Case Title: State Farm Fire & Casualty Co. v. Martin

Citation: 

Docket Number: 85659

State: illinois

Court: Illinois Supreme Court

Date: 1999-04-15T00:00:00Z

Document:
State Farm v. Martin  (Ill. S.Ct.)

Docket No. 85659-Agenda
7-January 1999.
Opinion filed April 15,
1999.
JUSTICE HEIPLE delivered the opinion of the
court:
Plaintiff-appellant, State Farm Fire and Casualty Company
(State Farm), filed a declaratory judgment action in the circuit court of
Madison County seeking a determination of whether it owed its insured, Gregory Lee Martin, Sr.
(Martin), a defense and
indemnification in two underlying wrongful death suits. The trial court found that State Farm had a
duty to defend and indemnify
Martin, and State Farm appealed. The appellate court affirmed the decision of the trial court (296 Ill.
App. 3d 466), and we
granted leave to appeal.
BACKGROUND
This case originated with an arrangement between Martin
and Delaney Gordon, Sr., to destroy a building owned by Martin.
Gordon was one of Martin's tenants, and in exchange for his participation, Martin offered him a
reduced rental rate. On October
24, 1992, at approximately 2 a.m., Gordon ignited the fire by leaving an unattended candle in a
hamper in the basement. An
accelerant was also used. During the ensuing blaze, firefighters Timmie Lewis and Gary Porter were
killed. Thereafter, Martin
was indicted by a federal grand jury for "maliciously damaging and destroying by means of fire,
[Martin's] building ***, and as a
direct and proximate result of this conduct, death resulted to Gary Porter and Tim Lewis, both
firemen in Alton, Illinois; all in
violation of Title 18, United States Code, Section 844(i)." 
In June and July of 1993, respectively, Scott Lewis,
special administrator of the estate of Timmie Lewis, and Ethelyn J. Gorham,
executrix of the estate of Gary Porter, each filed wrongful death suits against Martin in the circuit
court of Madison County.
Martin tendered defense of both complaints to State Farm under his rental dwelling insurance policy.
Because of Martin's arson,
however, State Farm denied coverage under the policy and refused to defend Martin. State Farm then
filed a complaint seeking a
declaration that it owed no duty to defend or indemnify Martin. The complaint named Martin, Lewis,
and Gorham as defendants.
In the complaint, State Farm alleged that the underlying actions did not constitute a covered
"occurrence" as defined in the policy
and that Martin's action triggered two coverage exclusions. Defendant Gorham sought a stay of the
declaratory judgment
proceedings pending resolution of the federal criminal cases then pending against Martin and Gordon
(defendant Lewis had not
yet answered State Farm's declaratory judgment petition and thus did not file a motion to stay). Over
State Farm's objection, the
trial court granted the stay on February 23, 1994. The court's order provided that any party could
move to lift the stay after the
criminal cases had been resolved.
In September 1994, Martin was found guilty on the
criminal charge, and in December 1994, Martin was sentenced to 50 years'
imprisonment. Although the record contains no order lifting the trial court's stay in the declaratory
judgment action, State Farm
filed a motion for summary judgment in that action on April 18, 1995. In an order dated August 30,
1995, the trial court found
that coverage existed and denied State Farm's motion. On October 4, 1995, the trial court granted
summary judgment in favor of
defendants and against State Farm.
In the meantime, on August 8, 1995, the trial court in the
wrongful death case entered a default judgment against Martin on
Gorham's complaint in the amount of $10 million. On September 5, 1995, the trial court entered a
default judgment against
Martin on Lewis' complaint in the amount of $9 million.
State Farm appealed the decision of the trial court in the
declaratory judgment action. The appellate court opined that State Farm
was estopped from denying coverage because the company had failed to secure a declaratory
judgment before default judgments
were entered in the wrongful death suits. 296 Ill. App. 3d at 470. Nevertheless, the appellate court
declined to decide the case on
an estoppel theory, but rather went on to hold that State Farm's policy substantively did require the
company to indemnify Martin
for his liability arising from the deaths of the two firemen. Accordingly, the appellate court affirmed
the judgment of the circuit
court.
