store at a mall located in Northern Illinois. Pursuant to its lease agreement, it was required to name the mall owners and managers C-12

14 as additional insureds to its CGL policy. The mall owners and managers were not specifically named in the CGL policy as additional insureds but the CGL policy had a general endorsement that automatically added entities as additional insureds if certain requirements were met. The mall owners and managers were sued when a personal injury occurred at the Ohio subsidiary corporation s location in Illinois. After litigation was initiated over the application of the CGL policy to the claim, a dispute arose over the applicable state law. This dispute was eventually addressed by the Illinois Appellate Court. According to the Appellate Court, when a policy does not contain an express choice of law provision, the policy s provisions are governed by the substantive law of (1) the location of the subject matter, (2) the domicile of the insured or of the insurer, (3) the place of the last act to give rise to an enforceable contract, (4) the place of performance, or (5) any other place bearing a rational relationship to the contract. The Court noted that [t]hese factors do not have equal significance and are to be weighed according to the issue involved, but that [a] choice-of-law analysis should consider the contracting parties justified expectations, yield certain, predictable, and uniform results, and avoid inconsistent interpretations of the same insurance contract. Liberty Mut., 941 N.E.2d 215. After considering these principles, the Illinois Appellate Court determined that Ohio law applied to this dispute. First, the Court ruled that the location of the insured risk was not an important factor in this case because the CGL policy covered the named insureds risks on a nationwide basis and the location of the accident and injuries in Illinois had little bearing on the analysis. On the other hand, the subsidiary named insured involved was headquartered in Ohio, the CGL policy was negotiated by representatives of the named insureds located in Ohio, and the policy was delivered to the named insureds in Ohio. B. Termination of Insurer/Insured Relationship 1. Cancellation versus Non-Renewal: Yunker v. Farmers Auto. Management Corp. In Yunker v. Farmers Auto. Management Corporation, 404 Ill. App. 3d 816, 935 N.E.2d 630, 343 Ill. Dec. 622 (3d Dist. 2010), an insurer had issued a personal auto policy to an insured. The policy period for the personal auto policy ended on July 20, On June 14, 2006, the insurer sent the insured a notice stating: THIS IS THE ONLY NOTICE YOU WILL RECEIVE PRIOR TO THE DATE PREMIUM IS DUE[.] YOUR POLICY WILL EXPIRE IF PREMIUM IS NOT RECEIVED BY THE DUE DATE. Yunker, 404 Ill. App. 3d at 818. The insured did not pay the premium by July 20, 2006, and the policy expired on July 20, After the insured was involved in an accident on August 7, 2006 and submitted a claim against the insurer for coverage, the insurer sent the insured a correspondence informing the insured that the policy had expired. The insured subsequently sued the insurer. During the coverage litigation, the Illinois Appellate Court found that the insurer had acted appropriately, and no coverage existed. According to the Appellate Court, a cancellation means C-13

15 the termination of the policy by the insurer before the expiration date of the policy, and insurers must strictly conform to the procedures laid out in its policy along with the Insurance Code when canceling a policy. This case, however, involved a non-renewal due to the expiration of a policy. As such, the requirements of the policy and the Insurance Code for cancellations did not apply. 2. Cancellation of Policy Covering a Government Vehicle: American Home Assurance Co. v. Taylor In American Home Assur. Co. v. Taylor, 402 Ill. App. 3d 549, 931 N.E.2d 313, 341 Ill. Dec. 705 (1st Dist. 2010), an insurer issued an auto policy covering the insured s vehicles. The insured operated medical transport vehicles. When procuring its policy, the insured executed a power of attorney in favor of a premium finance company. According to this power of attorney, the insured authorized the premium finance company to cancel the policy if timely payments were not made on the premium loan. The insured failed to make its premium payment due in March The premium finance company sent the insured a letter stating that it would cancel the insured s policy in 10 days if it did not receive the premium payment. When the insured failed to make payment on the loan, the premium finance company sent the insured a letter stating that the policy was canceled effective April 4, Neither the premium finance company nor the insurer ever sent notification to the Illinois Secretary of State that the insured s policy was being canceled. After the effective date of cancellation, the insured was involved in an accident. The uninsured motorist carrier for the injured driver then brought a declaratory judgment action against the insured s insurer alleging that the April 4th cancellation was ineffective. The Appellate Court agreed with the uninsured motorist carrier. Citing 625 ILCS 5/8-110, the Appellate Court noted that the Illinois Vehicle Code requires that an insurer give the Illinois Secretary of State notice when it cancels a policy covering a medical transport vehicle. Furthermore, the Court stated that, under the Insurance Code, when an insured has granted a premium finance company power of attorney enabling the premium finance company to cancel the insured s policy, an insurer must nonetheless comply with any statutory restrictions requiring that the insurer give notice to governmental agency prior to cancellation. Thus, reading the Vehicle Code and Insurance Code harmoniously, the Court found that the cancellation of the insured s policy was ineffective because neither the insurer nor the premium finance company gave the Secretary of State notice, and there was coverage under the insured s policy. C. Duties of the Insured 1. Lack of Notice: West American Ins. Co. v. Yorkville Nat. Bank In West American Ins. Co. v. Yorkville Nat. Bank, 238 Ill. 2d 177, 939 N.E.2d 288, 345 Ill. Dec. 445 (2010), the insured was a bank and insured under a CGL policy that required the insured to give its insurer written notice of a claim as soon as practicable. The insured learned that an individual might sue it for defamation in November On September 24, 2001, the insured was sued for defamation. In late 2001 or early 2002, the insured informed the insurer s agent of C-14

