ILLINOIS OFFICIAL REPORTS

Appellate Court

American Family Mutual Insurance Co. v. Westfield Insurance Co., 2011 IL App (4th)

110088

Appellate Court

Caption

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, PlaintiffAppellant, v. WESTFIELD INSURANCE COMPANY, as Subrogee of 

Central Supply and as Subrogee of Thomas Wells; and SHANNON

DENNIS, a Minor, by PATRICK DENNIS, Her Natural Parent and

Guardian, Defendants-Appellees.

 District & No. Fourth District

Docket No. 4-11-0088

Argued

Filed

Rehearing denied

August 10, 2011

November 16, 2011

December 23, 2011

Held

(Note: This syllabus

constitutes no part of

the opinion of the court

but has been prepared

by the Reporter of

Decisions for the

convenience of the

reader.)

Where defendant insurer obtained a judgment against defendant minor

based on a finding that she negligently caused the fire and the minor was

insured under a policy issued by plaintiff to the minor’s paternal

grandparents, with whom she resided, the trial court erred in entering

summary judgment against plaintiff insurer in its action seeking a

declaration that it was not obligated to indemnify the minor for the

judgment in favor of defendant insurer, since the doctrine of collateral

estoppel did not estop plaintiff from asserting policy defenses, including

the defense that the intentional-injury exclusion in the policy precluded

coverage, and the reservation-of-rights letter plaintiff sent to the insured

was too premature to be a proper reservation of rights.
Decision Under 

Review

Appeal from the Circuit Court of McLean County, No. 09-MR-147; the

Hon. Lee Ann S. Hill, Judge, presiding.

Judgment Reversed and remanded.

Counsel on

Appeal

Richard A. Chapin (argued), of Chapin & Long, P.C., of Champaign, for

appellant.

Robert Ostojic (argued), of Leahy, Eisenberg & Fraenkel, Ltd., of

Chicago, for appellee Westfield Insurance Company.

Scott A. Ruksakiati (argued), of Vanek, Vickers & Masini, P.C., of

Chicago, and Stacey E. Lynch, of Dorris Law Firm, PC, of Bloomington,

for appellee Shannon Dennis.

Panel JUSTICE COOK delivered the judgment of the court, with opinion.

Justices Turner and Steigmann concurred in the judgment and opinion.

OPINION

¶ 1 On September 12, 2005, codefendant Shannon Dennis, a minor, was convicted of

criminal damage to property for recklessly setting fire to the Central Supply Company in

Bloomington, Illinois. 720 ILCS 5/21-1(1)(b) (West 2004). At the time of the incident,

Shannon was insured under a farm-ranch policy issued to her paternal grandparents by

plaintiff, American Family Mutual Insurance Company (American Family).

¶ 2 On October 24, 2006, codefendant Westfield Insurance Company (Westfield), as

subrogee of Central Supply Company, filed suit against Patrick Dennis, as natural parent and

guardian of Shannon, a minor, for damages stemming from the fire. American Family

retained counsel and provided a defense to Shannon. Prior to Westfield filing suit, American

Family sent a reservation-of-rights letter to Patrick. On May 7, 2009, the trial court found

Shannon negligently caused the Central Supply Company fire and awarded Westfield

damages.

¶ 3 On May 14, 2009, American Family filed a complaint for declaratory judgment seeking

a judicial determination that it is not obligated to indemnify Shannon for the judgment

entered against her and in favor of Westfield. In response, Shannon filed a motion for

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summary judgment alleging that American Family (1) was collaterally estopped from

asserting that its policy’s intentional-injury exclusion provision applied and (2) sent an

improper reservation-of-rights letter. The trial court granted the motions. We reverse and

remand.

¶ 4 I. BACKGROUND

¶ 5 In July 2004, Shannon and two boys found hundreds of matchbooks in a Dumpster

located outside the Coachman Motel in Bloomington, Illinois. At the time, Shannon was

nearing her thirteenth birthday. She resided with her paternal grandparents and father. On

July 24, 2004, Shannon and the boys were lighting the Coachman Motel matches and

throwing them at each other as well as on the ground. While playing with the matches, the

minors walked by the Central Supply Company. A match was thrown through a cracked

window at the Central Supply Company property and the property caught on fire.

