Title: Guillen v. Potomac Insurance Co.
Citation: N/A
Docket Number: 92056
State: Illinois
Issuer: Illinois Supreme Court
Date: January 24, 2003

Docket No. 92056-Agenda 27-January 2002.
DENISE GUILLEN, a Minor, by Suamy Guillen, Her Father and
Next Friend, Appellee, v. POTOMAC INSURANCE COMPANY
								 OF ILLINOIS, Appellant.
Opinion filed January 24, 2003.
 
	CHIEF JUSTICE McMORROW delivered the opinion of the
court:
	Two principal issues are presented in this case: (1) whether an
insurer who mails notice to its insured of a material change in an
insurance policy, as required under section 143.17a(b) of the
Illinois Insurance Code (215 ILCS 5/143.17a(b) (West 1992)),
must maintain proof of the mailing on a recognized "U.S. Post
Office" (hereinafter, Postal Service) form or form acceptable to the
Postal Service or other commercial delivery service; and (2)
whether the plaintiff, by virtue of an assignment given by the
insured in this case, obtained a right to indemnification from the
defendant insurance company.



BACKGROUND
	In May 1996, the plaintiff, Denise Guillen, a minor, by her
father and next friend, Suamy Guillen (Guillen), filed a complaint
against her former landlords, Ezequiel and Maria Ortiz, in the
circuit court of Cook County. In her complaint, Guillen alleged
that she was a tenant in an apartment owned by the Ortizes for
approximately the first two years of her life, from October 19,
1993, until September 1995. During this time, Guillen alleged, she
was exposed to deteriorating lead-based paint and paint dust,
which was present in the apartment. Guillen asserted that, as a
result of this exposure, she suffered severe lead poisoning and
permanent developmental injuries. Guillen further alleged that her
injuries were proximately caused by the Ortizes' negligent failure
to inspect for or remove the lead-based paint.
	Shortly after receiving Guillen's complaint, the Ortizes
tendered Guillen's claims to their insurer, defendant Potomac
Insurance Company of Illinois (Potomac). Potomac refused the
tender and denied any obligation to defend or indemnify the
Ortizes. According to Potomac, an endorsement that had recently
been added to the Ortizes' commercial liability policy contained
a lead exclusion which precluded coverage for Guillen's claims.
After refusing the tender and denying coverage, Potomac took no
further action with respect to Guillen's complaint. Potomac did
not defend under a reservation of rights or file suit seeking a
declaration of the rights of the parties.
	In July 1997, Guillen and the Ortizes entered into a settlement
agreement. Under the terms of the settlement, the Ortizes agreed
to pay Guillen the sum of $600,000 in exchange for a release from
liability for any claims relating to Guillen's lead poisoning.
Importantly, however, the Ortizes' obligation to pay the $600,000
was subject to the condition that it would "be satisfied solely
through the assignment" to Guillen of the Ortizes' right to
payment from Potomac. The assignment of the Ortizes' right to
payment from Potomac was included within the terms of the
settlement agreement. No other payment obligation was imposed
upon the Ortizes and no judgment was entered against them.
	In March 1998, Guillen, as the assignee of the rights of the
Ortizes, filed an amended declaratory judgment complaint against
Potomac in the circuit court of Cook County. In this action, which
is the subject of the instant appeal, Guillen sought a declaration
that Potomac was obligated to pay Guillen the $600,000 settlement
amount agreed to by the Ortizes. Potomac filed an answer to
Guillen's complaint in which it raised numerous affirmative
defenses. The parties thereafter filed cross-motions for summary
judgment.
	In her motion for summary judgment, Guillen alleged that
Potomac had failed to comply with the statutory notice
requirements that governed the addition of the lead exclusion.
Guillen argued that, under section 143.17a(b) of the Illinois
Insurance Code (Code) (215 ILCS 5/143.17a(b) (West 1992)),
when an exclusion that materially alters insurance coverage is
added to a renewal insurance policy, the insurer must give the
policyholder 60 days written notice and must "maintain proof of
mailing or proof of receipt [of notice]" to make the alteration
effective. Guillen contended that Potomac had failed to maintain
the required proof of mailing or proof of receipt and, as a result,
could not establish that the Ortizes had been notified of the change
in coverage affected by the lead exclusion. Thus, according to
Guillen, the lead exclusion never became part of the Ortizes'
insurance policy. Because the lead exclusion was not part of the
Ortizes' insurance policy, Guillen maintained that Potomac had
breached its duty to defend and should be estopped from raising
policy defenses to coverage for Guillen's claims against the
Ortizes. Finally, Guillen alleged that Potomac's wrongful refusal
to defend made it responsible for any reasonable settlement
amount agreed to by the Ortizes. And, since the Ortizes had
assigned to Guillen their right to recovery from Potomac, Guillen
argued that she was entitled to recover the $600,000 settlement
amount from Potomac.