Now before this court, State Farm maintains that the
circuit and appellate courts erred in finding that State Farm had a duty to
defend and indemnify Martin. State Farm argues that Martin's actions in hiring his tenant to set fire
to the building are outside the
scope of coverage under its rental dwelling policy. In addition, State Farm contends that the
allegations of the wrongful death
complaints trigger two coverage exclusions contained in the policy. Accordingly, State Farm argues
that it had neither a duty to
defend nor a duty to indemnify Martin. As an initial matter, however, the parties disagree over
whether State Farm is entitled to
deny coverage at all. Defendants Gorham and Lewis argue that State Farm should be estopped from
denying coverage because
the company breached its duty to defend Martin.
ANALYSIS
As this court has repeatedly held,"[w]hen a complaint
against the insured alleges facts within or potentially within the scope of
the policy coverage, the insurer taking the position that the complaint is not covered by the policy
must defend the suit under a
reservation of rights or seek a declaratory judgment that there is no coverage." Clemmons v.
Travelers Insurance Co., 88 Ill. 2d 469, 475 (1981); Waste Management, Inc. v. International Surplus Lines Insurance Co.,
144 Ill. 2d 178, 207-08 (1991); Murphy
v. Urso, 88 Ill. 2d 444, 451 (1981); see also Sims v. Illinois National Casualty
Co., 43 Ill. App. 2d 184, 199 (1963). If the
insurer fails to take either of these actions, it will be estopped from later raising policy defenses to
coverage. Clemmons, 88 Ill. 2d 
at 475; Waste Management, 144 Ill. 2d at 207-08; Murphy, 88 Ill. 2d  at
451;  see also Sims, 43 Ill. App. 2d at 199. In the instant
case, the parties do not dispute that State Farm did, in fact, seek a declaratory judgment as to its
duties to Martin under its
insurance policy. Nevertheless, defendants Gorham and Lewis argue that the rule cited above should
be construed so as to
require an insurance company to actually secure a declaratory judgment or defend under
a reservation of rights. In support of
their position, defendants cite Country Mutual Insurance Co. v. Murray, 97 Ill. App.
2d 61 (1968), in which the appellate court
held:
Defendants also
cite several appellate court cases in which courts have quoted the "secure a declaratory judgment"
language
without further analysis. See, e.g., Consolidated R. Corp. v. Liberty Mutual
Insurance Co., 92 Ill. App. 3d 1066, 1073 (1981);
Associated Indemnity Co. v. Insurance Co. of North America, 68 Ill. App. 3d 807, 821
(1979).
In reply, State Farm argues that it properly preserved its
right to deny coverage by seeking a declaratory judgment as to its
responsibilities under the insurance policy. State Farm points out that this court has never adopted
the language or the rule
proposed by defendants. Moreover, a clear majority of Illinois courts which have expressly considered
the argument now made
by defendants have rejected it. Industrial Coatings Group, Inc. v. American Motorists
Insurance Co., 276 Ill. App. 3d 799
(1995); Gibraltar Casualty Co. v. Sargent & Lundy, 214 Ill. App. 3d 768 (1990);
Insurance Co. v. Markogiannakis, 188 Ill.
App. 3d 643 (1989); Ayres v. Bituminous Insurance Co., 100 Ill. App. 3d 33 (1981).
State Farm also argues that the rule
advanced by defendants would effectively require insurance companies to defend their purported
insureds in all cases, even where
the underlying complaints are clearly outside the scope of the policy. According to State Farm, such
a holding would represent an
unprecedented and unwarranted expansion of an insurer's duty to defend. We agree.
This court has consistently identified two options for an
insurer taking the position that a complaint potentially alleging coverage
is actually not covered under its insurance policy: the insurer may either "defend the suit under a
reservation of rights or seek a
declaratory judgment that there is no coverage." Clemmons, 88 Ill. 2d  at 475;
Waste Management, 144 Ill. 2d at 207-08;
Murphy, 88 Ill. 2d  at 451; see also Sims, 43 Ill. App. 2d at 199. These
are separate and distinct options. To argue, as defendants
do, that an insurer choosing the latter option is estopped from denying coverage unless he
actually secures a declaratory
judgment before judgment is entered on the underlying tort complaint is to render the declaratory
judgment option illusory. Such
a rule would force insurers into a race in which they must obtain declaratory relief before the
underlying tort suits proceed to
judgment.
