Court Opinion

ID: 3147536
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:33:02.62377+00
Date Added: 2024-06-11T08:37:05.724044
License: Public Domain

THIRD DIVISION
                                                                                 February 3, 2010

No. 1-08-3400

UHLICH CHILDREN’S ADVANTAGE                          )       Appeal from the Circuit Court
NETWORK and DARLENE SOWELL,                          )       of Cook County, Illinois
                                                     )
                Plaintiffs-Appellants,               )       No. 08 CH 4394
                                                     )
v.                                                   )       Honorable Rita M. Novak,
                                                     )       Judge Presiding
NATIONAL UNION FIRE COMPANY OF )
PITTSBURGH, PA, and AIG DOMESTIC                     )
CLAIMS, INC.,                                        )
                                                     )
                Defendants-Appellees.                )

       PRESIDING JUSTICE MURPHY delivered the opinion of the court:

       Plaintiffs, Uhlich Children’s Advantage Network (UCAN) and Darlene Sowell, filed a

complaint for declaratory judgment seeking a determination of whether defendants, National

Union Fire Insurance Co. of Pittsburgh and AIG Domestic Claims, had a duty to defend them in

underlying litigation and alleging breach of contract and a violation of section 155 of the

Insurance Code (215 ILCS 5/155 (West 2006)). The trial court dismissed plaintiffs’ complaint

on the basis that they failed to comply with the notice requirements of the policy. On appeal,

plaintiffs argue that defendants had an obligation to provide coverage for both of them in the

underlying suit.
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                                       I. BACKGROUND

                                      A. Insurance Policies

       AIG issued two insurance policies that insured UCAN and Sowell: one in effect from

July 1, 2004, through July 1, 2005 (first policy), and another in effect from July 1, 2005, through

July 1, 2006 (second policy). Both policies, which were “claims first made and reported”

policies, contained the following language:

       “COVERAGE A: INDIVIDUAL INSURED INSURANCE

               This policy shall pay on behalf of each and every Individual Insured Loss

       arising from a Claim first made against such Individual during the Policy Period

       or the Discovery Period (if applicable) and reported to the insurer pursuant to the

       terms of this policy for any actual or alleged Wrongful Act of the Organization,

       except when and to the extent that the Organization has indemnified the

       Individual Insured. The insurer shall, in accordance with and subject to Clause 8,

       advance Defense Costs of such Claim prior to its final disposition.

               ***

       COVERAGE C: ORGANIZATION ENTITY COVERAGE

               This policy shall pay on behalf of the Organization Loss arising from a

       Claim first made against the Organization during the Policy Period or the

       Discovery Period (if applicable) and reported to the insurer pursuant to the terms

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        of this policy for any actual or alleged Wrongful Act of the Organization. The

        insurer shall, in accordance with and subject to Clause 8, advance Defense Costs

        of such Claim prior to its final disposition.”

        “Individual insureds” include directors, officer, and employees of the organization. The

policies define a “claim” as “a civil, criminal, regulatory, or administrative proceeding for

monetary or non-monetary relief” that is commenced by service of a complaint or similar

pleading, return of an indictment, or receipt of filing of a notice of charges. A “wrongful act”

includes “any breach of duty, neglect, error, misstatement, misleading statement, omission or

act.”   “Related wrongful acts” are “wrongful acts” that are “the same, related or continuous” or

that “arise from a common nucleus of facts. Claims can allege Related Wrongful Acts regardless

of whether such Claims involve the same or different claimants, insureds or legal causes of

action.” Clause 6 provides that a single retention amount or deductible “shall apply to Loss

arising from all Claims alleging the same Wrongful Act or Related Wrongful Acts.”

        Clause 8 of the policies provides that “[t]he Insurer does not assume any duty to defend.