	In its motion for summary judgment, Potomac disputed
Guillen's contention that it had not provided proper notice to the
Ortizes regarding the addition of the lead exclusion. Potomac
argued that it had notified the Ortizes in writing about the lead
exclusion 75 days prior to renewal and that it had maintained
sufficient proof of mailing. In support of this contention, Potomac
provided the circuit court with an unsigned copy of a letter which
was purportedly sent to the Ortizes, and an affidavit from an
employee of Potomac that described Potomac's custom and
practice with respect to mailing notices of material changes in
insurance policies to its insureds.
	Potomac additionally argued in its motion for summary
judgment that, even if it had breached its duty to defend, it was not
required to pay the $600,000 settlement amount agreed to by the
Ortizes. According to Potomac, it was under no obligation to pay
Guillen because the Ortizes' assignment to Guillen of their right
to recovery against Potomac was invalid. Potomac pointed out that
under the terms of the Ortizes' insurance policy, Potomac was
required to pay "those sums that the insured becomes legally
obligated to pay as damages." Potomac argued that the Ortizes
were never "legally obligated" to pay anything under the terms of
the settlement agreement with Guillen. In support of this
contention, Potomac noted that, since the Ortizes' payment
obligation under the settlement agreement was limited solely to an
assignment of the Ortizes' right to recover under their insurance
policy, the Ortizes were never personally obligated to pay any
money and, indeed, were never placed in any personal financial
risk by the agreement. Potomac argued, therefore, that the Ortizes
were not "legally obligated" to pay damages to Guillen in any
practical sense of the term and, thus, had no right to
indemnification from Potomac. Potomac further noted that
Guillen, as the assignee of the Ortizes' rights against Potomac,
"stood in the shoes" of the Ortizes. Therefore, Potomac argued,
since the Ortizes had no right to recover from Potomac, neither did
Guillen.
	In a written order dated June 26, 2000, the circuit court found
that, with respect to the lead exclusion, Potomac had not satisfied
the notice requirements of section 143.17a(b) of the Code. The
court concluded that the unsigned letter and employee affidavit
offered by Potomac failed to show that Potomac had "maintain[ed]
a contemporaneous proof of mailing" as required under the statute.
The court further reasoned that, because of Potomac's failure to
comply with the notice requirements of the Code, the lead
exclusion never became a part of the Ortizes' insurance policy.
Consequently, the circuit court found that Potomac had a duty to
defend the underlying lawsuit brought by Guillen, that Potomac
had breached that duty, and that Potomac was estopped from
raising policy defenses to coverage.
	The circuit court further found, however, that Guillen had
failed to establish the elements of a prima facie claim for
indemnification against Potomac. The circuit court concluded that,
because the Ortizes' payment obligation under the settlement was
limited to the assignment, the Ortizes had not "incurred any
liability for damages with respect to the Guillen lawsuit" and
therefore had no right to assert a cause of action for indemnity
against Potomac. The circuit court also noted that Guillen, as the
assignee of the Ortizes' rights against Potomac, could have no
greater claim against Potomac than the Ortizes themselves had.
Thus, because Potomac owed no duty to indemnify the Ortizes, the
court concluded that Potomac was not liable to Guillen. The
circuit court therefore granted Potomac's motion for summary
judgment.
	On appeal, the appellate court reversed the circuit court's
grant of summary judgment in favor of Potomac. 323 Ill. App. 3d
121. Initially, the appellate court addressed whether Potomac had
established that it provided the Ortizes with notice of the lead
exclusion. In deciding whether Potomac had adhered to the notice
requirements of section 143.17a(b) with respect to the lead
exclusion, the appellate court turned to subsection (a) of the
statute, which governs an insurer's notice obligations when it
chooses not to renew an insurance policy. Subsection (a) states
that "proof of mailing" notice of nonrenewal shall be maintained
on "a recognized U.S. Post Office form or a form acceptable to the
U.S. Post Office or other commercial mail delivery service." 215
ILCS 5/143.17a(a) (West 1992). Subsection (b), which deals with
notice of a material policy change, also states that the insurer must
maintain "proof of mailing" but does not repeat the definition of
that term which is set forth in subsection (a). Concluding that the
words "proof of mailing" should be given the same meaning
throughout the statute, the appellate court held that an insurer who
attempts to prove that it mailed notice of a material policy change
under subsection (b) must show that it maintained proof of mailing
on a form acceptable to the Postal Service or other commercial
mail delivery service. Since Potomac failed to show proof of
mailing on such a form with respect to the lead exclusion, the
appellate court concluded, like the circuit court, that the exclusion
never became part of the Oritzes' insurance policy and that
Potomac had therefore breached its duty to defend. 323 Ill. App.
3d at 131.
