Title: Cincinnati Insurance Cos. v. West American Insurance Co.

State: illinois

Issuer: Illinois Supreme Court

Document:

Cincinnati Cos. v. American Ins. Co., No. 83282 (9/24/98) 
                              Docket No. 83282--Agenda 13--March 1998. 
           THE CINCINNATI COMPANIES, Appellee, v. WEST 
            AMERICAN INSURANCE COMPANY, Appellant. 
 
             JUSTICE McMORROW delivered the opinion of the court: 
             The issue in this case is whether an insurer's duty to defend 
           its insured arises upon its receipt of actual notice of the suit 
           against its insured, or whether the duty to defend is triggered 
           only upon the insured's tender of its defense to the insurer. The 
           appellate court held that actual notice of the underlying claim 
           was sufficient to trigger the duty to defend, regardless of 
           whether the insured tendered its defense to the insurer, provided 
           the insured did not knowingly forgo the insurer's involvement. 
           287 Ill. App. 3d 505. We affirm the appellate court. 
 
                     BACKGROUND 
             This insurance coverage case has its roots in an underlying 
           suit brought by Lorren Kessel against several defendants, 
           including Baird Land Surveyors (Baird) and William Grady, 
           doing business as B&D Home Repair and Builders (B&D). 
           Kessel was injured while working at a construction site. Baird 
           and B&D were contractors at the site. Baird was listed as an 
           additional insured on a policy which was issued by the plaintiff, 
           The Cincinnati Companies (Cincinnati), and held by another 
           contractor at the site. B&D was insured under a policy issued by 
           the defendant, West American Insurance Company (West 
           American). 
             Upon receiving service of process in Kessel's suit, Baird 
           tendered its defense in the case to its own insurer, which then 
           tendered the defense to Cincinnati. B&D tendered its defense to 
           West American. Thus, both Cincinnati and West American had 
           notice of the suit shortly after service of process upon Baird and 
           B&D. In the course of discovery in the underlying suit, Kessel 
           served B&D with interrogatories which, inter alia, asked B&D 
           whether it was insured for the injuries alleged in Kessel's 
           complaint, and asked that B&D list the insureds under each 
           policy which might cover Kessel's injuries. B&D's answer to 
           the interrogatories stated that B&D was covered by the West 
           American policy, and listed only itself, B&D, as an insured 
           under that policy. 
             On January 27, 1992, the eve of the third trial date set for 
           the underlying case, counsel for B&D disclosed to Baird that, 
           contrary to the answer given in response to Kessel's 
           interrogatories, Baird was in fact listed as an additional insured 
           on the West American policy issued to B&D. Prior to this 
           disclosure, Baird did not know that it was listed as an additional 
           insured on the West American policy. Counsel for Baird, 
           retained by Cincinnati, then tendered Baird's defense to West 
           American. West American rejected the tender. 
             On February 17, 1992, Kessel settled the underlying case 
           for $60,000. Under the terms of that settlement, Baird and B&D 
           were each to pay $30,000. Cincinnati paid Baird's share of the 
           settlement, and West American paid B&D's share. Prior to 
           reaching the settlement, Cincinnati and West American entered 
           into a stipulation in which it was agreed that Cincinnati would 
           preserve its right to pursue a contribution action against West 
           American for reimbursement of the settlement payment and 
           attorneys' fees. 
             On January 25, 1993, Cincinnati filed this declaratory 
           judgment action against West American. Cincinnati sought a 
           declaration that West American was a primary insurer for Baird 
           in the underlying litigation, and that West American was thus 