The insureds shall defend and contest any Claim made against them.” It further provides that

“[n]otwithstanding the foregoing, the Insureds shall have the right to tender the defense of any

Claim to the Insurer, which right shall be exercised in writing by the Named Organization on

behalf of all Insureds to the Insurer pursuant to Clause 7 of this policy. This right shall terminate

if not exercised within 30 days of the date the Claim is first made against an Insured, pursuant to

Clause 7 of the policy.”

        Clause 7 requires that notice to the insurer of a claim must be in writing. It further

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provides in relevant part:

               “A claim shall be considered to have been first made against an Insured

       when written notice of such Claim is received by any Insured, by the Named

       Organization on behalf of any Insured or by the Insurer, whichever comes first.

               (a) The Insureds shall, as a condition precedent to the obligations of the

       Insurer under this policy, give written notice to the Insurer of any Claim made

       against an Insured as soon as practicable and either:

                       (1) anytime during the Policy Year or during the Discovery Period

              (if applicable); or

                       (2) within 30 days after the end of the Policy Year or the Discovery

                Period (if applicable), as long as such Claim is reported no later than 30

             days after the date such Claim was first made against an insured.

                                                      ***

               (c) If during the Policy Period or during the Discovery Period (if

       applicable) the Insureds shall become aware of any circumstances which may

       reasonably be expected to give rise to a Claim being made against the Insureds

       and shall give written notice to the Insurer of the circumstances and the reasons

       for anticipating such a Claim, with full particulars as to dates, persons, and

       entities involved, then any Claim which is subsequently made against the Insureds

       and reported to the Insurer alleging, arising out of, based upon or attributable to

       such circumstances or alleging any Wrongful Act which is the same as or related

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       to any Wrongful Act alleged or contained in such circumstances, shall be

       considered made at the time such notice of such circumstances was given.”

                                           B. Leonard Claim

       On January 31, 2005, Andrew Leonard, a former UCAN employee, filed a charge with

the Equal Employment Opportunity Commission (EEOC) alleging that UCAN discriminated

against him in violation of the Americans With Disabilities Act of 1990 (ADA) (42 U.S.C.

§12101 (2000)). He amended his charge on July 13, 2005.

       Leonard received a right-to-sue letter in August 2005 with respect to the EEOC charge

against UCAN. On September 29, 2005, Leonard filed a complaint in the United States District

Court for the Northern District of Illinois against UCAN and Darlene Sowell, UCAN’s then-

executive vice-president of human resources. The federal complaint alleged that UCAN

discriminated against him in violation of the ADA and that both UCAN and Sowell retaliated

against him for exercising his rights under the Family and Medical Leave Act of 1993 (FMLA) (5

U.S.C. §6381 (2000)). UCAN received a copy of the complaint on October 10, 2005, and

“notified AIG” of the complaint on the same day. AIG acknowledged receipt of the complaint on

November 3, 2005, but on March 2, 2006, AIG stated that it would not provide coverage for

Leonard’s claims.

       On February 4, 2008, UCAN filed a complaint seeking a declaration that defendants had a

duty to defend them in the Leonard action and alleging breach of contract and a violation of

section 155. Defendants filed a motion to dismiss pursuant to section 2-615 of the Code of Civil

Procedure (735 ILCS 5/2-615 (West 2006)), arguing that the Leonard claim was first made on

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January 31, 2005, during the policy period of the first policy, but was not reported until the

policy period for the second policy. Defendants argued that because both policies provided that

only a claim made and reported during the first policy period was covered, the complaint should

be dismissed. The trial court dismissed the complaint, and this appeal followed.

                                               II. ANALYSIS

       A motion to dismiss pursuant to section 2-615 attacks the legal sufficiency of the

complaint. R & B Kapital Development, LLC v. North Shore Community Bank & Trust Co., 358
Ill. App. 3d 912, 920 (2005). A court reviewing an order granting a section 2-615 motion takes

all well-pled facts as true. R & B, 358 Ill. App. 3d at 920. On review of a section 2-615

dismissal, the court must determine whether the allegations of the complaint, when interpreted in

the light most favorable to the plaintiff, sufficiently set forth a cause of action on which relief

may be granted. R & B, 358 Ill. App. 3d at 920. A dismissal pursuant to section 2-615 is

reviewed de novo. Collins v. Superior Air-Ground Ambulance Service, Inc., 338 Ill. App. 3d
812, 815 (2003).

