Court Opinion

ID: 9226166
Source: CourtListenerOpinion
Date Created: 2022-11-28 16:02:20.366922+00
Date Added: 2024-06-11T17:12:45.570868
License: Public Domain

2022 IL 128012

                                         IN THE
                                SUPREME COURT
                                            OF
                          THE STATE OF ILLINOIS

                                    (Docket No. 128012)

              MONROE SHECKLER et al., Appellees, v. AUTO-OWNERS
                     INSURANCE COMPANY, Appellant.

                             Opinion filed November 28, 2022.

        JUSTICE HOLDER WHITE delivered the judgment of the court, with opinion.

        Chief Justice Theis and Justices Anne M. Burke, Neville, Michael J. Burke,
     Overstreet, and Carter concurred in the judgment and opinion.

                                         OPINION

¶1       The issue presented in this appeal is whether an insurer’s duty to defend or
     indemnify extends to the tenants of an insured property against a third-party
     negligence contribution claim when the tenants are not identified as persons insured
     under the policy. The circuit court held that defendant, Auto-Owners Insurance
     Company (Auto-Owners), owed no duty to defend or indemnify plaintiffs, Monroe
     and Dorothy Sheckler, the tenants of the insured property, against a third-party
     contribution claim brought against them in Tazewell County case No. 17-L-49. The
     appellate court reversed and remanded, finding an equitable extension of Dix
     Mutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314 (1992), under the facts of
     this case, required Auto-Owners to defend and, if appropriate, indemnify the
     Shecklers against the contribution claim. 2021 IL App (3d) 190500, ¶¶ 25, 41.
     Justice Holdridge specially concurred, writing separately to express his
     disagreement with Dix for the reasons set forth in Justice Heiple’s dissent therein
     (Dix, 149 Ill. 2d at 326-30 (Heiple, J., dissenting)) but recognized Dix as controlling
     authority. 2021 IL App (3d) 190500, ¶ 48 (Holdridge, J., specially concurring).
     Presiding Justice McDade dissented, concluding “an insurer’s duty to defend [or
     indemnify] does not extend to the tenants of the insured property against a third-
     party negligence contribution claim when the tenants are not identified—or
     identifiable—as persons insured under the policy.” Id. ¶ 63 (McDade, P.J.,
     dissenting). For the following reasons, we reverse the appellate court’s judgment
     and affirm the judgment of the circuit court.

¶2                                    I. BACKGROUND

¶3                              A. Lease and Insurance Policy

¶4       On August 6, 2015, the Shecklers rented a residential property at 2205
     Valentine Avenue in Pekin, Illinois, from Ronald McIntosh. McIntosh and the
     Shecklers entered into a lease agreement for the property that provided McIntosh
     “shall maintain fire and other hazard insurance on the premises only” and that the
     Shecklers “shall be responsible for any insurance they desire on their possessions
     contained in the leased premises.” The lease also contained an indemnification
     clause, which further exculpated McIntosh from any damages or injury occurring
     on the premises.

¶5       In compliance with the lease, McIntosh obtained an insurance policy from
     Auto-Owners, which included (1) first-party dwelling coverage and (2) third-party
     landlord liability coverage. The first-party dwelling coverage provided, in relevant
     part, coverage for fire damage to the premises. The third-party landlord liability
     coverage provided coverage for claims brought by third parties that the insured
     “becomes legally obligated to pay as damages because of or arising out of bodily

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       injury or property damage.” The third-party landlord liability coverage also
       provided a duty to defend any claim or suit for damages covered by the policy.
       However, the third-party landlord liability coverage excluded from coverage
       “property damage to property occupied or used by an insured or rented to or in the
       care of, any insured.” The policy declarations listed McIntosh and his wife as the
       only named insureds.

¶6         McIntosh stated he generally paid the property insurance for his multiple
       properties out of the rents received from the various renters. However, prior to
       renting the property to the Shecklers, McIntosh fully paid the annual premium on
       the insurance policy covering the property located at 2205 Valentine Avenue.
       McIntosh asserted no money received from the Shecklers was used to pay the
       annual premium on the insurance policy for the property located at 2205 Valentine
       Avenue.