¶ 6 Central Supply Company was insured by Westfield. As a result of the fire, Westfield paid

to or on behalf of Central Supply Company $467,235.36.

¶ 7 In 2005, Shannon was charged with arson (720 ILCS 5/20-1 (West 2004)) and criminal

damage to property recklessly by fire (720 ILCS 5/21-1(1)(b) (West 2004)) relating to the

Central Supply Company fire. On September 12, 2005, Shannon was convicted of criminal

damage to property.

¶ 8 Shannon was insured under a farm-ranch policy issued to her paternal grandparents by

American Family. The policy covered Shannon, because at the time of the incident she was

a resident of her paternal grandparents’ household. The policy was effective from October

26, 2003, to October 26, 2004.

¶ 9 On June 29, 2006, Westfield sent to American Family a copy of a complaint it planned

to file against Patrick, as natural parent and guardian of Shannon, a minor, on account of the

fire. Following receipt of the document, James Keane, an in-house attorney for American

Family, sent a reservation-of-rights letter to Patrick. The letter was sent on September 29,

2006. In the letter, American Family provides that its policy’s intentional-act exclusion

provision may limit or eliminate coverage for damages stemming from the fire. The letter set

forth the policy’s intentional-act exclusion provision. The provision states in relevant part:

“11. Intentional injury. We will not pay for damages due to bodily injury or property damage

expected or intended from the standpoint of the insured.”

¶ 10 On October 24, 2006, Westfield filed suit against Patrick, as natural parent and guardian

of Shannon, a minor. American Family retained counsel, at its expense, and provided a

defense to Shannon.

¶ 11 On May 7, 2009, the trial court found Shannon negligently caused the fire. The court

awarded Westfield $465,735.36 plus costs of $725. The following day, American Family

denied indemnity coverage to Shannon.

¶ 12 On May 14, 2009, American Family filed a complaint for declaratory judgment seeking

a judicial determination that it is not obligated to indemnify Shannon for the judgment

entered against her and in favor of Westfield. In response, Shannon filed a motion for

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summary judgment as to her second and sixth affirmative defense as set forth in her answer

to American Family’s complaint for declaratory judgment. Shortly thereafter, Westfield filed

a motion to adopt and join in Shannon’s motion for summary judgment. In the second

affirmative defense, Shannon alleges that American Family is collaterally estopped from

asserting that the intentional-injury exclusion provision in its policy precluded coverage. In

her sixth affirmative defense, Shannon claims that American Family sent an improper

reservation-of-rights letter. After a hearing, on September 10, 2010, the trial court awarded

summary judgment as to Shannon’s second and sixth affirmative defense. The court found

that American Family was collaterally estopped from asserting that the intentional-injury

exclusion provision applied, because “all three prongs of [c]ollateral [e]stoppel exist here and

any other result would lead to inconsistent results on identical facts.” The court also

determined that the reservation-of-rights letter was sent so prematurely “that the defendant

could not possibly be properly informed as to her rights under a proper reservation of rights,

and any potential for conflict which would exclude American Family from indemnification

of its insured.”

¶ 13 This appeal followed.

¶ 14 II. ANALYSIS

¶ 15 On appeal, American Family argues that the trial court erred in granting summary

judgement to Shannon and Westfield, because (1) the doctrine of collateral estoppel does not

estop it from asserting policy defenses and (2) the letter it sent to Patrick on September 29,

2006, was a proper reservation of rights.

¶ 16 A. Collateral Estoppel

¶ 17 Whether the doctrine of collateral estoppel applies is a question of law that we review

de novo. In re A.W., 231 Ill. 2d 92, 99, 896 N.E.2d 316, 321 (2008). The doctrine of

collateral estoppel prevents the relitigation of issues resolved in earlier causes of action.