                                                 A. Estoppel

       A court’s primary objective in construing the language of an insurance contract is to

ascertain and give effect to the intent of the parties to the contract. American Service Insurance

Co. v. Pasalka, 363 Ill. App. 3d 385, 389 (2006). Courts should construe an insurance policy as

a whole and take into account the type of insurance purchased, the nature of the risks involved,

and the overall purpose of the contract. Crum & Forster Managers Corp. v. Resolution Trust

Corp., 156 Ill. 2d 384, 391 (1993). If the terms of the policy are clear and unambiguous, they

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must be given their plain and ordinary meaning. Pasalka, 363 Ill. App. 3d at 389. Conversely, if

the language in the policy is susceptible to more than one meaning, it is ambiguous and will be

construed strictly against the insurer. Pasalka, 363 Ill. App. 3d at 389. Courts should not strain

to find ambiguity in an insurance policy where none exists. Crum & Forster Managers Corp.,
156 Ill. 2d at 391.

        Claims-made and occurrence-based insurance policies insure different risks. “ ‘In the

occurrence policy, the risk is the occurrence itself. In the claims made policy, the risk insured is

the claim brought by a third party against the insured.’ ” Continental Casualty Co. v. Coregis

Insurance Co., 316 Ill. App. 3d 1052, 1062 (2000), quoting General Insurance Co. of America v.

Robert B. McManus, Inc., 272 Ill. App. 3d 510, 514 (1995).

                “Conventional liability insurance policies are ‘occurrence’ policies; they

        insure against a negligent or other liability-causing act or omission that occurs

        during the policy period regardless of when a legal claim arising out of the act or

        omission is made against the insured. Because of the indefinite future liability to

        which an occurrence policy exposes the insurance company, these companies now

        offer (also or instead) ‘claims made’ policies, which limit coverage to claims

        made during the policy period. The coverage is less, but so, therefore, is the cost.”

        National Union Fire Insurance Co. of Pittsburgh v. Baker & McKenzie, 997 F.2d
305, 306 (7th Cir. 1993).

        The purpose of a claims-made policy is to allow the insurance company to easily identify

risks, allowing it to know in advance the extent of its claims exposure and compute its premiums

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with greater certainty. Aetna Casualty & Surety Co. of Illinois v. Allsteel, Inc., 304 Ill. App. 3d
34, 40 (1999). A “claims made and reported” policy requires not only that the claim be first

made during the policy period, but also that it be reported to the insurer during the policy period.

Medical Protective Co. v. Kim, 507 F.3d 1076, 1083 (7th Cir. 2007). See also Graman v.

Continental Casualty Co., 87 Ill. App. 3d 896, 899 (1980).

       Plaintiffs argue that defendants owed both UCAN and Sowell a duty to defend because

the Leonard lawsuit falls within the coverage provided by the policies. Plaintiffs further argue

that because defendants breached their duty to defend, the estoppel doctrine precludes them from

asserting their policy-based “late notice” defenses.

       The general rule of estoppel provides that an insurer that takes the position that a

complaint potentially alleging coverage is not covered under a policy that includes a duty to

defend may not simply refuse to defend the insured. Employers Insurance of Wausau v. Ehlco

Liquidating Trust, 186 Ill. 2d 127, 150 (1999). “Rather, the insurer has two options: (1) defend

the suit under a reservation of rights or (2) seek a declaratory judgment that there is no coverage.

If the insurer fails to take either of these steps and is later found to have wrongfully denied

coverage, the insurer is estopped from raising policy defenses to coverage.” Ehlco, 186 Ill. 2d at

150-51. Because the estoppel doctrine applies only where an insurer has breached its duty to

defend, a court first “inquires whether the insurer had a duty to defend and whether it breached

that duty.” Ehlco, 186 Ill. 2d at 151.