¶7                                      B. Fire Incident

¶8         The rental property had a traditional gas stove and range. In late August 2015,
       the Shecklers notified McIntosh that the oven and burner on the gas stove were not
       working. McIntosh placed a service call with Wayne Workman, an appliance
       service technician. On August 26, 2015, Workman inspected the appliance and left
       the property to obtain a repair part. After Workman left, the Shecklers smelled gas.
       The Shecklers attempted to mask the odor by spraying a deodorizer before Monroe
       turned on the stove, which ignited, resulting in a fire that caused substantial
       property damage. As a result of the fire damage, McIntosh submitted a claim under
       the dwelling coverage provision of his insurance policy, and Auto-Owners paid
       McIntosh for damages incurred due to the fire and lost rental income.

¶9                                   C. Procedural History

¶ 10       After Auto-Owners paid McIntosh’s claim, Auto-Owners filed a subrogation
       action in McIntosh’s name against Workman in Tazewell County case No. 17-L-
       49, to recoup payment for the fire damage. Auto-Owners alleged Workman’s repair
       work was the proximate cause of the fire. In response, Workman filed a third-party
       complaint for contribution against the Shecklers. The Shecklers tendered their

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       defense against the contribution claim to Auto-Owners. In letters dated January 26,
       2018, and April 30, 2018, Auto-Owners declined to defend the Shecklers against
       the third-party contribution claim.

¶ 11       In July 2018, the Shecklers filed an amended complaint for declaratory
       judgment against Auto-Owners, McIntosh, and Workman in this case, Tazewell
       County case No. 18-MR-149, seeking a declaration of their rights under McIntosh’s
       insurance policy and asserting Auto-Owners had a duty to defend and indemnify
       them against the third-party contribution claim in Tazewell County case No. 17-L-
       49. Workman filed an answer and a counterclaim against Auto-Owners seeking
       coverage for the Shecklers.

¶ 12        In January and April 2019, the parties filed cross-motions for summary
       judgment. Both Workman and the Shecklers cited this court’s decision in Dix, 149
       Ill. 2d 314, to assert the Shecklers were coinsured under the Auto-Owners insurance
       policy for liability claims arising from the damages to the insured rental property.
       Workman and the Shecklers therefore argued Auto-Owners had a duty to defend
       the Shecklers against the third-party contribution claim in Tazewell County case
       No. 17-L-49. Auto-Owners argued the Shecklers were not insured under the
       insurance policy and thus Auto-Owners did not have a duty to defend or indemnify
       the Shecklers against the third-party contribution claim in Tazewell County case
       No. 17-L-49. In May 2019, the circuit court held a hearing on the cross-motions for
       summary judgment.

¶ 13       On August 2, 2019, the circuit court found, under a careful reading of Dix as it
       applied to this case, “Auto[-]Owners does not owe a duty to defend Sheckler.
       Sheckler is not being subrogated against. Sheckler is essentially being sued by the
       third party for negligence.” In an August 7, 2019, written order, the court entered
       summary judgment in favor of Auto-Owners and denied summary judgment for
       Workman and the Shecklers. The court stated, “Auto-Owners has no duty to defend
       or indemnify the Shecklers for the claims brought against the Shecklers in Tazewell
       County [c]ase [No.] 17-L-49.”

¶ 14       The Shecklers and Workman filed separate notices of appeal, which the
       appellate court consolidated. While this case was pending in the appellate court, a
       jury in Tazewell County case No. 17-L-49 returned a verdict for Workman in Auto-

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       Owners’ subrogation action against him. Workman subsequently filed a motion to
       voluntarily dismiss his appeal in this case, which the appellate court granted.

¶ 15       On the Shecklers’ appeal, the Third District reversed and remanded. 2021 IL
       App (3d) 190500. The court found that, under Dix and based on the facts in this
       case, the Shecklers were coinsured under Auto-Owners’ fire policy regardless of
       the policy language. Id. ¶ 24. The court based its finding on the fact that the
       Shecklers paid rent to McIntosh and reasoned that, as a practical reality, the rent
       amount accounted for the amount paid for insurance and served as reimbursement
       for the landlord. Id. Further, the court noted the lease stated McIntosh would obtain
       fire insurance on the premises while exculpating himself from liability for damage
       to the tenant’s personal property. Id. Accordingly, the court determined, based on
       Dix, Auto-Owners could not sustain a subrogation action against the Shecklers. Id.
       ¶ 25.