Moreover, defendants' rule would give both the potential
insured and the tort plaintiff an incentive to resolve the tort suit before
the declaratory judgment action. An insurer in such a position would be at an extreme disadvantage.
First, while the insurer
would not be in a position to affect the course of the tort suit, both the potential insured and the tort
plaintiff, as proper and
necessary parties to the declaratory judgment action (Williams v. Madison County Mutual
Automobile Insurance Co., 40 Ill. 2d 404, 407 (1968)), could exercise considerable influence over the progress of the declaratory judgment
action. While we attribute
no improper motive to defendants in the instant case, we note that defendant Gorham sought and
obtained a lengthy stay of State
Farm's declaratory judgment action-a delay which State Farm opposed. Second, under defendants'
rule, a potential insured with
a dubious claim to insurance coverage could effectively force his insurance company to provide him
with a defense by the simple
expedient of refusing to answer the complaint in the underlying tort suit. Under such circumstances,
an insurer would have no
realistic choice but to immediately defend its potential insured or risk entry of a default judgement
for which it would
subsequently be estopped from denying coverage.
For all of these reasons, we reaffirm that when a complaint
against the insured alleges facts potentially within the scope of the
policy coverage, an insurer taking the position that the complaint is not covered by its policy must
defend the suit under a
reservation of rights or seek a declaratory judgment. An insurer will not be estopped
from denying coverage merely because the
underlying case proceeds to judgment before the declaratory judgment action is resolved.
Accordingly, we hold that State Farm
did not breach its duty to defend Martin, and is therefore not estopped from raising policy defenses
to coverage.
We therefore turn the question of actual coverage under
State Farm's business liability policy. State Farm defends its denial of
coverage on four grounds: (1) that the underlying complaints did not allege a covered "occurrence"
within the meaning of the
policy because the fire was not an accident; (2) that Martin's actions triggered an exclusion for bodily
injury that is expected or
intended by the insured; (3) that Martin's actions triggered an exclusion for bodily injury that is the
result of willful and malicious
acts of an insured; and (4) that insurance for the civil consequences of arson is void as against the
public policy of Illinois.
Because we find that State Farm properly denied coverage based upon the "willful and malicious"
exclusion, we do not reach the
remaining arguments.
State Farm's insurance policy contained the following
coverage exclusion:
State Farm asserts
that Martin's acts in hiring his tenant to commit arson are willful and malicious as a matter of law, and
therefore are excluded from coverage under the policy. State Farm argues that the appellate court
erroneously equated the
"willful and malicious" exclusion with the "expected or intended" exclusion when it held that Martin's
acts were not "willful and
malicious" within the meaning of the policy unless Martin acted with a "specific intent to cause
personal injury [to the firemen]
with conscious knowledge that the deaths were practically certain to occur." (Emphasis omitted.) 296
Ill. App. 3d at 472. State
Farm further maintains that Martin's criminal conviction of "maliciously damaging and destroying [his
building] by means of fire"
is prima facie evidence of the nature of Martin's conduct where malice was an
element of the offense charged.
In response, defendants argue that because the terms
"willful and malicious" are not defined by the policy, the policy is therefore
ambiguous and should be construed against the drafter, State Farm. Defendants also cite testimony
from Martin's criminal trial to
the effect that Martin and his accomplice had not intended to injure anyone and, in fact, "were going
through hell about those two
firemen who got killed." Defendants claim that this testimony establishes that Martin did not intend
to do any harm to the
deceased firemen, and therefore Martin's acts were not "willful and malicious" towards
decedents.
We find defendants' arguments unpersuasive. Defendants
clearly equate the "willful and malicious" exclusion with the "expected
or intended" exclusion. Similarly, the appellate court's discussion of the "willful and malicious"
exclusion concluded: "The trial
court analyzed this issue in the same manner as it did the 'expected and intended' exclusion. We agree
with that analysis." 296 Ill.
App. 3d at 473. Not surprisingly, therefore, the appellate court's discussion of the "willful and
wanton" exclusion focuses almost
exclusively on cases construing exclusions for injuries which are "expected or intended." The
appellate court's approach was,
however, incorrect. 