       An insurer’s duty to defend, which is much broader than its duty to indemnify, is

generally determined by comparing the allegation of the underlying complaint against the insured

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to the language of the insurance policy. Outboard Marine Corp. v. Liberty Mutual Insurance

Co., 154 Ill. 2d 90, 107-08 (1992); American Country Insurance Co. v. James McHugh

Construction Co., 344 Ill. App. 3d 960, 970 (2003). In determining whether an insurer owes its

insured a duty to defend, the court must look to the allegations of the underlying complaint in

comparison to the relevant insurance policy provisions. Country Mutual Insurance Co. v.

Hagan, 298 Ill. App. 3d 495, 500 (1998). If the facts alleged in the underlying complaint fall

even potentially within the policy’s coverage, the insurer is obligated to defend its insured, even

if the allegations are groundless, false, or fraudulent. American Country Insurance Co. v. James

McHugh Construction Co., 344 Ill. App. 3d 960, 970 (2003). Because the insurer’s duty to

defend is broader than the duty to indemnify, it may be obligated to defend against causes of

action and theories of recovery that are not in fact covered by the policy. Illinois Masonic

Medical Center v. Turegum Insurance Co., 168 Ill. App. 3d 158, 162 (1988).

                                            1. Darlene Sowell

       We find that defendants had a duty to defend Sowell in the federal case brought by

Leonard. As an officer of the organization, Sowell was an “individual insured” under the

policies at issue in this case. Defendants argue that, similar to UCAN, Sowell was on notice that

she was likely to be sued when Leonard filed his amended EEOC charge. We note that the

EEOC amendment was made early during the second policy period and that Sowell gave

defendants notice of the claim later in the second policy period. Both the amendment and notice

occurred during the second policy period.

       Furthermore, neither the original EEOC charge nor the amended charge made a claim

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against Sowell for wrongful acts. While defendants argue that the amended charge’s mention of

the “Human Resources Vice President” put Sowell on notice, the EEOC charge alleging an ADA

violation could not have made such a claim against her, as ADA claims may not be brought

against officers of a corporation. See Albra v. Advan, Inc., 490 F.3d 826, 830, 834 (11th Cir.

2007), citing 42 U.S.C. §§12111(2), 12112(a) (2006). Because the claim against Sowell was

“first made” during the second policy period, when the federal lawsuit was filed, and UCAN

provided defendants notice the same day, also during the second policy period, the claim against

Sowell was covered by the second policy.

       Defendants cite American Center for International Labor Solidarity v. Federal Insurance

Co., 518 F. Supp. 2d 163 (D.D.C. 2007), for the idea that the failure to report a claim for a

wrongful act bars coverage for related wrongful acts; thus, according to defendants, UCAN's

failure to report the EEOC charge during the first policy period precludes coverage of Leonard's

federal lawsuit against Sowell. In American Center for International Labor Solidarity, the

insured received notice in August 2002 that a former employee filed a charge of discrimination.

The employee filed a second notice of charge in November 2002; the EEOC issued a right-to-sue

letter in September 2003; and in December 2003, the employee filed a lawsuit in federal court

against his former employer and its executive director. The former employer first notified its

insurance company of the claims of discrimination on January 20, 2004. The district court

rejected the employer’s argument that the insurer was obligated to cover the defense and

settlement costs associated with the lawsuit as it pertained to the executive director, since he was

not identified as a party to the EEOC charge of discrimination but was named in the lawsuit that

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the employee filed in federal court.

        The court found that the insurance company was not obligated to provide coverage for the

executive director. American Center for International Labor Solidarity, 518 F. Supp. 2d at 174.