Du Page Forklift Service, Inc. v. Material Handling Services, Inc., 195 Ill. 2d 71, 77, 744

N.E.2d 845, 849 (2001). For collateral estoppel to apply, the following requirements must

be met:

“(1) the issue decided in the prior adjudication is identical with the one presented in the

suit in question, (2) there was a final judgment on the merits in the prior adjudication,

and (3) the party against whom estoppel is asserted was a party or in privity with a party

to the prior adjudication.” Gumma v. White, 216 Ill. 2d 23, 38, 833 N.E.2d 834, 843

(2005).

¶ 18 This case is similar to State Farm Fire & Casualty Co. v. Leverton, 314 Ill. App. 3d

1080, 732 N.E.2d 1094 (2000) (Leverton II). In Leverton II, State Farm defended its insured

under a reservation of rights in a lawsuit alleging the insured had struck the plaintiff with a

beer bottle. The jury found for the plaintiff and awarded damages. We held that the jury

verdict did not collaterally estop State Farm from arguing the insured’s acts were intentional

and excluded from coverage. Leverton II, 314 Ill. App. 3d at 1087, 732 N.E.2d at 1099. We

noted that it was impossible for the jury to find that the acts were intentional because the

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plaintiff “voluntarily dismissed the count alleging ‘willful and malicious’ assault and battery,

leaving only the negligence count at issue.” Leverton II, 314 Ill. App. 3d at 1083, 732 N.E.2d

at 1096. The same is true in this case. The jury had only a negligence count before it. “It is

well-settled that in order for a previous adjudication to be conclusive, it must appear clearly

and certainly that the identical and precise issue was decided in the former action.” Cowan

v. Insurance Co. of North America, 22 Ill. App. 3d 883, 895, 318 N.E.2d 315, 325 (1974).

Because the issue decided in the prior adjudication is not identical with the one presented in

the suit before us, there is no collateral estoppel.

¶ 19 B. Reservation of Rights

¶ 20 The trial court also granted summary judgment on the basis that American Family sent

its reservation-of-rights letter prior to the filing of Westfield’s subrogation complaint, and

so far in advance of Shannon’s service that “she could not possibly be properly informed as

to her rights under a proper reservation of rights, and any potential for conflict which would

exclude American Family from indemnification of its insured.” The letter was sent

September 29, 2006, advising Shannon’s father and legal representative, Patrick Dennis, that

Westfield was threatening to file suit. In late June 2006, Westfield had sent American Family

a courtesy copy of the complaint to be filed. The reservation-of-rights letter advised that

preliminary investigation by American Family indicated there may be circumstances that

would limit or eliminate coverage under the subject policy, making specific reference to the

intentional-injury exclusion. Westfield’s complaint was filed 25 days later, on October 24,

2006, and served on Patrick on December 14, 2006. There is no requirement that a

reservation-of-rights letter be sent after the filing of the complaint, although a second letter

might be required if the filed complaint raised new issues, not the case here. We agree with

American Family that the better rule is that the reservation-of-rights letter be sent earlier,

rather than later, if that is possible.

¶ 21 An insurer has two options when it believes that the liability from a claim against its

insured will not be covered by its insurance policy: (1) defend the suit under a proper

reservation of rights or (2) seek a declaratory judgment that there is no coverage. Employer’s

Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127, 150, 708 N.E.2d 1122,

1134-35 (1999). If the insurer fails to take either of these steps and is later found to have

wrongfully denied coverage, then the insurer is estopped from raising policy defenses to

coverage. Ehlco Liquidating Trust, 186 Ill. 2d at 150-51, 708 N.E.2d at 1135. Where there

is a conflict of interest between the insurer and the insured, the insurer may not undertake the

defense of the insured itself. Nevertheless, the insurer remains bound under the insurance

policy to provide the insured with a defense and, therefore, must permit the insured to be

represented by counsel of its own choosing. Under those circumstances, the insurer then must

reimburse the insured for the reasonable cost of defending the action. Santa’s Best Craft,

L.L.C. v. Zurich American Insurance Co., 408 Ill. App. 3d 173, 181, 941 N.E.2d 291, 299-

300 (2010) (citing Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, 198-99, 355 N.E.2d 24,

31 (1976)).

¶ 22 A reservation of rights must adequately inform the insured of the rights the insurer

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intends to reserve, because it is only when the insured is adequately informed of the potential

policy defense that the insured can intelligently determine whether to retain his or her own

counsel or accept the tender of defense counsel from the insurer. Royal Insurance Co. v.