¶ 16       While the appellate court determined Auto-Owners could not sustain a
       subrogation action against the Shecklers, it stated, “the question presented here
       though is whether an equitable extension of Dix under these particular facts requires
       Auto-Owners to defend the Shecklers against the contribution claim.” Id. The court
       answered the question in the affirmative, finding Auto-Owners owed the Shecklers
       a duty to defend in this case. Id.

¶ 17        The appellate court determined this case involved a “subrogation action
       grounded in equity” and, absent Auto-Owners’ subrogation action, the Shecklers
       would not face the contribution claim, which was also equitable in nature. Id. ¶ 27.
       The court reasoned, “[i]n light of Dix and the terms of the lease, it would be an
       absurd outcome if the Shecklers are held liable for fire damage to the premises
       based on a claim grounded in equity to recover payments under a policy that they
       are coinsured.” Id. ¶ 29. Further, the court observed the Shecklers had to pay costs
       and attorney fees to defend themselves in a suit initially brought by their insurer to
       recover damages under a policy by which they were coinsureds. Id. ¶ 33.
       Ultimately, the court explained that a “[f]inding that Auto-Owners has a duty to
       defend its coinsured is the only reasonable mitigation against this absurdity under
       these facts.” Id. The court found the facts in Hacker v. Shelter Insurance Co., 388
       Ill. App. 3d 386 (2009), distinguishable from this case and Dix. 2021 IL App (3d)
       190500, ¶ 36. While the court acknowledged Hacker dealt with an insurer’s duty to

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       defend a tenant against a third-party contribution claim, the court found the injury
       in Hacker resulted from a fall, and the tenant in that case argued she was coinsured
       under the landlord liability policy, not a fire policy. Id. ¶ 37.

¶ 18       The appellate court also rejected Auto-Owners’ alternative argument that it had
       no duty to defend or indemnify the Shecklers even if they were coinsured because
       of the plain language of the insurance policy. Id. ¶ 39. The court stated, “Since 1992
       insurance companies insuring rental properties in this state know that a tenant is an
       implied coinsured with respect to fire damage to the insured premises.” Id.
       Accordingly, the court determined that, in situations like this, “the insurance
       company owes its coinsured not just a duty to refrain from suing it but also a duty
       to defend and, if appropriate, indemnify when someone else sues the coinsured to
       recover for fire damage to the insured structure.” Id. ¶ 41.

¶ 19       Justice Holdridge specially concurred, expressing his disagreement with Dix for
       the reasons set forth in Justice Heiple’s dissent therein but recognized Dix as
       controlling authority. Id. ¶ 48 (Holdridge, J., specially concurring).

¶ 20       Presiding Justice McDade dissented, stating, “The majority’s conclusion and
       holding are premised on a reading of Dix that goes well beyond the case’s narrow
       holding and are, therefore, misplaced. In fact, Dix has nothing to do with the issue
       before us.” Id. ¶ 50 (McDade, P.J., dissenting). Presiding Justice McDade found
       this court in Dix “expressly limited its holding to ‘the particular facts of [the] case’
       before it, which included the lease’s provision that the tenant would not be liable
       for any fire damage and the assumption that a portion of the rent would be used to
       purchase fire insurance.” Id. ¶ 55 (quoting Dix, 149 Ill. 2d at 323). Presiding Justice
       McDade determined nothing in this court’s reasoning in Dix asserted “a general
       rule that whenever tenants pay rent and their landlords insure the leased premises
       that the tenants are automatically coinsured under the insurance policy as a matter
       of law.” Id. Moreover, Presiding Justice McDade noted, here, McIntosh purchased
       the policy and paid the entire premium prior to leasing the property to the Shecklers.
       Id. ¶ 58.

