Opinion ID: 8414601
Heading Depth: 2
Heading Rank: 4

Heading: The Consequences of TIAC’s Breach

Text: When TIAC breached its duty by denying a defense in 2009, it left its Insured high and dry. TIAC complains that Chicago Abstract did not “contest or object to TIAC’s coverage declination.” At oral argument, TIAC took the point one step farther, suggesting that because Chicago Abstract did not challenge its denial decision, TIAC was unaware “that there was any suggestion that there might be coverage under the policy.” Nonsense. Chicago Abstract placed TIAC on notice of its claim for coverage when it tendered the underlying complaints. TIAC cites no authority for the proposition that an insured must lodge an exception to a denial decision or follow up, begging for reconsideration. On the contrary, Illinois courts even excuse insureds from complying with otherwise non-negotiable policy duties after receiving denial letters. E.g., Owners Ins. Co. v. Seamless Gutter Corp., 356 Ill.Dec. 137, 960 N.E.2d 1260, 1271 (2011) (“[A]n insurer should not be allowed to assert a blanket denial of coverage and then assert the insured’s failure to provide proof of loss, since the law does not require the insured to perform what appeared to be a useless act.”); Jones v. Universal Casualty Co., 257 Ill.App.3d 842, 196 Ill.Dec. 397, 630 N.E.2d 94, 101 (1994) (same). When an insurer learns of a claim against its insured, the ball is in the insurer’s court. It may defend under a reservation of rights, or it may seek judicial input as to its obligations under the policy. But if it refuses to defend, it cannot then blame the insured for failing to win it over, particularly where — as here — the insured faces significant exposure and must make prompt and difficult decisions regarding litigation or settlement. Cf. Waste Management, Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill.2d 178, 161 Ill.Dec. 774, 579 N.E.2d 322, 334 (1991) (estoppel did not apply where insurers did not abandon insureds but instead (1) sent letters expressing concerns about coverage, (2) evaluated claims under express reservation of rights, and (3) subsequently sought declaratory judgment). Though TIAC did appear in the Coastal Funding action and file for declaratory relief in federal court five years later, those long-overdue actions cannot excuse its breach of duty back in 2009. By the time TIAC saw fit to intervene, 1st Funding had settled its claims against Chicago Abstract, which had also defaulted on multiple counts in the Coastal Funding case. “Where an insurer waits to bring its declaratory judgment action until after the underlying action has been resolved by a judgment or a settlement, the insurer’s declaratory judgment action is untimely as a matter of law.” Ehlco Liquidating Trust, 237 Ill.Dec. 82, 708 N.E.2d at 1138; cf. Korte Construction Co. v. American States Ins., 322 Ill.App.3d 451, 255 IlLDec. 847, 750 N.E.2d 764, 770 (2001) (“[T]he insurer must take some action to adjudicate the issue of coverage or undertake to defend the insured under a reservation of rights, and it must take that action within a reasonable time of a demand by the insured.”) (emphasis added). “The world is a dangerous and litigious place. People and businesses buy liability insurance in large part for peace of mind— the knowledge that if one is sued, the insurer will provide a legal defense.... ” CE Design Ltd. v. King Supply Co., 791 F.3d 722, 727 (7th Cir. 2015) (Hamilton, J., concurring). When an insurer breaches its duty to defend, “it’s not just any breach of contract. An insurer’s breach abandons its insured and deprives it of the peace of mind it has bought.” Id.; see also Pompa v. American Family Mutual Ins. Co., 520 F.3d 1139, 1146 (10th Cir. 2008) (“‘By purchasing insurance, the insured reasonably expects that he will not be required to furnish the cost of defending actions that facially fall within the terms of his policy.’ The insured will be deprived of the peace of mind that insurance promises if the insurer can refuse to defend the case, await developments, and then decide to reimburse the insured for defense costs only once it is clear that there was coverage.”) (citations omitted); Cates Construction, Inc. v. Talbot Partners, 21 Cal.4th 28, 86 Cal.Rptr.2d 855, 980 P.2d 407, 416 (1999) (“In general, insurance policies are not purchased for profit or advantage; rather, they are obtained for peace of mind .and security in the event of an accident or other catastrophe.”). Under Illinois law, an insurer that breaches its duty to defend and abandons its insured is estopped from later invoking policy defenses to indemnity. See Panfil v. Nautilus Ins. Co., 799 F.3d 716, 719 (7th Cir. 2015); Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., 771 F.3d 391, 400 n.6 (7th Cir. 2014). This Illinois rule of estoppel is strong stuff, but it is intended to protect insureds’ reasonable expectations of coverage when they most need it. Because TIAC breached its duty to its Insured, it is barred from asserting any policy defenses to coverage that might have applied otherwise. As a practical matter, this means TIAC is on the hook for the judgment or any reasonable settlement amount that the Claimants ultimately recover against TIAC’s Insured. See Delatorre v. Safeway Ins. Co., 370 Ill.Dec. 880, 989 N.E.2d 268, 276 (2013) (“When an insurer wrongfully refuses to defend [its insured], it is liable ... for breach of contract. The measure of damages for such a contractual breach is generally the amount of the judgment against the insured.”), citing Fidelity & Casualty Co. of New York v. Mobay Chemical Corp., 252 Ill.App.3d 992, 192 Ill.Dec. 191, 625 N.E.2d 151, 155 (1992); see also Guillen v. Potomac Ins. Co. of Illinois, 323 Ill.App.3d 121, 256 Ill.Dec. 51, 751 N.E.2d 104, 114 (2001) (“The measure of damages for ... a breach is generally the amount of the judgment against the insured or of a reasonable settlement, plus any expenses incurred.”), aff'd as modified, 203 Ill.2d 141, 271 Ill.Dec. 350, 785 N.E.2d 1 (2003). In the end, TIAC’s hasty abandonment of its Insured may cost it far more than it would have spent if it had simply honored its duty to defend. The judgment of the district court is AFFIRMED.