           liable for the amount which Cincinnati had paid on behalf of 
           Baird to settle the underlying case, as well as the attorney fees 
           and costs incurred by Cincinnati on behalf of Baird in defending 
           the case. Cincinnati and West American then filed cross-motions 
           for summary judgment. The trial court granted Cincinnati's 
           motion for summary judgment. The court found that "[t]he 
           Answers to Interrogatories provided to Baird made no reference 
           to the West American/Ohio Casualty policy and foreclosed 
           Baird's opportunity to make a reasonable judgment as to 
           tender," and that "[t]he lack of tender must not be attributed to 
           Baird but to West American through the actions of the B&D 
           attorney in the Kessel v. Baird case." The trial court found that 
           West American was liable for an "equitable" share of the 
           settlement and of attorney fees incurred after the service of the 
           answers to interrogatories on January 2, 1991. Cincinnati filed 
           a motion for entry of money judgment for $15,000, representing 
           one-half of the settlement paid on behalf of Baird, and 
           $14,384.50, representing one-half of the attorney fees and costs 
           incurred after January 2, 1991, on behalf of Baird. On April 26, 
           1996, the circuit court entered judgment against West American 
           in the amount of $29,384.50. 
             West American appealed the trial court's ruling on the 
           motions for summary judgment and its entry of the monetary 
           judgment. West American argued that an insurer has no 
           obligation to defend an insured until the insured tenders its 
           defense to the insurer, that is, asks the insurer for assistance in 
           defending the underlying suit; that Baird never tendered its 
           defense in the underlying action; and that the trial court erred in 
           attributing this lack of tender to the attorney for B&D. The 
           appellate court affirmed the judgment of the court, holding that 
           "an insurer's duty to defend claims potentially falling within the 
           terms of a policy is triggered when the insurer has actual notice 
           of the lawsuit, regardless of whether there has been an actual 
           tender of defense by the insured." 287 Ill. App. 3d at 511, citing 
           Federated Mutual Insurance Co. v. State Farm Mutual 
           Automobile Insurance Co., 282 Ill. App. 3d 716, 726 (1996). 
           The appellate court recognized, but declined to follow, the 
           contrary decision in Institute of London Underwriters v. 
           Hartford Fire Insurance Co., 234 Ill. App. 3d 70 (1992), in 
           which the court held that an insurer's duty to defend a 
           sophisticated insured arose only upon tender of the defense to 
           the insurer. The appellate court in the case at bar determined 
           that West American had received actual notice of the underlying 
           suit against both Baird and B&D shortly after service of process 
           in that case. Moreover, the court found no evidence that Baird 
           had consciously selected one insurer over another to provide its 
           defense. The court found that B&D's attorney, acting as the 
           agent for both B&D and West American, had responded 
           inadequately to Kessel's discovery requests by failing to note 
           that Baird was an insured under the West American policy, and 
           that Baird's failure to tender was thus attributable to West 
           American. Finally, the appellate court rejected West American's 
           argument that it should not be liable for attorneys' fees and 
           costs incurred by Cincinnati prior to Baird's tender to West 
           American in January 1992. The appellate court held that, 
           because the delay in tender was due to the incomplete discovery 
           responses of B&D's attorney, who was an agent of West 
           American, West American's obligation to share in these 
           expenses took effect at the time of those responses. We granted 
           West American's petition for leave to appeal to this court. 166 
           Ill. 2d R. 315. 
 