¶ 21       Presiding Justice McDade asserted that, even if Dix had announced a new and
       different general rule, the decision expressly limited its application to the equitable
       right of subrogation and offers no authorization to apply such a rule when
       determining an insurer’s duty to defend or indemnify. Id. ¶ 56. Presiding Justice

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       McDade stated, “Whether Auto-Owners has a duty to defend is the specific issue
       in the instant case, and it presents a question of law, not equity, to be answered
       based on the specific language of the insurance contract, not the lease.” Id.

¶ 22       Ultimately, Presiding Justice McDade concluded, as the appellate court did in
       Hacker, 388 Ill. App. 3d at 394, that “an insurer’s duty to defend does not extend
       to the tenants of the insured property against a third-party negligence contribution
       claim when the tenants are not identified—or identifiable—as persons insured
       under the policy.” 2021 IL App (3d) 190500, ¶ 63. Presiding Justice McDade found
       nothing in either the lease agreement or the insurance policy supported the
       imposition that Auto-Owners owed a duty to defend to the Shecklers. Id.

¶ 23      This court allowed Auto-Owners’ petition for leave to appeal. Ill. S. Ct. R.
       315(a) (eff. Oct. 1, 2021).

¶ 24                                      II. ANALYSIS

¶ 25        On appeal, Auto-Owners argues the appellate court erred by using McIntosh’s
       first-party dwelling policy to create and impose on Auto-Owners a duty to defend
       the Shecklers in a third-party liability suit, where (1) the dwelling policy does not
       identify the tenants as covered insureds, (2) the dwelling policy does not offer third-
       party liability coverage, and (3) the landlord’s actual third-party liability policy,
       which also does not identify the tenants as covered insureds, expressly excludes
       coverage for the allegations against the tenants. Auto-Owners asserts an insurer’s
       duty to defend is a question of law governed by the plain language of the insurance
       policy. See Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2d 23, 48
       (1987) (“The insurer’s duty to defend its insured arises from the undertaking to
       defend as stated in the contract of insurance.”); Valley Forge Insurance Co. v.
       Swiderski Electronics, Inc., 223 Ill. 2d 352, 363 (2006) (“To determine whether an
       insurer has a duty to defend its insured from a lawsuit, a court must compare the
       facts alleged in the underlying complaint to the relevant provisions of the insurance
       policy.”).

¶ 26      The Shecklers argue this court’s holding in Dix, 149 Ill. 2d at 323, made the
       Shecklers coinsured under the terms of the lease for losses paid by Auto-Owners
       pursuant to its policy. Therefore, the Shecklers argue they are entitled to protection
       from personal liability arising from their negligence that caused the fire losses paid

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       by Auto-Owners. The Shecklers appear to assert an entitlement to some sort of
       hybrid relief. They indicate Dix made them additional coinsureds as a matter of law
       under the lease provisions and the policy at issue. However, they also assert the
       central issue on appeal is whether this court’s decision in Dix is controlling and,
       like Dix, this is a subrogation case governed by equitable principles. See id. at 319.

¶ 27       Auto-Owners argues Dix and its equitable principles are irrelevant to an
       insurer’s duty to defend. See Hacker, 388 Ill. App. 3d at 391 (“The Dix court’s
       analysis of the equities of subrogation is not relevant in determining an insurance
       company’s duty to defend.”).

¶ 28                                  A. Standard of Review

¶ 29       “When the parties file cross-motions for summary judgment, they agree that
       only questions of law are involved and invite the court to decide the issues based
       on the record.” State Farm Mutual Automobile Insurance Co. v. Elmore, 2020 IL
       125441, ¶ 19 (citing Bremer v. City of Rockford, 2016 IL 119889, ¶ 20). We review
       summary judgment orders de novo. Id.

¶ 30                             B. Duty to Defend or Indemnify

¶ 31       The issue presented in this matter is whether Auto-Owners owes a duty to
       defend or indemnify the Shecklers against a third-party contribution claim. “To
       determine whether an insurer has a duty to defend its insured from a lawsuit, a court
       must compare the facts alleged in the underlying complaint to the relevant
       provisions of the insurance policy.” Valley Forge Insurance Co., 223 Ill. 2d at 363.
       “The duty to indemnify arises only when the insured becomes legally obligated to
       pay damages in the underlying action that gives rise to a claim under the policy.”
       Zurich Insurance Co., 118 Ill. 2d at 52.