When construing an insurance contract,"[a] court must
strive to give each term in the policy meaning unless to do so would
render the clause or policy inconsistent or inherently contradictory." Outboard Marine Corp.
v. Liberty Mutual Insurance Co.,
154 Ill. 2d 90, 123 (1992). In the instant case, the language of State Farm's policy excludes coverage
for injuries which are
"expected or intended" or "which [are] the result of willful and malicious acts of an
insured." By use of the conjunction "or," the
policy unambiguously indicates that each of the two exclusionary clauses must be given its own
meaning. Accordingly, the
applicability of the "willful and malicious" exclusion cannot be made to depend upon whether Martin
subjectively "expected or
intended" to injure the decedent firemen.
State Farm's policy excludes coverage for injuries "which
[are] the result of willful and malicious acts of an insured." (Emphasis
added.) Notably, the exclusion is not phrased in terms of willful and malicious injuries.
Accordingly, an assessment of this
exclusion's applicability requires a focus upon the acts of the insured-not upon the
injuries of the tort plaintiffs. The only act
from which Martin's liability could have arisen was his act of hiring his tenant to set fire to the
building. As defendants' wrongful
death complaints each allege: (1) Martin hired Gordon to start the fire, (2) Martin knew or should
have known that firemen
would respond to the fire and could be injured because of the fire; and (3) as a direct and proximate
result of Martin's acts, two
firemen were killed. Although for strategic reasons Gorham and Lewis phrase their complaints in
terms of negligence, it strains
credulity to suggest that Martin's acts were merely negligent. On the contrary, it is manifestly clear
that defendants allege, and
that Martin committed, an intentional, willful act. We further note that Martin was convicted of
"maliciously damaging and
destroying [his building] by means of fire." Martin's criminal conviction is prima facie
evidence of the facts on which it was
based. Thornton v. Paul, 74 Ill. 2d 132, 151 (1978); see also Talarico v.
Dunlap, 177 Ill. 2d 185, 193 (1997). Under the
circumstances of this case, we have little difficulty concluding that Martin's actions were willful and
malicious as a matter of law,
and therefore fall within the policy's exclusion.
CONCLUSION
For the reasons stated above, we hold that State Farm
preserved its right to raise policy defenses to coverage by seeking a
declaratory judgment as to its responsibilities under its policy of insurance. Further, we hold that
Martin's acts in hiring a tenant
to set fire to Martin's building, which ultimately resulted in the tragic deaths of two firemen, fall
within an express coverage
exclusion under State Farm's policy. Accordingly, State Farm is not required to indemnify Martin for
the civil liability resulting
from his actions. The judgments of the appellate and circuit courts are reversed.
Judgments
reversed.
JUSTICE BILANDIC took no part in the consideration
or decision of this case.
JUSTICE HARRISON, dissenting:
An insurer's duty to defend is much broader than its duty
to indemnify. Crum & Forster Managers Corp. v. Resolution Trust
Corp., 156 Ill. 2d 384, 393-94 (1993). An insurer may be required to defend its insured even
when there will ultimately be no
obligation to provide indemnification. Zurich Insurance Co. v. Raymark Industries, Inc.,
118 Ill. 2d 23, 52 (1987).
Whether an insurer has a duty to defend depends on a
comparison of the allegations of the underlying complaint with the relevant
provisions of the insurance policy. If the underlying complaint alleges facts within or potentially
within the policy's coverage, the
insurer has a duty to defend. Dixon Distributing Co. v. Hanover Insurance Co., 161 Ill. 2d 433, 438 (1994). That is so even if
the allegations are groundless, false or fraudulent. United States Fidelity & Guaranty Co.
v. Wilkin Insulation Co., 144 Ill. 2d 64,
73 (1991).
The threshold that a complaint must satisfy to present a
case of potential coverage is low. The allegations of the complaint must
be liberally construed, and all doubts must be resolved in favor of the insured. See Trovillion
v. United States Fidelity &
Guaranty Co., 130 Ill. App. 3d 694, 700 (1985). An insurer cannot safely or justifiably refuse
to defend an action against its
insured unless it is clear from the face of the complaint that the claim is beyond the policy's coverage.
Wilkin Insulation Co., 144 Ill. 2d  at 73.
When an insured tenders the defense of a claim to its
insurer, but the insurer does not believe that the policy affords coverage, the
insurer may not simply abandon the insured. Rather, it must defend the insured under a reservation
of rights and either secure a
declaratory judgment as to its rights or else adjudicate the issue of coverage in a supplemental suit.