                      ANALYSIS 
             "In insurance law, contribution is `an equitable principle 
           arising among coinsurers which permits one who has paid the 
           entire loss to receive reimbursement from the other insurer liable 
           for the loss." Aetna Casualty & Surety Co. v. James J. Benes & 
           Associates, Inc., 229 Ill. App. 3d 413, 417 (1992), quoting Hall 
           v. Country Casualty Insurance Co., 204 Ill. App. 3d 765, 772 
           (1990). In the case at bar, Cincinnati alone paid the costs of 
           Baird's defense, and the amount of Baird's settlement 
           indebtedness, in the underlying case. Cincinnati then brought 
           this action for equitable contribution against West American, 
           seeking to recover half of these costs. The issue presented in 
           this appeal is whether West American was also liable for 
           Baird's costs because Baird was an insured covered by the 
           policy issued by West American. More specifically, the question 
           is whether West American's duty to defend Baird was triggered 
           when it had actual notice of the suit against Baird, even though 
           Baird did not tender its defense to West American.[fn1] 
           Because this is an appeal from an order granting summary 
           judgment, we review the case de novo. Outboard Marine Corp. 
           v. Liberty Mutual Insurance Co.,  154 Ill. 2d 90 , 102 (1992). 
             Generally, the question of whether an insurer has a duty to 
           defend an insured depends on the allegations of the complaint 
           and the scope of the policy. "In order to determine whether [an] 
           insurer's duty to defend [an insured] has arisen, the court must 
           compare the allegations of the underlying complaint to the 
           policy language. [Citations.] *** If the court determines that 
           these allegations fall within or potentially within the policy's 
           coverage, the insurer has a duty to defend [an] insured against 
           the underlying complaint. [Citations.]" (Emphasis in original.) 
           Outboard Marine Corp., 154 Ill. 2d  at 125. 
             However, certain courts applying Illinois law, including the 
           United States Court of Appeals for the Seventh Circuit and 
           certain districts of the Illinois appellate court, have held that an 
           additional requirement must be met before an insurer's duty to 
           defend is triggered. These courts hold that the duty to defend 
           arises only after the insured tenders its defense to the insurer. 
           Hartford Accident & Indemnity Co. v. Gulf Insurance Co., 776 F.2d 1380, 1383 (7th Cir. 1985) (Hartford I); Institute of 
           London, 234 Ill. App. 3d at 80. According to these courts, 
           "[w]hat is required [to trigger the duty to defend] is knowledge 
           that the suit is potentially within the policy's coverage coupled 
           with knowledge that the insurer's assistance is desired." 
           Hartford I, 776 F.2d  at 1383. 
             The courts which require an insured to tender its defense 
           before the duty to defend is triggered recognize an exception to 
           the tender rule if the insured is "unsophisticated." Under this 
           exception, an insurer's duty to defend an unsophisticated insured 
           is triggered solely by the insurer having "actual notice" of the 
           suit against its insured. See Long v. Great Central Insurance 
           Co., 190 Ill. App. 3d 159, 169-70 (1989). See also Aetna 
           Casualty & Surety Co. v. Chicago Insurance Co., 994 F.2d 1254, 1260 (7th Cir. 1993); Hartford I, 776 F.2d  at 1383; 
           Institute of London, 234 Ill. App. 3d at 76-77. "Actual notice" 
           is defined as "notice sufficient to permit the insurer to locate the 
           suit and defend it." Long, 190 Ill. App. 3d at 168. This 
           exception to the tender requirement is the result of concern that 
           application of the tender rule to an unsophisticated insured 
           would be unfair in light of the fact that the insurer has superior 
           knowledge about the scope of its policies, and that the insured 
           may not be aware of the tender requirement. See, e.g., Hartford 
           Accident & Indemnity Co. v. Gulf Insurance Co., 837 F.2d 767, 
           774 (7th Cir. 1988) (Hartford II). 
             The courts which require tender also hold that any insured-- 
           irrespective of the sophistication of the insured--covered by 
           more than one policy can knowingly designate one of the 
           insurers to defend. Institute of London, 234 Ill. App. 3d at 78- 
           80; Aetna, 994 F.2d  at 1260. Where the insured makes such a 
           designation, the duty to defend falls solely on the selected 
           insurer. That insurer may not in turn seek equitable contribution 
           from the other insurers who were not designated by the insured. 
           Institute of London, 234 Ill. App. 3d at 79. This rule is intended 
           to protect the insured's right to knowingly forgo an insurer's 
           involvement. Institute of London, 234 Ill. App. 3d at 79. 
             In the case at bar, consistent with its prior announcements 
           on the issue of whether tender is required to trigger the duty to 
           defend, the appellate court, Second District, rejected the 
           requirement of tender. The court held that an insurer's duty to 
           defend is triggered solely by its having "actual notice" of a 
           claim against its insured. 287 Ill. App. 3d at 511-12, citing 
           Federated Mutual, 282 Ill. App. 3d at 726. It defined "actual 
           notice" as " `notice sufficient to permit the insurer to locate and 
           defend the lawsuit.' " 287 Ill. App. 3d at 512, quoting Federated 
           Mutual, 282 Ill. App. 3d at 726. The court further held that the 
           rule allowing notice to trigger the duty to defend applies without 
           regard to the level of the insured's sophistication. Finally, the 