¶ 32       Before we can determine whether Auto-Owners owes a duty to defend or
       indemnify the Shecklers against a third-party contribution claim, we must first
       determine whether the Shecklers were coinsured under the insurance policy. For
       purposes of this analysis, we view the insurance policy at issue to be one policy that
       includes multiple types of coverages.

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¶ 33       Auto-Owners argues that, when looking at the plain language of the insurance
       policy, the Shecklers were not coinsureds where the policy only named McIntosh
       and his wife as covered insureds. The Shecklers acknowledge they were not named
       as covered insureds under the insurance policy. However, the Shecklers argue that,
       under an equitable extension of Dix, they are considered additional insureds as a
       matter of law under the lease provisions and the insurance policy. Thus, we review
       this court’s analysis and holding in Dix.

¶ 34       In Dix, 149 Ill. 2d at 318, a tenant attempted to remove paint from the exterior
       of a leased residential property, causing fire damage and loss to the property. The
       landlord filed a claim with his insurance company pursuant to a fire insurance
       policy covering the leased premises. Id. The insurance company paid the landlord
       for the fire loss and subsequently filed a subrogation action against the tenant to
       recoup payment for the fire damage, alleging the tenant negligently caused the fire
       damage. Id. On appeal, this court addressed the issue of whether the insurance
       company had a right of subrogation against the tenant. Id.

¶ 35       The supreme court’s analysis focused on the equitable nature of subrogation.
       Id. at 319. This court stated that, in order to assert a subrogation right, the insurance
       company must “step into the shoes of” its insured. Id. Specifically, the court
       determined,

           “in the case at bar, the insurance company may assert a right of subrogation
           against the tenant for the fire damage if: (1) the landlord could maintain a cause
           of action against the tenant and (2) it would be equitable to allow the insurance
           company to enforce a right of subrogation against the tenant.” Id.

¶ 36       In looking at whether the insurance company could maintain a subrogation
       action against the tenant, this court noted, “a tenant is generally liable for fire
       damage caused to the leased premises by his negligence,” but the parties may agree
       to exonerate the tenant from liability under the terms of the lease. Id. The court
       looked to the terms of the lease “ ‘as a whole’ ” to conclude the parties did not
       intend for the tenant to be responsible for any fire damage to the leased premises.
       Id. at 320-21.

¶ 37       This court found that, under the terms of the lease, the tenant assumed the risk
       for his own personal property and, in the event of a fire, the landlord was exempt

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       from liability for damage to the tenant’s personal property, but the lease was silent
       as to who was responsible for fire damage to the leased premises. Id. at 321-22.
       Thus, this court determined “the parties intended for each to be responsible for his
       own property.” Id. at 322. This determination was further supported “by the
       landlord’s conduct in taking out a fire insurance policy to cover the leased
       premises.” Id. Accordingly, the intention of the parties indicated the tenant would
       not be liable for any fire damage to the premises and the landlord would look solely
       to the insurance policy as compensation for any fire damage to the premises. Id.

¶ 38       Moreover, this court cited the well-settled principle that “an insurer may not
       subrogate against its own insured or any person or entity who has the status of a co-
       insured under the insurance policy.” Id. at 323. Thus, “[u]nder the particular facts
       of this case, the tenant, by payment of rent, has contributed to the payment of the
       insurance premium, thereby gaining the status of co-insured under the insurance
       policy.” Id. Accordingly, this court held, “under the provisions of the lease as a
       whole, the reasonable expectations of the parties, and the principles of equity and
       good conscience, the insurance company cannot maintain a subrogation action
       against the tenant under the facts of this case.” Id.

