Opinion ID: 149882
Heading Depth: 2
Heading Rank: 2

Heading: Complying with the duty to defend.

Text: The district court found no breach of the duty to defend because St. Paul timely filed a cross-motion and a counterclaim seeking a declaration that it did not have a duty to defend. Under Illinois law, an insurer has three options if it contests its duty to defend: (1) seek a declaratory judgment regarding its obligations before trial of the underlying action; (2) defend the insured under a reservation of rights; or (3) refuse either to defend or to seek a declaratory judgment at the insurer's peril that it might later be found to have breached its duty to defend and estopped from asserting defenses as to payment based on non-coverage. See, e.g., County Mut. Ins. Co. v. Olsak, 391 Ill.App.3d 295, 330 Ill.Dec. 433, 908 N.E.2d 1091, 1098 (2009). That is, if it declines to defend under a reservation of rights, to avoid estoppel, the insurer must file a declaratory action or answer and cross claim in an action against an insured. See, e.g., L.A. Connection v. Penn-America Ins. Co., 363 Ill.App.3d 259, 300 Ill.Dec. 169, 843 N.E.2d 427, 431 (2006) (collecting cases and deciding that the weight of Illinois authority holds that the insured may file the declaratory judgment action, even though contrary authority exists); Roman Catholic Diocese of Springfield in Ill. v. Md. Cas. Co., 139 F.3d 561, 565-66 (7th Cir.1998) (Illinois law). But see Supreme Laundry Serv., L.L.C. v. Hartford Cas. Ins. Co., 521 F.3d 743, 749 (7th Cir.2008) (Illinois law) (explaining, without citation, that because the insured instituted the declaratory action regarding coverage, the insurer was estopped from raising a policy defense). [6] St. Paul claims that it did not breach its duty to defend because the plaintiffs initiated a declaratory judgment action in February 2004, before St. Paul had time to finish its investigation of coverage of the amended complaint, tendered in January 2004. Moreover, St. Paul counterclaimed in June 2004, seeking a declaration that it owed no duty to defend before the case reached settlement, talks for which began in late 2004. Illinois courts have three tests to measure the timeliness of the declaratory action. It must be filed: (1) before the underlying action is resolved, see Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127, 237 Ill.Dec. 82, 708 N.E.2d 1122, 1138 (1999); (2) before settlement or trial is imminent, Westchester Fire Ins. Co. v. G. Heileman Brewing Co., 321 Ill.App.3d 622, 254 Ill.Dec. 543, 747 N.E.2d 955, 965 (2001) (finding no breach when declaratory judgment was filed 15 months before settlement); or (3) within a reasonable time of being notified of the underlying suit. L.A. Connection, 300 Ill.Dec. 169, 843 N.E.2d at 432-33 (timely when insurer cross-claimed 4 months after it denied insurance coverage); Sears, Roebuck & Co. v. Seneca Ins. Co., 254 Ill.App.3d 686, 194 Ill.Dec. 57, 627 N.E.2d 173, 178 (1993) (seven months not untimely). St. Paul satisfies all of these timeliness tests. Because St. Paul did not breach its duty to defend, we do not address the plaintiffs' arguments based on a breach.