16 the lawsuit. The insurer s agent told the insured that the suit would probably not be covered under the CGL policy. Furthermore, the insurer s agent was on the insured s board of directors and attended various meetings where the lawsuit against the insured was discussed. In January 2004, the insured was advised that its CGL policy should cover the defamation lawsuit. On January 19, 2004, the insured gave written notice of the claim to the insurer approximately 27 months after the filing of the lawsuit and less than three months prior to the trial date. The insurer denied the claim and filed a complaint for declaratory judgment alleging breach of the policy s notice provisions. The trial court ruled against the insurer and found that the insurer had a duty to defend and indemnify the insured. The Illinois Supreme Court affirmed the ruling. According to the Illinois Supreme Court, [a] policy provision requiring notice as soon as practicable means notice must be given within a reasonable time. West American, 238 Ill. 2d at 185. Whether the insured gave notice within a reasonable time depends on the facts and circumstances of the case and is a question of fact. Certain factors may be considered when determining whether notice was given within a reasonable time, including (1) the specific language of the policy s notice provision, (2) the insured s sophistication in commerce and insurance matters; (3) the insured s awareness of an event that may trigger insurance coverage; (4) the insured s diligence in ascertaining whether policy coverage is available; and (5) prejudice to the insurer. Id. at After considering these factors, the Supreme Court found that the trial court s decision was not against the manifest weight of the evidence (the appropriate standard of review) and affirmed its decision. In doing so, the Court noted that while written notice was not given until January 2004, the insurer had actual notice of the lawsuit when its agent received notice at various times in 2001 and Furthermore, the Court found that the insured was diligent in determining whether coverage existed because it asked the insurer s agent whether coverage existed in 2001 and the agent informed the insured that the policy probably did not cover the defamation lawsuit. 2. Duty to Cooperate: Founders Ins. Co v. Shaikh In Founders Ins. Co. v. Shaikh, 405 Ill. App. 3d 367, 937 N.E.2d 1186, 344 Ill. Dec. 845 (1st Dist. 2010), the insurer s policy with the insured imposed the following duty to cooperate with the insurer during the investigation of a claim: As a condition precedent to the Company s duty of indemnity with respect to suits against an insured, the insured shall cooperate with the Company and, upon the Company s request, assist in making settlements, in the conduct of suits and in enforcing any right of contribution or indemnity against any person or organization who may be liable to the insured ***; and the insured shall attend hearings and trials and assist in securing and giving evidence and obtaining the attendance of witnesses. *** The insured must cooperate with us in the investigation, settlement or defense of any claim or suit, failure to cooperate fully will be deemed a breach of contract. Founders, 405 Ill. App. 3d at 371. C-15