           appellate court held that the insurer's duty to defend was not 
           triggered where an insured has knowingly forgone an insurer's 
           involvement, or where " `there is *** prejudice to the insurer.' " 
           287 Ill. App. 3d at 511, quoting Federated Mutual, 282 Ill. App. 
           3d at 726. 
             West American argues that the appellate court erred in 
           ruling that tender is not required to trigger an insurer's duty to 
           defend when the insured is "sophisticated." It offers several 
           arguments in support of this position. First, West American 
           argues that, by holding actual notice is sufficient to trigger the 
           duty to defend, the appellate court "stripped policyholders of an 
           initial measure of autonomy--by curtly dismissing the notion that 
           an insured might not want a particular insurer to defend a 
           particular claim, even if the policy in question allows the 
           insured to claim a defense." West American further argues that 
           a rule allowing actual notice to trigger the duty to defend is 
           based on the "unfortunate presumption that an insurer should 
           presume that an insured desires its involvement unless the 
           insured declares otherwise," and that, while this presumption 
           "might frequently be true[,] there are easily imaginable 
           circumstances in which it is untrue--and in which the insurer's 
           intermeddling might be unwelcome or even detrimental." In 
           sum, West American argues that an insured should have the 
           right to forgo coverage under a policy if the insured so desires, 
           and that allowing actual notice of an underlying suit against an 
           insured to trigger an insurer's duty to defend might deprive the 
           insured of that right. 
             We find this argument unpersuasive. It is true that an 
           insured may choose to forgo an insurer's assistance for various 
           reasons, such as the insured's fear that premiums would be 
           increased, or the policy cancelled, in the future. See Institute of 
           London, 234 Ill. App. 3d at 78-79. Moreover, an insured's 
           ability to forgo that assistance should be protected. However, we 
           do not believe that the appellate court's holding that actual 
           notice is sufficient to trigger a duty to defend would operate to 
           "strip" policyholders of the ability to forgo an insurer's 
           assistance. On the contrary, an insured may knowingly forgo the 
           insurer's assistance by instructing the insurer not to involve 
           itself in the litigation. The insurer would then be relieved of its 
           obligation to the insured with regard to that claim. Furthermore, 
           and contrary to West American's suggestion, the insurer is not 
           required to actually defend every claim against its insured of 
           which it has actual notice. The duty to defend may be 
           discharged simply by contacting the insured to ascertain whether 
           the insurer's assistance is desired. If the insured indicates that 
           it does not want the insurer's assistance, or is unresponsive or 
           uncooperative, the insurer is relieved of its duty to defend. 
           Towne Realty, Inc. v. Zurich Insurance Co., 548 N.W.2d 64, 67 
           & n.2 (Wis. 1996). If, after being contacted, the insured 
           indicates that it desires the insurer's assistance, then the 
           insurer's duty to defend continues. 
             West American next argues that, under the appellate court's 
           decision, every claim against an insured of which an insurer has 
           notice will require the insurer either to involve itself in the 
           underlying litigation or to seek a declaratory judgment that it 
           does not owe a duty to defend. West American explains that, 
           "uncertain of whether its insured's silence is an implicit tender 
           or an indication that the insured does not regard the claim as a 
           covered one, the insurer is at peril of forfeiting its ability to 
           challenge its obligations under the policy. Its prudent response 
           is either to insinuate itself into litigation its policy might not 
           cover, or to commence its own litigation to determine its 
           coverage obligations." This argument is similar to that relied 
           upon by a number of "tender rule" courts, which have found that 
           allowing mere notice to trigger the duty to defend would require 
           the insurer to "intermeddle officiously" in the underlying 
           litigation. See Hartford I, 776 F.2d  at 1383, citing Oda v. 
           Highway Insurance Co., 44 Ill. App. 2d 235, 253 (1963). See 
           also Institute of London, 234 Ill. App. 3d at 75, quoting 
           Hartford I, 776 F.2d  at 1383. 
             We find this argument also to be misplaced. Where the 
           insurer has actual notice of a claim against its insured, it would 
           not be required to interpret the insured's silence as a desire for 
           assistance. Rather, the insurer can simply ask the insured if the 
           insurer's involvement is desired, thus eliminating any 
           uncertainty on the question. Contrary to West American's 
           argument, the insurer is not required to insinuate itself into the 
           litigation at this stage. The insurer does not become liable 
           simply by inquiring of the insured whether it desires the insurer 
           to defend. The insurer is only potentially liable at this stage. 
           Moreover, this potential liability is not a result of the insurer's 
           contacting the insured, but of the insurance contract for which 
           the insurer received consideration. 
             West American next argues that a rule allowing actual 
           notice to trigger the duty to defend a sophisticated insured 
           would create "difficult problems of proof concerning the 
           insurer's knowledge of the underlying suit," and that a tender of 