	However, the appellate court reversed the circuit court's
holding that Guillen had failed to state a prima facie claim for
indemnification against Potomac. Potomac argued before the
appellate court, as it did in the circuit court, that because of the
nature of the settlement agreement between the Ortizes and
Guillen, the Ortizes were under no "legal obligation" to pay any
damages to Guillen. Therefore, according to Potomac, the Ortizes
had no right to indemnification from Potomac and had nothing to
assign to Guillen. The appellate court rejected these arguments and
held that the Ortizes had a right to indemnification from Potomac
and that they had properly assigned this right to Guillen. In so
holding, the appellate court emphasized that the issue of the
Ortizes' right to indemnification and the validity of their
assignment to Guillen could not be considered "in a vacuum" but
had to be considered in light of the fact that Potomac had breached
its duty to defend. 323 Ill. App. 3d at 135.
	Finally, the appellate court observed that courts have raised
concerns about the possibility of collusion between an insured and
an injured plaintiff who agree to settle a claim following an
insurer's breach of the duty to defend. 323 Ill. App. 3d at 132-33,
citing United States Gypsum Co. v. Admiral Insurance Co., 268
Ill. App. 3d 598, 637 (1994). Thus, the appellate court noted, an
insurer may challenge a settlement made in its absence-even
though the insurer's absence was caused by its own breach of the
duty to defend-on the basis that either the decision to settle or the
settlement amount was unreasonable. 323 Ill. App. 3d at 133.
Applying these principles to the case at bar, the appellate court
concluded that the Ortizes' decision to settle with Guillan was
made "in reasonable anticipation of liability" and was not subject
to challenge by Potomac. However, the appellate court remanded
the cause to the circuit court for a hearing to determine whether
the settlement amount agreed to by the Ortizes was reasonable.
323 Ill. App. 3d at 137-38.
	Potomac subsequently filed a petition for leave to appeal,
which we allowed (177 Ill. 2d R. 315).



ANALYSIS
	The circuit court's entry of summary judgment is subject to de
novo review. Outboard Marine Corp. v. Liberty Mutual Insurance
Co., 154 Ill. 2d 90, 102 (1992). The construction of an insurance
policy, which is a question of law, is also reviewed de novo.
American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 479-80
(1997).
	At the outset, Guillen acknowledges the general rule which
holds that, in the absence of a breach of the duty to defend, an
insured must obtain the consent of the insurer before settling with
an injured plaintiff. See, e.g., Thornton v. Paul, 74 Ill. 2d 132, 144
(1978); Alliance Syndicate, Inc. v. Parsec, Inc., 318 Ill. App. 3d
590, 600 (2000). Guillen concedes that in this case, if Potomac did
not breach its duty to defend the Ortizes, then the Ortizes' decision
to settle with Guillen has no binding effect upon Potomac.
Accordingly, we first consider whether Potomac breached its duty
to defend the Ortizes against Guillens' complaint.



Duty to Defend
	In determining whether an insurer owes its insured a duty to
defend, a court looks to the allegations contained in the underlying
complaint against the insured and compares those allegations to
the relevant coverage provisions of the insurance policy. Crum &amp;
Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384, 393 (1993). If the facts alleged in the underlying complaint
fall within or potentially fall within the coverage of the policy, the
insurer's duty to defendant is triggered. Outboard Marine, 154 Ill. 2d  at 108.
	As noted, the complaint at issue in this case was filed against
the Ortizes by Guillen in May 1996. In that complaint, Guillen
alleged that she suffered serious injuries after being exposed to
lead-based paint and paint dust in the Ortizes' apartment from
approximately October 19, 1993, to September 1995. The
complaint alleged that Guillens' injuries were caused by the
Oritzes' negligent failure to inspect for or remove the lead-based
paint.
	The relevant insurance policies in this case are commercial
general liability policies that were issued by Potomac to the
Ortizes from 1991 through 1994. The Ortizes' initial insurance
policy was issued by Potomac for the period of October 12, 1991,
to October 12, 1992. Two renewal policies were subsequently
issued for the period of October 12, 1992, to October 12, 1993,
and for October 12, 1993, to October 23, 1994.
	As it did in the courts below, Potomac maintains in this court
that it sent a letter to the Oritzes on July 28, 1993, in which it
notified them that a lead liability exclusion would take effect in
their October 12, 1993, renewal policy. The lead exclusion stated,
in pertinent part, that
		"This insurance does not apply to:
			1. 'Bodily injury', 'property damage', 'personal
injury', or 'advertising injury' arising out of, resulting
from, or in any way caused or contributed to by the actual,
alleged or threatened ingestion, inhalation, absorption of,
exposure to or presence of lead in any form emanating
from any source ***." (Emphasis in original.)