The policy in that case specified that all “ ‘Interrelated Wrongful Acts of any Insured shall be

deemed one Loss, and such Loss shall be deemed to have originated in the earliest Policy Year in

which a Claim is first made against any Insured.’ ” American Center for International Labor

Solidarity, 518 F. Supp. 2d at 174. The policy defined “ ‘Interrelated Wrongful Acts’ ” as all “

‘causally connected Wrongful Acts.’ ” American Center for International Labor Solidarity, 518
F. Supp. 2d at 174. Because the EEOC charge and the lawsuit “arise out of the same causally

connected facts,” “there is only a single loss to be claimed under the Policy, and not a separate

‘claim’ as to [the executive director] individually.” American Center for International Labor

Solidarity, 518 F. Supp. 2d at 174.

        The pivotal difference between American Center for International Labor Solidarity and

this case is that the definition of “claim” in defendants’ policies does not state that all suits or

proceedings arising out of the same facts are a single “claim.” Indeed, there is no language in the

policies overtly establishing that related wrongful acts constitute one loss, unlike the provision in

American Center for International Labor Solidarity, 518 F. Supp. 2d at 174, providing that all “

‘Interrelated Wrongful Acts of any Insured shall be deemed one Loss, and such Loss shall be

deemed to have originated in the earliest Policy Year in which a Claim is first made against any

Insured.’ ” See Lodgenet Entertainment Corp. v. American International Specialty Lines

Insurance Co., 299 F. Supp. 2d 987 (D.S.D. 2003). Defendants want the instant policies to say

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that related wrongful acts constitute a single claim, but they simply do not. “An agreement

reduced to writing must be presumed to reflect the intention of the parties who signed it.”

Central Illinois Public Service Co. v. American Surplus Lines Insurance Co., 267 Ill. App. 3d
1043, 1048 (1994).

                                2. Uhlich Children’s Advantage Network

       Plaintiffs argue that because defendants had a duty to defend Sowell, they also had a duty

to defend UCAN, relying on International Insurance Co. v. Rollprint Packaging Products, Inc.,

312 Ill. App. 3d 998, 1011 (2000) (holding in the context of an occurrence policy that an

“insurer’s duty to defend extends to cases where the complaint contains several theories or causes

of action against the insured and only one of the theories is within the policy’s coverage and the

others may not be”). We disagree. In Williams v. American Country Insurance Co., 359 Ill.

App. 3d 128, 139 (2005), we found that the policy language “allows coverage to be excluded as

to one insured and remain in effect as to the other insured.” Had defendants not been estopped

under Ehlco, as we discuss below, they would have been permitted to represent Sowell only.

       Defendants, citing Graman, contend that “an additional element” must be considered in

determining whether a claim is potentially covered under a “claims made and reported policy,”

i.e., whether the claim was actually first made and reported as required by the policy. In

Graman, the defendant insurance company sold the plaintiff, an architect, a claims-made policy,

which required any claim against the plaintiff to be made during the period of the policy and be

reported to the insurer no later than 60 days after the end of the policy period. The plaintiff

performed work on a new school building, but in September 1973, the school notified him of

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problems with the roof. For four years, the plaintiff, contractor, and school district

unsuccessfully attempted to rectify the problem, and in October 1977, the school district filed a

lawsuit against the plaintiff. The plaintiff tendered the defense of the suit to the defendant, which

denied coverage, and the plaintiff filed a complaint for declaratory judgment. On appeal, the

court noted that the claims-made policy is characterized by coverage for acts discovered during

and brought to the attention of the insurer during the policy term. Graman, 87 Ill. App. 3d at

899. It concluded that “[i]t would appear that plaintiff is foreclosed from pressing his claim” that

the insurer owes him coverage, since the lawsuit “was not filed and [the insurer] did not receive

notification thereof until more than three years after the effective cancellation date.” Graman, 87
Ill. App. 3d at 900.