           the defense should be required. We are not persuaded by this 
           argument for two reasons. First, courts have long allowed actual 
           notice to trigger the duty to defend unsophisticated insureds. 
           See, e.g., Federated Mutual, 282 Ill. App. 3d at 726-27; Long, 
           190 Ill. App. 3d at 169-70. West American points to no case in 
           which a court has struggled with the question of when an 
           insurer had actual notice. Second, West American's suggested 
           alternative to this rule--an alternative which would provide 
           different treatment for sophisticated and unsophisticated 
           insureds--might also create difficult problems of proof by 
           requiring courts to determine the level of an insured's 
           "sophistication." Continental Casualty Co. v. United Pacific 
           Insurance Co., 637 So. 2d 270, 274-75 (Fla. Dist. Ct. App. 
           1994) ("[o]bviously, what constitutes `sophistication' *** is 
           fertile ground for litigation"). 
             For these reasons, we reject West American's arguments in 
           support of the tender requirement. We believe that the better 
           rule is one which allows actual notice of a claim to trigger the 
           insurer's duty to defend, irrespective of the level of the 
           insured's sophistication, except where the insured has knowingly 
           forgone the insurer's assistance. This rule is the result of a 
           number of considerations. First, the insurer is usually in a better 
           position than even a sophisticated insured to know the scope of 
           the insurance contract and its duties under it. See Towne Realty, 
           548 N.W.2d  at 67. In light of this frequent disparity in 
           information and knowledge of insurance law, we are reluctant 
           to interpret an insured's silence as a statement of intent to forgo 
           the insurer's assistance, particularly where, as West American 
           concedes, the insured more often than not does in fact desire the 
           insurer's involvement. As the Federated Mutual court stated: 
             "Such a rule [requiring tender] requires an insured to jump 
                        through meaningless hoops towards an absurd end: telling 
                        the insurer something it already knows. Such a rule injects 
                        a degree of gamesmanship into the insurer-insured 
                        relationship without providing any valid corresponding 
                        benefit. In fact, the only benefit of such a rule is to create 
                        a possibility--where none would otherwise exist--for an 
                        insurer to escape an obligation it otherwise owes its 
                        insured." Federated Mutual, 282 Ill. App. 3d at 725. 
           This argument is supported by the fact that the duty placed on 
           an insurer, one which may be satisfied by a simple letter to the 
           insured requesting clarification, is hardly "onerous." Towne 
           Realty, 548 N.W.2d  at 67. 
             A second reason for allowing actual notice to trigger the 
           duty to defend is to assure or protect the benefits of the 
           insurance contract. The insurer, having received consideration 
           for inclusion of the insured on its policy, should not be allowed 
           to evade its responsibilities under the policy as a result of the 
           insured's ignorance, particularly where the insurer has actual 
           notice of a claim against its insured. See Federated Mutual, 282 
           Ill. App. 3d at 726-27. 
             Finally, we note that the state has an interest in having an 
           insured being adequately represented in the underlying litigation. 
           Aetna, 994 F.2d  at 1260; Hartford I, 776 F.2d  at 1382; 
           Federated Mutual, 282 Ill. App. 3d at 726. A rule which 
           requires only actual notice to trigger the duty to defend will 
           protect that interest. See Federated Mutual, 282 Ill. App. 3d at 
           726. 
             For these reasons, we hold that where the insured has not 
           knowingly decided against an insurer's involvement, the 
           insurer's duty to defend is triggered by actual notice of the 
           underlying suit, regardless of the level of the insured's 
           sophistication. We also agree with the appellate court's 
           determination that "actual notice" should be defined as " `notice 
           sufficient to permit the insurer to locate and defend the 
           lawsuit.' " 287 Ill. App. 3d at 512, quoting Federated Mutual, 
           282 Ill. App. 3d at 726. We note that, in order to have actual 
           notice sufficient to locate and defend a suit, the insurer must 
           know both that a cause of action has been filed and that the 
           complaint falls within or potentially within the scope of the 
           coverage of one of its policies. 
             It is clear from the record and from the findings of the trial 
           court that West American had notice of the claim against its 
           additional insured, Baird, no later than January 2, 1991. 
           Moreover, Baird clearly would have tendered its defense to 
           West American if Baird had known that it was listed as an 
           additional insured on a policy issued by West American. 
           Therefore, we affirm the appellate court's holding that West 
           American is obligated to reimburse Cincinnati for one-half of 
           Baird's settlement indebtedness, and also for one-half of Baird's 
           attorney fees incurred after January 2, 1991. 
 
                     CONCLUSION 
             For the reasons discussed above, the judgment of the 
           appellate court is affirmed. 
 
           Appellate court judgment affirmed. 
 
 
           [fn1]   We note that neither Cincinnati nor West American 
           argues governance of the terms of the policy with respect to 
           when the duty to defend arises. Consequently, policy defenses 
           have not been a factor our decision.