Potomac maintains that the lead exclusion clearly precluded
coverage for claims such as those brought by Guillen. Moreover,
according to Potomac, because the exclusion took effect on
October 12, 1993, and Guillen's complaint alleges that her injuries
began October 19, 1993, the underlying complaint did not fall
within the Ortizes' policy language. Accordingly, Potomac
contends that the Ortizes had no coverage and Potomac had no
duty to defend.
	Guillen maintains, however, that Potomac failed to comply
with the notice requirements of section 143a of the Code with
respect to the lead exclusion. Section 143a of the Code provides,
in pertinent part:
			"§143.17a. Notice of Intention Not to Renew. a. No
company shall fail to renew any policy of insurance ***
unless it shall send by mail to the named insured at least
60 days advance notice of its intention not to renew. The
company shall maintain proof of mailing of such notice
on one of the following forms: a recognized U.S. Post
Office form or a form acceptable to the U.S. Post Office
or other commercial mail delivery service. ***
			b. *** [N]o company may increase the renewal
premium on any policy of insurance *** by 30% or more,
nor impose changes in deductibles or coverage that
materially alter the policy, unless the company shall have
mailed or delivered to the named insured written notice of
such increase or change in *** coverage at least 60 days
prior to the renewal or anniversary date. *** An exact and
unaltered copy of such notice shall also be sent to the
insured's broker ***. The company shall maintain proof
of mailing or proof of receipt whichever is required."
(Emphases added.) 215 ILCS 5/143.17a(a), (b) (West
1992).
	Mirroring the reasoning of the appellate court, Guillen
contends that, under subsection (b) of section 143.17a, the term
"proof of mailing" must be defined as it is under subsection (a),
i.e., a form acceptable to the Postal Service or other commercial
mail delivery service which shows that notice was mailed.
Applying this definition, Guillen argues that Potomac has failed to
establish that it notified the Ortizes of the lead exclusion because
Potomac has not presented an acceptable form which shows that
the notice was mailed. Thus, Guillen contends that Potomac did
not satisfy the notice requirements of section 143.17a(b), that the
lead exclusion never took effect, and that Potomac breached its
duty to defend the Ortizes. We agree.
	Subsection (a) of section 143.17a defines an insurer's
obligation to provide notice to its insured when the insurer chooses
not to renew an insurance policy. Subsection (a) requires the
insurer to "maintain proof of mailing" of the nonrenewal notice on
"a recognized U.S. Post Office form or a form acceptable to the
U.S. Post Office or other commercial mail delivery service." 215
ILCS 5/143.17a(a) (West 1992). Subsection (b), which governs the
notice requirements for material changes to policies, repeats the
same words, "proof of mailing," found in subsection (a) but does
not repeat the definition set forth in subsection (a). However, this
court has held that, "[u]nder basic rules of statutory construction,
where the same words appear in different parts of the same statute,
they should be given the same meaning unless something in the
context indicates that the legislature intended otherwise."
McMahan v. Industrial Comm'n, 183 Ill. 2d 499, 513 (1998),
citing People v. Talbot, 322 Ill. 416, 422 (1926). Applying this
general rule, as the appellate court below did, leads to the
conclusion that the term "proof of mailing" should be given the
same meaning in both subsection (a) and subsection (b).
	Potomac does not dispute the general rule of statutory
construction set forth above but, instead, questions its application
in the case at bar. Potomac contends that, in this case, the context
of section 143.17a indicates that the legislature intended that a
different meaning of "proof of mailing" be applied in subsection
(b) from that found in subsection (a). Potomac maintains that a
material policy modification is a less serious transaction than a
policy nonrenewal because the latter leaves the insured without
any insurance whatsoever while the former does not. Thus,
Potomac argues, it is reasonable to conclude that the legislature
imposed less stringent notice requirements on insurers with respect
to material modifications than policy nonrenewals. Potomac
contends, therefore, that the term "proof of mailing" found in
subsection (b) is not limited to Postal Service forms or commercial
delivery forms but may also include other forms of proof such as
an insurer's custom and practice with respect to mailing. We
disagree.
	It is true, as Potomac notes, that subsection (b) of section
143.17a addresses material modifications to insurance policies
rather than policy nonrenewals. However, by definition, a material
modification to an insurance policy is one that makes significant
changes to that policy. Moreover, in most cases, the material
modification made by the insurer will not be a change that
increases coverage but, instead, will be a partial cancellation or
reduction in coverage for the insured. The material modification
may be equally as significant from the perspective of the insured
as a policy nonrenewal would be. Indeed, the attempted
modification at issue in this case, the lead exclusion, would be
significant from the Ortizes' point of view since it would have
eliminated coverage for an entire category of serious claims
brought against them.