       The plaintiff argued, however, that there was a potential for coverage under the policy,

and since the defendant failed to defend it under a reservation of rights or to file a declaratory

judgment action, it was estopped from denying liability under the policy. The court disagreed,

finding that the time qualifications “control the coverage provision” and related “directly to the

coverage afforded under the policy.” Graman, 87 Ill. App. 3d at 901, 902. The court continued:

       “Plaintiff would excise the time clause from the contract, thereby allowing any

       insured who once owned such a policy to assert coverage no matter when it

       notified the insurer of such a claim. However, we do not believe the allegation of

       a situation which technically falls under the error, omission, or negligent act

       definition of coverage is all that is needed to show potentiality of coverage under

       the policy at issue here. The insured must notify the insurer of such a claim

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        within the time constraints listed in the policy or there is no coverage for the acts,

        omissions or negligent acts of the insured, no matter when they occurred.”

        Graman, 87 Ill. App. 3d at 902.

Because the plaintiff did not present the claim to the insurer within 60 days after the expiration of

the policy, no potential coverage existed. Graman, 87 Ill. App. 3d at 902.

        Citing Graman, defendants argue that under a “claims first made and reported” policy,

failure to timely notify the insurer is a condition precedent to coverage. However, Ehlco, decided

19 years after Graman, expressly rejected this argument:

                “The decisions recognizing an exception for late-notice defenses reason

        that an insured’s compliance with a notice provision in a liability insurance policy

        is a condition precedent to coverage. As a result, where the insured breaches the

        notice provision, that breach negates any duty to defend or indemnify on the

        insurer’s part. Furthermore, because the duty to defend has been negated, the

        general rule estopping the insurer from denying coverage where it breaches the

        duty to defend does not apply. *** We are not persuaded by this argument. To

        accept it would be to contradict long established law governing the insurers’ duty

        to defend and the consequences of breaching that duty.” Ehlco, 186 Ill. 2d at 152-

        53.

        Ehlco concluded that “there is no exception to the estoppel doctrine for late-notice

defenses” and held that “[i]f an insurer believes that it received notice too late to trigger its

obligations, it should defend its insured under a reservation of rights or litigate the matter in a

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declaratory judgment action.” Ehlco, 186 Ill. 2d at 154. Defendants argue that the holding in

Ehlco applies only to occurrence-based policies and therefore we should not hold that “claims

first made and reported” policies are subject to the estoppel doctrine. There is nothing in Ehlco

limiting the estoppel doctrine to occurrence-based policies. Indeed, Ehlco noted that, to the

extent that decisions recognizing an exception to the estoppel doctrine for late-notice defenses

“conflict with our holding, they are hereby overruled.” Ehlco, 186 Ill. 2d at 154.

         We agree with defendants’ argument that there are some instances in which an insurance

company may decline to defend an entity that claims to be an insured. In United Stationers

Supply Co. v. Zurich American Insurance Co., 386 Ill. App. 3d 88 (2008), the plaintiff, like

plaintiffs in the instant case, filed a declaratory judgment action alleging that the insurer breached

its duty to defend it in an underlying action and, thus, was estopped from raising policy defenses.

We concluded that the plaintiff in United Stationers was not an additional insured under the

policy, and in light of that finding, we did not reach the other issues raised by the plaintiff,

including the question of whether the insurer was estopped from raising policy defenses. United

Stationers, 386 Ill. App. 3d at 105-06. Implicit in our ruling was that before a court applies the

estoppel doctrine as elucidated in Ehlco, the purported insured must actually be an insured. In

the instant case, both plaintiffs were “insureds” of defendants under the language of the policy at

issue.

         Defendants correctly note that UCAN did not give them timely notice, as it received

notice of the EEOC charge during the first policy period but did not give defendants notice until

the second policy period, when Leonard filed his lawsuit in federal court. See Baker &

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McKenzie, 997 F.2d at 308, 309; Continental Casualty Co. v. Cuda, 306 Ill. App. 3d 340, 349

(1999) (“Coverage under plaintiff’s claims-made policy is triggered when two events occur: (1)

the claim must be made during the policy period, and (2) the claim must be reported during the

policy period. Unless the two conditions occur, no coverage is provided under the claims-made

policy” (emphasis in original)).