17 After the insured was sued for allegedly causing an automobile accident, he notified his insurer of the claim. When the insured reported the claim, the insurer procured the insured s current address and phone number. The insurer subsequently assigned the insured an attorney. Approximately six months after reporting the claim, mail sent to the insured came back undeliverable, and his phone number was disconnected. The insurer then attempted to locate the insured, including personally checking each known address for the insured, hiring an investigator, speaking with the insured s estranged son, and checking prison records. After these efforts proved futile in locating the insured, the insurer then filed an action for declaratory judgment for failure to cooperate. The Appellate Court found that the insured breached his duty to cooperate in this case. According to the Appellate Court, [i]n order to establish breach of a cooperation clause, the insurer must show that it exercised a reasonable degree of diligence in seeking the insured s participation and that the insured s absence was due to a refusal to cooperate. Id. at 374. Whether the insurer satisfied this duty is based on the facts and circumstances at hand. Furthermore, as a matter of public policy, an insurer will not be relieved of its contractual responsibilities unless it proves it was substantially prejudiced by the insured s actions or conduct in regard to its investigation or presentation or defense of the case. Id. at 375. In this case, the Court found that the insurer satisfied these requirements. The Court found that the insurer was diligent in attempting to secure the insured s cooperation and that the insured s disappearance after reporting the claim demonstrated his willful refusal to cooperate with the insurer. The Court also found that the insurer was substantially prejudiced by the insured s noncooperation because the insured was the only individual who knew facts about the accident other than the underlying personal injury plaintiff. V. MUTUAL MISTAKE BY THE PARTIES A. Mutual Mistake of Fact: Mid-Century Ins. Co. v. Founders Ins. Co. In Mid-Century Ins. Co. v. Founders Ins. Co., 404 Ill. App. 3d 961, 936 N.E.2d 780, 344 Ill. Dec. 251 (1st Dist. 2010), the insured owned two vehicles: a Durango and a Cavalier. The insureds procured insurance policies from two different insurers. One insurer was supposed to cover the Durango, and the other insurer was supposed to cover the Cavalier. Due to a mistake during underwriting, the policy that was supposed to cover the Durango listed the Cavalier as the insured vehicle instead. The evidence was clear, however, that both the insurer and insured made a mistake and that this policy was supposed to list the Durango as the insured vehicle. The insured was in an automobile accident while driving the Cavalier. After the accident occurred, a dispute arose between the two insurers over the amount that each should contribute to the settlement claim. Due to the existence of the mutual mistake of fact between the insured and one of the insurers, the Appellate Court reformed the policy that was supposed to cover the Durango and ruled that the insurer that made a mistake had no duty to contribute to the claim C-16

18 arising out of the Cavalier s accident. In doing so, the Appellate Court considered the following principles: A mutual mistake of fact occurs when the parties reach a good-faith agreement, but that agreement is not expressed in the written reduction of the agreement due to error.... Thus, the mistake must have existed at the time of the execution of the instrument, must have been mutual and common to all parties, and must have been such that the parties intended to say one thing but by the written instrument expressed another. Mid. Century, 404 Ill. App. 3d at 967. The Appellate Court found that these elements were satisfied in this case. B. Mutual Mistake of Law: Hartford Cas. Ins. Co. v. Moore In Hartford Cas. Ins. Co. v. Moore, 731 F. Supp. 2d 800 (C.D. Ill. 2010), an insurer issued a professional liability policy for its insured law firm. The professional liability policy protected the insured law firm against legal malpractice claims. According to the terms of the policy, the retroactive date of the policy was December 21, According to the law firm, during the procurement of the policy, the agent selling the policy informed the insured that the retroactive date of the policy would provide the firm with malpractice insurance retroactive to the inception of the law firm. In 2008, the law firm was sued for legal malpractice for mishandling three appeals that took place in 2005 and The last appeal ended on July 27, The law firm tendered the defense of this suit to the malpractice insurer. The insurer stated that it had no duty to defend because the lawsuit predated the retroactive date of the policy. In the ensuing coverage litigation, the federal district court found that the claim predated the policy. It also found that whether the agent told the insured that the retroactive date of the policy would cover the firm back to its inception was irrelevant. According to the district court, In order for a court to reform an instrument on the ground of mistake, the mistake must be of fact and not of law, mutual and common to both parties, and in existence at the time of the execution of the instrument, showing that at such time the parties intended to say a certain thing and, by a mistake, expressed another. The law of reformation applies to insurance policies. Hartford, 731 F. Supp. 2d at 806. The district court found that the dispute in this case was not over the facts surrounding the policy but the legal effect of the language of the policy. Because a mistake over the legal effect of the policy would be a mistake of law and not a mistake of fact, the contract could not be reformed. C-17