¶ 39       We agree with Presiding Justice McDade’s dissent and find Dix is not
       applicable to this case. Dix is a subrogation case, which is governed by equitable
       principles. To “subrogate” means “[t]o substitute (a person) for another regarding
       a legal right or claim.” Black’s Law Dictionary 1726 (11th ed. 2019). When put
       into context, subrogation is defined as “[t]he principle under which an insurer that
       has paid a loss under an insurance policy is entitled to all the rights and remedies
       belonging to the insured against a third party with respect to any loss covered by
       the policy.” Id. The issue in this case does not involve the equitable principles of
       subrogation. While the underlying claim in Tazewell County case No. 17-L-49 was
       a subrogation action filed by Auto-Owners in McIntosh’s name against Workman
       to recoup payment for the fire damage to the premises, the underlying claim in
       Tazewell County case No. 17-L-49 against the Shecklers was a third-party
       contribution claim brought by Workman. Thus, this court’s holding in Dix is not
       relevant here where the issue is not one of subrogation but whether Auto-Owners
       owes a duty to defend or indemnify the Shecklers against Workman’s third-party
       contribution claim.

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¶ 40       Moreover, Dix is not applicable to this case, where this court in Dix expressly
       limited its holding to “the particular facts of [that] case.” 149 Ill. 2d at 323.

¶ 41       Having found Dix is not applicable, we look to the insurance policy to
       determine whether the Shecklers are coinsured for purposes of Auto-Owners’ duty
       to defend or indemnify under the policy. “A court’s primary objective in construing
       the language of an insurance policy is to ascertain and give effect to the intentions
       of the parties as expressed by the language of the policy.” Valley Forge Insurance
       Co., 223 Ill. 2d at 362. “If the words used in the policy, given their plain and
       ordinary meaning, are unambiguous, they must be applied as written.” Id. at 363.

¶ 42       When looking at the plain language of the policy, we find the Shecklers are not
       covered insureds under the policy. The policy declarations list McIntosh and his
       wife as the only named insureds. Further, the separate coverages in the policy both
       define the term “insured.” The dwelling coverage defines “insured” as “(a) you; (b)
       your relatives; and (c) any other person under the age of 21 residing with you who
       is in your care or the care of a relative.” The landlord liability coverage defines
       “insured” as follows:

          “[W]hen you are designated in the Declarations as: [(a)] an individual, you;
          [(b)] a partnership or joint venture, you, your partners, your members and their
          spouses; [(c)] a limited liability company, you and your members. Your
          managers are also insureds, but only with respect to their duties as such; ([d)]
          an organization other than a partnership, joint venture or limited liability
          company, you, your executive officers and directors.

              Any person (other than your employee), or any organization while acting as
          your real estate manager is also an insured, but only with respect to their duties
          as such.”

       The Shecklers are not identified as persons insured under the policy, and they do
       not fall under either definition of “insured.”

¶ 43       Moreover, we find the policy provisions make clear that only insureds are
       covered under the policy. The dwelling coverage provides coverage for fire damage
       to the covered premises and reimburses those insured for “accidental direct physical
       loss” to the property itself. The dwelling coverage relates entirely to the premises

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       and does not include a duty to defend or indemnify an insured against a third-party
       liability claim.

¶ 44       The landlord liability coverage provides a duty to defend and coverage for
       claims brought by third parties that “any insured becomes legally obligated to pay
       as damages because of or arising out of bodily injury or property damage.” The
       policy covers only those “insured” from third-party liability claims. However, even
       an insured is not covered under this provision where the third-party landlord
       liability coverage excludes from coverage “property damage to property occupied
       or used by an insured or rented to or in the care of, any insured.”

¶ 45       Accordingly, because the Shecklers are not covered insureds under the policy,
       they are not entitled to the coverage and protection afforded by the policy.
       Therefore, we conclude Auto-Owners does not owe a duty to defend or indemnify
       the Shecklers against a third-party contribution claim.

¶ 46                                  III. CONCLUSION

¶ 47      For the foregoing reasons, we hold an insurer’s duty to defend or indemnify
       does not extend to the tenants of an insured property against a third-party
       negligence contribution claim when the tenants are not identified as persons insured
       under the policy. We reverse the judgment of the appellate court and affirm the
       judgment of the circuit court.

¶ 48      Appellate court judgment reversed.

¶ 49      Circuit court judgment affirmed.

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