Shelter Mutual Insurance Co.
v. Bailey, 160 Ill. App. 3d 146, 151-52 (1987); Consolidated R. Corp. v. Liberty
Mutual Insurance Co., 92 Ill. App. 3d 1066,
1072-73 (1981); Graman v. Continental Casualty Co., 87 Ill. App. 3d 896, 900 (1980);
Associated Indemnity Co. v. Insurance
Co. of North America, 68 Ill. App. 3d 807, 821 (1979); Aetna Casualty & Surety
Co. v. Coronet Insurance Co., 44 Ill. App. 3d
744, 748 (1976). Of course, it may also defend without a reservation of rights. Tapp v.
Wrightsman-Musso Insurance Agency,
109 Ill. App. 3d 928, 930 (1982). Whichever of these options it elects, however, it still must defend
the insured. That duty does
not abate unless and until there has been an adjudication that no defense is owed under the
policy.
If an insurer obtains a declaratory judgment prior to trial
or settlement which frees it from its obligation to provide a defense, its
responsibility for defending its insured will, of course, terminate. The mere filing of a declaratory
judgment action, however, does
not relieve an insurer of its responsibilities. Although there is some authority to the contrary, that
view is not and has never been
the prevailing view in Illinois. It is a doctrine which has been limited to a few divisions of the First
District of the Appellate Court
and some opinions from the Third District, e.g., Ayres v. Bituminous Insurance
Co., 100 Ill. App. 3d 33 (1981), which
misconstrued the precedent.
Admittedly, our own court has been lax in formulating
the insurer's duty to provide a defense. In cases such as Employer's
Insurance of Wausau v. Ehlco Liquidating Trust, No. 84684, slip op. at 18 (January 22, 1999),
we have articulated the rule as if
filing a declaratory judgment action and defending under a reservation of rights were merely
independent alternatives. It is
important to recognize, however, that before today we have never actually held that an insurer can
escape the consequences of
refusing to provide a defense merely by initiating a separate declaratory judgment action. The
majority's suggestion that today's
decision "reaffirms" our previous holdings is simply wrong.
The doctrine embraced by my colleagues in this case
fundamentally alters the law in Illinois. In the end, it will accomplish nothing
other than to advance the pecuniary interests of the insurance industry. Why the majority has decided
to follow such a course is
unclear to me. There is no demonstrable basis for concluding that the insurance industry needs any
greater protection under the
law than it already receives. The fears of collusion or forced races to judgment cited by the majority
are illusory. The notion that
insurance companies will somehow be exploited by plotting policyholders is manufactured. In my
experience, it is the
policyholders who normally need protection from the insurers, not the other way
around.
In urging the position my colleagues adopt today, State
Farm argued that it was at risk of having to provide a defense in all cases,
even where the underlying complaints are clearly outside the scope of the policy. The majority
accepted this proposition
uncritically, but it is completely false. What the law actually provided, until today, was that the duty
to provide a defense, while
broad, was not absolute. As previously indicated, an insurer was not obligated to provide a defense
where it was clear from the
complaint that the claim was beyond the policy's coverage.
If the majority was concerned about insurers having to
provide a defense in every case, today's decision takes us to the opposite
extreme. Under this ruling, insurance companies will no longer be required to expend any portion of
the premiums they collect in
order to meet their contractual obligation to provide defenses to their insureds. As soon as they learn
that an insured has been
sued, all they will have to do is have their attorneys prepare and file a complaint for declaratory
judgment challenging coverage.
With the filing of that complaint, their duty to defend the insured will cease. Even if no further action
is ever taken on the
declaratory judgment action, they will be excused from securing counsel to appear on behalf of their
policyholder. For all
practical purposes, their duty to defend will be rendered a nullity.   Insureds are entitled to more than
this. They have paid for
more and the law requires more. I would therefore hold that State Farm was obligated to defend
Martin in this case. Because it
did not, it should be estopped from raising policy defenses to Martin's claim for indemnification. See,
e.g., Country Mutual
Insurance Co. v. Murray, 97 Ill. App. 2d 61, 73-74 (1968).
For the foregoing reasons, the judgments of the circuit
and appellate courts should be affirmed.