	A material alteration of an insurance policy is an important
transaction that may have a serious effect on the interests of the
insured. Recognizing this, the legislature imposed the notice
requirements for material modifications to protect the insured from
cancellation or reduction of certain coverage without the insured's
knowledge. Given these facts, we cannot agree with Potomac's
contention that material policy modifications are, as a general
matter, so lacking in importance compared to policy nonrenewals
that the words "proof of mailing" should be read as having
different meanings under subsection (a) and subsection (b).
	We note, too, that there are other, affirmative, reasons to
conclude that the words "proof of mailing" should be given the
same meaning in both subsection (a) and subsection (b). For
example, one benefit provided by the simple, defined "proof of
mailing" standard found in subsection (a) is that it helps avoid
evidentiary disputes and wasteful litigation over whether notice of
the nonrenewal was actually provided the insured. By applying the
definition of "proof of mailing" found in subsection (a) to
subsection (b), that same benefit can be afforded to disputes
regarding notice of material modifications.
	In light of the above, we discern no compelling reason to
depart from the general rule which holds that when the same
words appear in different places in a statute they should be given
the same meaning. See McMahan, 183 Ill. 2d  at 513. We therefore
agree with the appellate court's determination that an insurer who
mails notice to its insured of a material change in an insurance
policy pursuant to section 143.17a(b) of the Code must maintain
proof of the mailing on a recognized Postal Service form or form
acceptable to the Postal Service or other commercial delivery
service.
	In the case at bar, it is undisputed that Potomac did not
maintain proof that it mailed the lead exclusion on a form
acceptable to the Postal Service or other commercial delivery
service. However, Potomac contends that this failure is of no
moment because the legislature has not provided a remedy for an
insurer's failure to comply with the notice requirements regarding
material modifications. In support of this contention, Potomac
points to subsection (c) of section 143.17a, the provision which
governs the remedies to be applied when the notice provisions of
section 143.17a are violated. Subsection (c) provides:
			"c. Should a company fail to comply with the notice
requirements of this Section, the policy shall terminate
only as provided in this subsection. In the event notice is
provided at least 31 days, but less than 60 days prior to
expiration of the policy, the policy shall be extended for
a period of 60 days or until the effective date of any
similar insurance procured by the insured, whichever is
less, on the same terms and conditions as the policy
sought to be terminated. In the event notice is provided
less than 31 days prior to the expiration of the policy, the
policy shall be extended for a period of one year or until
the effective date of any similar insurance procured by the
insured, whichever is less, on the same terms and
conditions as the policy sought to be terminated unless the
insurer has manifested its willingness to renew at a
premium which represents an increase not exceeding
30%." 215 ILCS 5/143.17a(c) (West 1992).
	Potomac notes that subsection (c) does not expressly refer to
the notice requirements for material modifications or what remedy
should be afforded when an insurer fails to comply with those
requirements. Potomac contends, therefore, that the appellate court
"crafted an unenumerated remedy into subparagraph (c)" when the
court concluded that Potomac's failure to comply with the proof
of mailing requirement of subsection (b) meant that the lead
exclusion never became a part of the Ortizes' insurance policy.
	This court has previously recognized the importance of the
insurer's obligation to provide notice to its insured of changes that
materially diminish insurance coverage. See Ragan v. Columbia
Mutual Insurance Co., 183 Ill. 2d 342 (1998) (addressing section
143.14a). The notice requirements of the Code are not mere
technicalities, but are important provisions enacted by the
legislature to protect insureds from having significant changes
made to their insurance coverage without their knowledge. Ragan,
183 Ill. 2d  at 351. Further, where, as here, the legislature has
determined that a particular form of proof is required to prove
notice, the legislature has struck a public policy balance between
the needs of the insured and the insurer. By requiring a defined
"proof of mailing," the legislature helps secure the insured's right
to notification while, at the same time, imposing only "a very low
threshold of proof" upon the insurer. Ragan, 183 Ill. 2d  at 351-52.
Because of this policy determination, in these situations, "[t]here
is no alternative method for proving compliance with the proof of
mailing requirements other than to maintain the proof of mailing"
defined in the statute. Ragan, 183 Ill. 2d  at 351. Given the
importance attached to the notice requirements under the Code,
and the public policy considerations reflected in the legislature's
decision to define the specific notice requirements under
subsection (b), we reject Potomac's suggestion that no
consequences flow from an insurer's failure to comply with those
provisions.
	Both parties in the case at bar discuss the possibility that,
under subsection (c), when an insurer fails to give an insured
notice of a material modification to a renewal insurance policy,
then the remedy afforded is that the entire renewal policy is not
activated and the insured's previous insurance policy remains in
effect. We note that this remedy is not well suited to a violation of
the notice provisions pertaining to material modifications. If the
remedy of continuing the previous insurance policy were applied
to breaches of notice of material modifications, then the statutory
breach would void not just the modification but the entire renewal
policy as well. This would be true even though the statutory
violation had nothing to do with the renewal policy as a whole and
even though the insured otherwise had notice of the renewal
policy. Although the remedy of having the previous insurance
policy continue in effect is clearly required when an insurer
breaches the notice provisions for policy nonrenewals, we think it
unlikely that the legislature intended such a result for breaches
pertaining to policy modifications.