       However, once the insurer breaches its duty to defend, the estoppel doctrine “has broad

application and operates to bar the insurer from raising policy defenses to coverage, even those

defenses that may have been successful had the insurer not breached its duty to defend.” Ehlco,
186 Ill. 2d at 152. Accordingly, but for Ehlco, defendants would not have had a duty to defend

UCAN. However, there is no question that the first policy was in effect when UCAN received

notice of the EEOC charge and the second policy was in effect when Leonard filed his lawsuit

and UCAN notified defendants of the lawsuit. Consequently, Ehlco required defendants to either

represent plaintiffs under a reservation of rights or file a declaratory action. Ehlco, 186 Ill. 2d at

154.

       Defendants further contend that they did not assume a duty to defend under the policies.

Defendants argue that the duty to defend is a creature of contract (Conway v. Country Casualty

Insurance Co., 92 Ill. 2d 388, 394 (1982)), and the policies specifically provide, “The Insurer

does not assume any duty to defend. The insureds shall defend and contest any Claim made

against them.” Defendants recognize that the policies go on to say:

               “[T]he Insureds shall have the right to tender the defense of any Claim to

       the Insurer, which right shall be exercised in writing ***. This right shall

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        terminate if not exercised within 30 days of the date the Claim is first made

        against an Insured, pursuant to Clause 7 of the policy. *** Provided the Insureds

        have complied with the foregoing, the Insurer shall be obligated to assume the

        defense of the Claim even if such Claim is groundless, false or fraudulent.”

Defendants contend that the complaint does not allege, and there is no evidence in the record

suggesting, that UCAN tendered the defense in writing. We note, however, that plaintiffs

forwarded the federal Leonard complaint to defendants on October 10, 2005, the same day they

received it. AIG also admitted in its March 2, 2006, letter, that “this Claim was reported to

AIGDC on October 10, 2005.” We conclude that plaintiffs’ action in sending a copy of the

complaint to defendants complied with the requirements of Cincinnati Cos. v. West American

Insurance Co., 183 Ill. 2d 317, 328 (1998), which held that actual notice of a claim triggers the

insurer’s duty to defend.

        Defendants argue that estoppel should not apply in this case for the additional reason that

they actively sought a judicial determination of their rights and duties after plaintiffs filed their

complaint for declaratory relief. Defendants cite Village of Melrose Park v. Nautilus Insurance

Co., 214 Ill. App. 3d 864, 867 (1991). In Village of Melrose Park, the court held that the

insurer’s failure to bring the declaratory action was irrelevant, since it “sought, through a motion

for summary judgment, an adjudication of its rights and duties.” Village of Melrose Park, 214
Ill. App. 3d at 867. See also Waitzman v. Classic Syndicate, Inc., 271 Ill. App. 3d 246 (1995)

(insurer filed a motion for summary judgment seeking an adjudication of its rights under the

policy); but see County of Massac County v. United States Fidelity & Guaranty Co., 113 Ill. App.

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3d 35 (1983) (finding insurer estopped where it responded to the insured’s declaratory judgment

action by filing a motion to dismiss). Here, the insureds filed a complaint for declaratory

judgment two years after defendants denied their claim.

               “While there need not be a race to the courthouse and the insured should

       not be able to estop the insurer from asserting policy defenses by filing a

       complaint for declaratory judgment first, the 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.” Korte Construction Co. v. American States Insurance,

       322 Ill. App. 3d 451, 458 (2001).

Forcing the insureds to file a declaratory action two years after defendants denied their claim did

not constitute “a reasonable time of a demand by the insured.” Korte Construction Co., 322 Ill.

App. 3d at 458.

       Accordingly, we conclude that because defendants failed to either represent plaintiffs

under a reservation of rights or file a declaratory action, they are estopped from asserting their

late-notice defense. Ehlco, 186 Ill. 2d at 154. Consequently, defendants have a duty to defend

UCAN.