19 VI. AGENCY: APPARENT AGENCY: FIRST CHICAGO INS. CO. V. MOLDA In First Chicago Ins. Co. v. Molda, No , 2011 WL (1st Dist. Mar. 29, 2011), the insured had a commercial auto policy with the insurer. The policy stated that the insured must give the insurer or its authorized representative prompt notice of any loss or accident. The policy listed the contact information for the insured s broker. The policy contained no other contact information and did not identify an authorized representative. Furthermore, if an accident or loss happened, the policy did not refer the insured to a telephone number or list an authorized representative for the insured to contact. On August 17, 2005, an employee of the insured was involved in an automobile accident that injured another driver. Shortly after the accident, the insured advised his broker of the accident but did not advise the insurer directly. The broker never advised the insurer of the accident. According to the corporate treasurer of the insured, when the insured had a question or insurance need, it always contacted its broker, and, when a loss, accident, or occurrence happened, the insured would report the claim to its broker. On August 17, 2007, the driver injured in the 2005 accident sued the insured s employee. In January 2008, the insured s employee informed the insured about the lawsuit. On March 10, 2008, the injured driver amended his complaint to add the insured. On March 26, 2008, the insured advised the insurer of the claim directly. After receiving notice, the insurer filed a complaint for declaratory judgment, asserting that the insured s late notice forfeited coverage. After the trial court granted the insurer summary judgment, the Illinois Appellate Court reversed, finding that a question of fact existed over whether the broker was an agent of the insurer. According to the Appellate Court, where an insurance producer is an insurance broker and not a general agent of the insurer, he is generally an agent for the insured and not the insurer. That said, even where the producer is a broker, he can act as the agent of the insurer in certain circumstances. Furthermore, even if the broker does not have the actual authority to act as the insurer s agent for notice, it may have apparent authority to do so. Whether a broker has apparent authority to act for the insurer is determined by examining the course of dealings between the broker and the insurance company. Where an insurer s manner of dealing with the broker in regard to the insured would lead the insured to believe that the broker had the authority to perform the acts in question, the insurer is estopped to deny the broker s authority to perform those acts. First Chicago, 2011 WL at *6. In this case, the Court found that a question of fact existed over whether the insured s broker had the apparent authority of the insurer to accept notice of a loss or claim. The Court reasoned: In the case at bar, there is evidence that [the broker] could have had apparent authority to act on [the insurer s] behalf with regard to accepting notice from [the insured]. [The broker] had been placing clients with [the insurer] since approximately 1996, and [the insured] had had an insurance policy with [the insurer] for several years at the time of the accident. The [insurer s] policy included [the broker s] name, address and telephone number on its declarations page as the producer. It did not provide any other contact information, nor was C-18

20 Id. at *7. any other individual or business other than [the broker] named anywhere within the policy. If a claim was to be made there was no reference to a phone number or person in his representative capacity to contact other than our authorized representative. [The insured s treasurer] testified that during the course of his dealings with [the broker] and [the insurer], he followed the same pattern: speaking with [the broker] about an incident and deciding what action to take, after which [the broker] would report the claim and obtain a claim number from [the insurer] and assist [the treasurer] filing a claim. Thus, there was a pattern of conduct on prior claims between [the insurer] and [the broker] in which [the broker] would accept notice of a claim and submit the information to [the insurer.] VII. DUTY TO DEFEND: DETERMINATION OF DUTY TO DEFEND: KONSTANT PRODUCTS, INC. V. LIBERTY MUT. FIRE INS. CO. In Konstant Products, Inc. v. Liberty Mutual Fire Ins. Co., 401 Ill. App. 3d 83, 929 N.E.2d 1200, 341 Ill. Dec. 121 (1st Dist. 2010), an insurer issued a commercial auto policy for a truck owned by a scrap metal company. The policy covered permissive users of the truck. An employee of the scrap metal company drove the truck to a facility, where he was in the process of picking up scrap metal. While picking up scrap metal, he became pinned between a dumpster and the truck. One of the facility s workers then got into the truck in order to help the scrap metal company s employee. Instead of reversing the truck, however, the worker placed the truck in the wrong gear, moved the truck forward, and injured the scrap metal employee. The scrap metal employee then sued the facility and its worker. In his initial verified complaint, the scrap metal employee stated: Against Plaintiff s verbal request, [the facility s worker] negligently and carelessly entered Plaintiff s vehicle, against Plaintiff s request and drove the vehicle into the dumpster three (3) times causing Plaintiff each time to be pinned between the truck and the dumpster. Konstant Products, 401 Ill. App. 3d at 86. The scrap metal employee filed amended complaints, however, that dropped this allegation. The suit was submitted to the scrap metal company s commercial auto carrier on the grounds that the facility s worker was a permissive user of the insured vehicle. The commercial auto carrier denied the claim. In the ensuing coverage litigation, the court concurred with the commercial auto carrier. The Court started from the initial proposition that a court determines whether a duty to defend exists by comparing the allegations of the complaint to the terms of the policy. According to the Court, despite the underlying complaint s subsequent amendments, the C-19