	Subsection (c) clearly provides that, when notice requirements
are not met with respect to the attempted nonrenewal of an
insurance policy, the nonrenewal does not take effect. We think it
reasonable to conclude that the legislature intended the same logic
to apply with regard to an attempted material policy modification.
That is, as both the appellate and circuit courts below determined,
when a notification requirement is not satisfied with respect to a
material modification to an insurance policy, the modification does
not take effect. Cf. Ragan, 183 Ill. 2d 342 (insurer's failure to
maintain proof of mailing of policy cancellation rendered that
cancellation invalid). We note that this result provides both an
incentive to the insurer to comply with the notice requirements of
subsection (b) and an appropriately tailored remedy to the insured
for an insurer's breach of those requirements.
	In the instant case, Potomac failed to maintain the "proof of
mailing" required under section 143.17a(b) when it attempted to
modify the Ortizes' insurance policy to add the lead exclusion.
Accordingly, that modification never became a part of the
insurance policy. Potomac therefore breached its duty to defend
the Ortizes from Guillen's claims and is estopped from raising
policy defenses to coverage. Clemmons v. Travelers Insurance
Co., 88 Ill. 2d 469, 475 (1981).


Validity of the Assignment
	Potomac next argues that, even if it breached its duty to
defend the Ortizes, it is entitled to summary judgment because the
assignment given by the Ortizes to Guillen is invalid. The
settlement agreement between Guillen and the Ortizes contains the
following provisions relating to the assignment:
			"1. Payment. Subject to paragraph 10 below [requiring
court approval of the settlement], Defendants will pay
Plaintiff the sum of $600,000.00, to be satisfied solely
through the assignment to Plaintiff reflected in Paragraph
2 below.
			2. Assignment. Defendant hereby assigns to Plaintiff,
to the fullest extent permitted by law or otherwise, all of
their rights to payment if any, from General Accident
Insurance ("General") under that certain Business Owners
Policy of insurance [ ] issued to Defendants MARIA G.
ORTIZ AND EZEQUIEL B. ORTIZ, by General, arising
out of the claims asserted against Defendants in the
Action or the settlement thereof." (Emphasis in original.)
	As it did in the lower courts, Potomac notes before this court
that an assignee "stands in the shoes" of the assignor and can have
no greater rights than those possessed by the assignor. Thus,
Potomac observes, for Guillen to state a prima facie claim for
indemnification against Potomac, she must first establish that the
Ortizes themselves possessed a right to indemnification. Potomac
contends that Guillen cannot meet this burden.
	Potomac points out that, under the terms of the Ortizes'
insurance policy, Potomac was required to indemnify the Ortizes
for those sums which they were "legally obligated to pay as
damages." Potomac does not dispute that, generally speaking, once
an insurer breaches its duty to defend, the insured may enter into
a reasonable settlement agreement without foregoing its right to
seek indemnification. See Outboard Marine, 154 Ill. 2d  at 128.
Potomac concedes that, in such a case, if the payment obligation
of the insured is not limited by an assignment, the settlement
agreement would create a legal obligation on the part of the
insured to pay damages.
	Potomac argues, however, that in this case, the Ortizes were
never "legally obligated" to pay damages under the terms of their
settlement agreement with Guillen because their payment
obligation was limited solely to an assignment of the Ortizes' right
to recover under their insurance policy. Potomac observes that,
because of the assignment, the Ortizes were never personally
obligated to pay any money and were never placed in any personal
financial risk. This is in contrast, Potomac notes, with a settlement
that does not contain such an assignment. In that situation, the
insured is placed in financial risk because, unless the insured can
prove the insurer breached the duty to defend, the insured will be
personally responsible for the amount of the settlement. Potomac
contends, however, that in this case, the assignment effectively
extinguished the Ortizes' legal obligation to pay damages.
Potomac maintains, therefore, that the Oritzes were not legally
obligated to pay damages in any real or practical sense of those
words, that they suffered no insurable loss, and that they had no
right to indemnification. Thus, since Guillen stands in the shoes of
the Ortizes, Potomac argues that she cannot state a prima facie
claim for indemnification.
	Potomac's argument regarding the validity of the Ortizes'
assignment presents a question: How should the "legally obligated
to pay" language be interpreted when an insurer breaches its duty
to defend? Although this is a question of first impression in this
court, numerous courts in other jurisdiction have considered it,
albeit in a somewhat different context from that presented here.