Process Design Associates, Inc., 221 Ill. App. 3d 966, 973, 582 N.E.2d 1234, 1239 (1991).

Bare notice of a reservation of rights is insufficient; the notice must specifically reference the

policy defense that ultimately may be asserted by the insurer and the potential conflict of

interest. Royal, 221 Ill. App. 3d at 973, 582 N.E.2d at 1239.

¶ 23 A conflict of interest that may prejudice the insured exists if, when comparing the

allegations of the complaint to the policy terms, the interest of the insurer would be furthered

by providing a less than vigorous defense to those allegations. Royal, 221 Ill. App. 3d at 975-

76, 582 N.E.2d at 1240. However, “an insurer’s interest in negating policy coverage does not

in itself give rise to a conflict of interest.” Royal, 221 Ill. App. 3d at 976, 582 N.E.2d at

1240-41. The insured has the burden of proving prejudice from a conflict of interest by clear,

concise, and unequivocal evidence. Royal, 221 Ill. App. 3d at 976, 582 N.E.2d at 1240. 

¶ 24 In Royal, the appellate court found an insurance company was estopped from asserting

a policy defense in a declaratory-judgment proceeding, because the insurance company failed

to properly reserve its rights and to adequately inform the insured of the existence of a

potential conflict of interest. Royal, 221 Ill. App. 3d at 978, 582 N.E.2d at 1242. The court

held that the insurer created a conflict of interest when it undertook to defend its insured

while attempting to show that the insured was liable for professional negligence, which was

not covered under the policy. Royal, 221 Ill. App. 3d at 976-77, 582 N.E.2d at 1241-42. The

insurer would have benefitted from a finding adverse to its insured, a finding of professional

negligence. Royal, 221 Ill. App. 3d at 978, 582 N.E.2d at 1242. That is not the case here.

Both American Family and the insured would have profitted from a finding that the insured

was not negligent. Conflicts have been found where the underlying complaint asserts claims

that are covered, as well as others that the insurer is required to defend but asserts are not

covered by the policy. Illinois Masonic Medical Center v. Turegum Insurance Co., 168 Ill.

App. 3d 158, 522 N.E.2d 611, (1988). Shannon’s conduct could not have been found

intentional in the underlying action here.

¶ 25 James Keane, an in-house attorney for American Family, discussed a Westfield

settlement offer with Steven Morris, the defense attorney provided by American Family. In

a January 6, 2009, file note concerning Westfield’s settlement offer of $400,000, Keane

states that “American Family would be better off taking its chances at trial to see if a jury or

judge would award the entire amount. I told Steve [Morris] that I would settle the case if it

could settle for $100,000. However, I told him I would not offer that and not to convey that

position specifically to the plaintiff’s attorney.” Westfield argues that Keane refused to

consider any settlement offer on Shannon’s behalf because of his loyalty to American

Family’s interests. It appears, however, that Shannon, also, was better off rejecting the offer.

The decision whether to settle belongs to the insured. Shannon’s settlement of the case for

$400,000 would not have prevented American Family from denying coverage. Perhaps

American Family could have agreed to abandon its reservation of rights and thereby settled

the claim for a lesser amount, but it was not obligated to do so. An insurer has a duty to act

in good faith in responding to settlement offers, for example where the third party has offered

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to settle for an amount less than the policy limits, but that duty only exists where there is

coverage under the policy. Chandler v. American Fire and Casualty Co., 377 Ill. App. 3d

253, 256-57, 879 N.E.2d 396, 399 (2007). An insured is only entitled to indemnity for losses

that actually fall within the terms of the insurance policy. Where the insured settles an

underlying lawsuit, it must demonstrate that it settled an otherwise covered loss to recover

the settlement. Santa’s Best Craft, L.L.C., 408 Ill. App. 3d at 183, 941 N.E.2d at 301.

¶ 26 III. CONCLUSION

¶ 27 For the foregoing reasons, we reverse the trial court’s judgment and remand for further

proceedings.

¶ 28 Reversed and remanded.

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