Courts Examining Insurers' Duties to Policy Holders

I recall the story of a young lawyer who represented a family that came to hi m with a case of a businessman who had been killed in an automobile accident in Illinois.

The liability was clear, but the statute of limitations was running out in two days. He scrambled and filed a timely lawsuit, including all of the parties that could be discovered in the short time frame. The case was pushed by the insurers to the pre-trial calendar within six months, with no discovery being held.

The insurance company was eager to settle for the $250,000 policy limits, and the court seemed amenable until the young lawyer heard one of the defense attorneys make an off-hand remark that it was "too bad" that the other insurance policies did not apply.

It was then revealed that the insurance company knew facts about the case that were not alleged in the complaint, facts that could not be known to the plaintiff without discovery. Needless to say, the court allowed discovery to proceed, and an additional $42 million in policies were held applicable.

This story points out a lingering problem with insurance law in Illinois: All pertinent information in determining the applicability of coverage is derived from the four corners of the underlying complaint.

A series of unrelated cases decided this year dealt with the right of insureds to have their insurance companies defend or indemnify them in underlying actions, but these cases also reinforce this rule that unnecessarily favors the insurer over the insured.

The construction of an insurance policy is a matter of law. In Illinois, it is well established that an insurer that questions policy coverage must either seek declaratory judgment or defend the policy under a reservation of rights. In determining whether a duty to defend arises, the courts will look at the allegations of the underlying complaint and compare these against the policy provisions, Lapham-Hickey Steel Corp. v. Protection Mutual Insurance Co., 166 Ill.2s 520, 655 N.E.2d 842 (Ill.1995).

Lawyers, therefore, must be vigilant in pleading the facts in the complaint, or they may find themselves out of luck regarding insurance coverage for their clients.

The series of cases decided this year reinforce the notion that insurance policies routinely are liberally construed in favor of coverage, and any ambiguities in the language are construed in favor of the insured. An insurer’s duty to defend arises if the underlying complaint’s allegations potentially fall within the coverage provisions of the policy. Lyons v. State Farm Fire and Casualty Company, 349 Ill.App.3d 404, 811 N.E.2d 718 (5th Dist.2004).

But this becomes an anomaly if insurers are not forced to reveal what they know when courts are making declaratory judgment decisions.

Insurers have the exclusive right to organize, commence and control the legal defense to its insureds’ lawsuits. Waste Management Inc. v. International Surplus Lines, Ins., 144 Ill.2d 178, 579 N.E.2d 322, 333 (Ill.1991). These rules of construction are particularly important when dealing with ambiguities that appear in exclusionary clauses where the insurer bears the burden of establishing that a claim falls within an exclusion. Progressive Universal Insurance Company of Illinois v. Liberty Mutual Fire Insurance Company, 347 Ill.App.3d 411, 806 N.E.2d 1224 (2d Dist.2004). Courts have long said than when an insurer relies upon an exclusionary provision to deny coverage, its language must be clear and free from doubt. Trovillion v. United States Fidelity and Guaranty Company, 130 Ill.App3d 694, 474 N.E.2d 953 (5th Dist.1985).

As one court reiterated earlier this year, "To ascertain the intent of the parties and the meaning of the words used in the insurance policy, the court must construe the policy as a whole, taking into account the type of insurance for which the parties have contracted, the risks undertaken and purchased, the subject matter that is insured and the purposes of the entire contract," Johnson v. State Farm Fire and Casualty Company, 346 Ill.App.3d 790, 806 N.E.2d 223 (4th Dist.2004), quoting, Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 391, 620 N.E.2d 1073, 1078 (1993). How can this be accomplished without examining issues outside of the policy and the allegations of the complaint?

"The threshold that the complaint must satisfy to present a claim of potential coverage is low," states Trovillion, supra, yet in a declaratory judgment action, coverage hinges on the wording of that complaint. Insurers, therefore, should not be allowed to use the courts to dodge their responsibilities through declaratory judgment actions. Certainly insurers must be careful in making coverage decisions, but court also need to be aware of insurers who continually fight coverage in an effort to fatten the bottom line.

As an insured, it is frustrating to carry auto coverage, homeowners coverage, umbrella coverage and the like only to find after quietly paying the premiums for years that when you need the policy the most, the insurer fights to pay what you feel is due. Instead of acting as your partner when disaster strikes, it appears you have another enemy with the insurance company expending time and money scrutinizing the fine print to somehow craft an exception to coverage. Insureds bought their coverage for peace of mind, not for profit motives.

Courts have to examine policies carefully before determining if insurance companies can double-talk their way out of coverage, keeping in mind that insurers must give insureds’ interests the same consideration as their own. These recent cases indicate that courts are attempting to do so, but their hands are tied if they are allowed only to look to the policy and the underlying complaint. Another more important lesson is, upon the filing of a declaratory judgment action by an insurer, the insured’s layers must immediately examine the underling complaint to make sure that it pleads all of the facts known. The insureds’ lawyers may also want to seek limited discovery to ensure that a poorly drafted or incomplete complaint is not held against the client.

Perhaps these recent declaratory judgment and indemnification actions also should signal a need for insurers to be more highly scrutinized by the state’s Department of Insurance when writing policies.