Most often, the interpretation of the "legally obligated to pay"
language has arisen when the insured and the injured plaintiff
enter into a settlement agreement consisting of a stipulated
judgment or consent judgment joined with a covenant not to
execute and an assignment of the insured's rights against the
insurer to the injured plaintiff. See generally C. Wood,
Assignments of Rights and Covenants Not to Execute in Insurance
Litigation, 75 Tex. L. Rev. 1373 (1997); J. Harris, Judicial
Approaches to Stipulated Judgments, Assignments of Rights, and
Covenants not to Execute in Insurance Litigation, 47 Drake L.
Rev. 853 (1999).
	When confronted by a settlement agreement consisting of a
stipulated judgment, an assignment and a covenant not to execute,
insurers have maintained, as Potomac does here, that the covenant
not to execute effectively extinguishes the insured's legal
obligation to pay since the insured "has no compelling obligation
to pay any sum to the injured party." Freeman v. Schmidt Real
Estate &amp; Insurance, Inc., 755 F.2d 135, 138 (8th Cir. 1985). The
majority of courts, however, have rejected this argument. See, e.g.,
47 Drake L. Rev. at 858 (the trend leans "overwhelmingly" to the
rule that the insured remains "legally obligated to pay" when the
settlement consists of a stipulated judgment, an assignment, and
a covenant not to execute); 75 Tex. L. Rev. 1373; Gainsco
Insurance Co. v. Amoco Production Co., 53 P.3d 1051, 1060-61
(Wyo. 2002) (collecting cases).
	The construction of the "legally obligated to pay" language
adopted by the majority of courts is a technical, rather than
practical, one. Courts accepting the conclusion that the insured
remains "legally obligated to pay" when the settlement consists of
a judgment, covenant not to execute, and an assignment hold that
a covenant not to execute is a contract and not a release. The
insured still remains liable in tort and a breach of contract action
lies if the injured party seeks to collect on the judgment. 47 Drake
L. Rev. at 858. Thus, under this construction, the insured is still
"legally obligated" to the injured plaintiff, and the insured retains
the right to indemnification from the insurer.
	The rationale supporting this technical construction of the
"legally obligated to pay" language is that "an insurer who has
abandoned the insured by refusing to defend a claim should not be
allowed to 'hide behind' the policy language." Gainsco, 53 P.3d 
at 1060-61 (and cases cited therein). Further, some courts have
observed that if the "legally obligated to pay" language were
construed in favor of the insurers, it would defeat the very purpose
of the settlement agreement entered into by the insured. See, e.g.,
State Farm Mutual Automobile Insurance Co. v. Paynter, 593 P.2d 948, 953 (Ariz. App. 1979). And, since the insured has the right to
protect itself after the insurer breaches its duty to defend, public
policy generally supports giving a technical construction to the
"legally obligated to pay" language. See, e.g., 75 Tex. L. Rev. at
1384. Thus, the prevailing view is that a liberal construction of the
words "legally obligated to pay" in favor of the insured is
appropriate, once the insurer has breached its duty to defend.
	We agree with the majority view regarding the construction
given the "legally obligated to pay" language. Once the insurer has
breached its duty to defend, it is in no position to demand that the
insured be held to a strict accounting under the policy language.
Fairness requires that the insured, having been wrongfully
abandoned by the insurer, be afforded a liberal construction of the
"legally obligated to pay" language.
	In the case at bar, the Ortizes agreed to pay Guillen the sum
of $600,000 to be paid solely from an assignment of the Ortizes'
rights against Potomac given to Guillen. Technically speaking, the
assignment did not release the Ortizes' from their obligation to pay
Guillen $600,000. Instead, it simply limited the assets against
which Guillen could collect the $600,000. The assignment did not
negate the payment obligation itself. It is true that, in practical
terms, the Ortizes never faced any personal financial risk under the
settlement agreement. However, because Potomac breached its
duty to defend, the Ortizes are entitled to have the "legally
obligated to pay" language liberally construed in their favor.
Applying that construction here, the Ortizes remained "legally
obligated to pay" under the terms of the insurance policy.
Accordingly, Potomac's argument that it has no duty to indemnify
the Ortizes, because the Ortizes had no "legal obligation to pay,"
fails.
	Potomac also attacks the validity of Ortizes' settlement with
Guillen based on public policy. Potomac argues that, in settlement
agreements such as the one at issue in the case at bar, the insured's
own money is never at risk and, therefore, the insured has no
incentive to contest liability or damages with the injured plaintiff.
According to Potomac, since the insured is essentially paying with
the insurer's money, the insured can, and will, agree to any amount
of damages the injured plaintiff requests. For this reason, Potomac
contends that settlements such as those at issue here create an
environment that fosters collusion and fraud. Thus, Potomac
maintains that the agreement between the Ortizes and Guillen
should be invalidated as against public policy.
			"In deciding whether an agreement violates public
policy, courts determine whether the agreement is so
capable of producing harm that its enforcement would be
contrary to the public interest. [Citation.] The courts apply
a strict test in determining when an agreement violates
public policy. J&amp;K Cement Construction, Inc. v.