21 allegations of the initial complaint were binding as judicial admissions because these allegations were verified. When compared to the terms of the policy, the initial allegations clearly disqualify the facility s worker as a permissive user of the insured vehicle. As a consequence, the insurer had no duty to defend under the policy. VIII. INTERPLEADERS AND THE DUTY TO DEFEND: AMERICAN SERVICE INS. CO. V. CHINA OCEAN SHIPPING CO. In American Service Ins. Co. v. China Ocean Shipping Co., 402 Ill. App. 3d 513, 932 N.E.2d 8, 342 Ill. Dec. 117 (1st Dist. 2010), after a multi-vehicle accident, an insurer attempted to interplead the policy limits with the circuit court and avoid providing its insured with a defense during the underlying personal injury actions. The insurer s policy stated: The company will pay on behalf of the insured all sums, except for punitive or exemplary damages, 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,... and the company shall defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent. American Service, 402 Ill. App. 3d at 515. The policy further provides that the company will not defend any suit after it has paid the applicable limit of its liability for the accident which is the basis of the lawsuit. Id. On appeal, the Illinois Appellate Court refused to permit the insurer to avoid the duty to defend by interpleading the policy limits with the circuit court. According to the Appellate Court, Illinois cases have consistently held that an insurer cannot discharge its duty to defend by simply depositing policy limits with the court. Id. at 526. Furthermore, the Court held that an insurer has not paid the applicable limit of its liability for purpose of eliminating the duty to defend until it exhausts the policy limits through settlement or payment of a judgment. C-20

22 Patrick D. Cloud - Associate Patrick, a native of the Saint Louis area, has spent his entire legal career with Heyl Royster. He started as a law clerk in the Edwardsville office in 2002 and joined the firm as an associate in While in law school, Patrick also served as an Associate Editor for the Washington University Global Studies Law Review. At Heyl Royster, Patrick concentrates his practice on toxic tort matters, insurance coverage litigation, complex civil litigation, and governmental law. As part of his practice, Patrick routinely takes a lead role in the preparation and argument in significant pretrial motions and briefs, such as those involving issues concerning the doctrine of forum non conveniens, venue, the Illinois Frye doctrine, consumer fraud, choice-of-law issues, and insurance coverage matters. Patrick also regularly defends the firm's clients in depositions in asbestos litigation pending in Illinois and Missouri. Significant Cases Rix v. Heartland Regional Medical Center, No (5th Dist. 2008) - Affirmation of dismissal of class action claim brought pursuant to the Illinois Consumer Fraud Act regarding hospital pricing of services provided to uninsured patients. Public Speaking Personal Auto Policy: The Fundamentals PLRB/LIRB Claims Conference & Insurance Services Expo, Nashville, TN (2011) Insurance Coverage Update Heyl Royster s 25th Annual Claims Handling Seminar (2010) Professional Associations American Bar Association Illinois State Bar Association Madison County Bar Association Court Admissions State Courts of Illinois and Missouri United States District Court, Southern District of Illinois Education Juris Doctor (Order of the Coif), Washington University School of Law, 2004 Bachelor of Arts-Economics (Summa Cum Laude), University of Notre Dame, 2001 Publications Co-author, "Intentional Act Exclusion (Supplement)," supplement to chapter in Illinois Institute for Continuing Legal Education Handbook, Commercial and Professional Liability Insurance (2010) C-21 Learn more about our speakers at