Montalbano Builders, Inc., 119 Ill. App. 3d 663, 683
(1983). The power to invalidate part or all of an
agreement on the basis of public policy is used sparingly
because private parties should not be needlessly hampered
in their freedom to contract between themselves. First
National Bank v. Malpractice Research, Inc., 179 Ill. 2d 353, 359 (1997). Whether an agreement is contrary to
public policy depends on the particular facts and
circumstances of the case." Kleinwort Benson of North
America, Inc. v. Quantum Financial Services, Inc., 181 Ill. 2d 214, 226 (1998).
	Potomac's concern regarding the possibility of collusion in
the type of settlement agreement at issue in the case at bar is well
taken. See generally 75 Tex. L. Rev. at 1385-87 ("neither party [to
the settlement agreement] is motivated to seriously negotiate over
issues of damages and liability because the end goal is to structure
the deal so that the carrier, a nonparty to the agreement, pays");
State Farm Fire &amp; Casualty Co. v. Gandy, 925 S.W.2d 696 (Tex.
1996). Nevertheless, we do not find the concern regarding the
possibility of collusion compelling enough to warrant voiding the
instant settlement agreement. As a majority of courts have
recognized, the risk of collusion and fraud can be lessened in cases
such as those at bar, if not avoided altogether, by placing a
requirement upon the plaintiff to prove that the settlement it
reached with the insured was reasonable before that settlement can
have any binding effect upon the insurer. See generally 75 Tex. L.
Rev. 1373; 47 Drake L. Rev. 853.
	The criteria for establishing the reasonableness of a settlement
agreement in the present context varies somewhat among
jurisdictions. Ultimately, however, with respect to the insured's
decision to settle, the litmus test must be whether, considering the
totality of the circumstances, the insured's decision "conformed to
the standard of a prudent uninsured." (Emphasis added.) Rhodes
v. Chicago Insurance Co., 719 F.2d 116, 120 (5th Cir. 1983).
Similarly, with respect to the amount of damages agreed to, the
test "is what a reasonably prudent person in the position of the
[insured] would have settled for on the merits of plaintiff's claim."
Miller v. Shugart, 316 N.W.2d 729, 735 (Minn. 1982). This
involves a commonsense consideration of the totality of "facts
bearing on the liability and damage aspects of plaintiff's claim, as
well as the risks of going to trial." Miller, 316 N.W.2d  at 735. We
note that the burden of proving reasonableness is properly placed
upon the plaintiff both out of fairness, since the plaintiff was the
one who agreed to the settlement, and out of practicality, since, as
between the plaintiff and the insurer, the plaintiff will have better
access to the facts bearing upon the reasonableness of the
settlement. Further, we note that the insurer retains the right to
rebut any preliminary showing of reasonableness with its own
affirmative evidence bearing on the reasonableness of the
settlement agreement.
	Like the appellate court, we agree that the matter at bar must
be remanded to the circuit court for further proceedings bearing on
whether the settlement agreement between the Ortizes and Guillen
was reasonable under the circumstances. However, in certain
respects, we depart from the appellate court's holding regarding
the remand hearing. As noted, the appellate court in the case at
bar, looking primarily at the face of the complaint filed by Guillen
against the Ortizes, concluded that the Ortizes' decision to settle
with Guillen was reasonable as a matter of law and was not subject
to challenge by Potomac. Unlike the appellate court, we cannot
conclude that the face of the complaint filed by Guillen is
sufficient to establish, as a matter of law, that the Ortizes acted as
a prudent uninsured when they decided to settle with Guillen. We
note, too, that Potomac has not had an opportunity to present any
evidence on the issue of the reasonableness of the Ortizes'
decision to settle. Accordingly, we order that the judgment of the
appellate court is to be modified. On remand, the circuit court
shall consider both whether the Ortizes' decision to settle and
whether the amount of damages were reasonable.
	Finally, with respect to the reasonableness of the amount of
damages, we note that the appellate court below stated, as a
general proposition of law, that if the settlement amount falls
below the policy limits, "the settlement amount is upheld as
reasonable." 323 Ill. App. 3d at 137. This is too broad a standard
to apply in the context of settlement agreements such as those at
bar. The fact that the amount of damages agreed to is within the
policy limits does not, by itself, establish that the damages are
what a reasonably prudent person in the position of the insured
would have settled for on the merits of the plaintiff's claim.



CONCLUSION
	For the foregoing reasons, the judgment of the appellate court
is affirmed as modified. The cause is remanded to the circuit court
for further proceedings consistent with this opinion.



	Appellate court judgment affirmed as modified;
	cause remanded.



	JUSTICE RARICK took no part in the consideration or
decision of this case.