                                           B. Section 155 Claim

       Plaintiffs next argue that the trial court erred in dismissing their count based on vexatious

refusal to settle under section 155 of the Insurance Code (215 ILCS 5/155 (West 2006)). Section

155 of the Insurance Code provides that an insurer is liable for certain penalties when “there is in

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issue the liability of a company on a policy or policies of insurance or the amount of the loss

payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court

that such action or delay is vexatious and unreasonable.” 215 ILCS 5/155 (West 2006). Section

155 was enacted by the legislature to provide a remedy to an insured who encounters unnecessary

difficulties when an insurer withholds policy benefits. McGee v. State Farm Fire & Casualty

Co., 315 Ill. App. 3d 673, 680-81 (2000). “The attorney fees, costs, and limited penalty

provisions of section 155 are an extracontractual remedy intended to make suits by policyholders

economically feasible and punish insurance companies for misconduct.” McGee, 315 Ill. App.
3d at 681.

       The “key question” in a section 155 claim is whether an insurer’s conduct is vexatious

and unreasonable. McGee, 315 Ill. App. 3d at 681. An insurance company does not violate

section 155 merely by unsuccessfully litigating a dispute. Buais v. Safeway Insurance Co., 275
Ill. App. 3d 587, 591 (1995). In addition, section 155 does not create a duty to settle, and a delay

in settling a claim does not violate the statute if the delay results from a bona fide dispute

concerning coverage. McGee, 315 Ill. App. 3d at 681. “However, an insurer’s conduct may be

vexatious and unreasonable if the insurer refuses to settle and proceeds to arbitration or trial

without presenting a bona fide defense.” McGee, 315 Ill. App. 3d at 681.

       Plaintiff argues that “AIG’s refusal to cover the Leonard claims when examined in light

of AIG’s undisputed ‘actual notice’ of the claim against UCAN and Sowell may be sufficient

evidence” from which a trier of fact could find vexatious behavior on the part of both defendants.

Plaintiffs further contend that they made clear their disagreement with defendants’ decision to

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1-08-3400

deny coverage, and they invited defendants to participate in early efforts to settle the Leonard

claim.

         “An insurer’s delay in settling a claim will not be deemed vexatious or unreasonable for

purposes of section 155 sections where a bona fide dispute over coverage exists.” Baxter

International, Inc. v. American Guarantee & Liability Insurance Co., 369 Ill. App. 3d 700, 710

(2006); Young v. Allstate Insurance Co., 351 Ill. App. 3d 151 (2004). We conclude that section

155 damages are not appropriate, as there was a genuine dispute regarding coverage.

                                         III. CONCLUSION

         For the foregoing reasons, we reverse the dismissal of plaintiffs’ declaratory action but

affirm the dismissal of their claim based on section 155.

         Affirmed in part and reversed in part; cause remanded.

         QUINN and STEELE, JJ., concur.

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             1-08-3400

Please Use                        REPORTER OF DECISIONS – ILLINOIS APPELLATE COURT
Following                                   (Front Sheet to be Attached to Each Case)
Form:

Comple te
                         UHLICH CHILDREN’S ADVANTAGE NETWORK and DARLENE SOWELL,
TITLE
of Case                                                                                Plaintiffs-Appellants,

                         v.

                         NATIONAL UNION FIRE COMPANY OF PITTSBURGH, PA, and AIG DOMESTIC

                         CLAIMS. INC.,
                                                                                       Defendants-Appellees.

Docket No.                                                         Nos. 1-08-3400
                                                             Appellate Court of Illinois
COURT
                                                           First District, THIRD Division
Opinion
Filed                                                              February 3, 2010
                                                                (Give month, day and year)

                                PRESIDING JUSTICE MURPHY delivered the opinion of the court:
JUSTICES

                                Quinn   and Steele, JJ.,                                                        concur [s]

                                             Lower Court and T rial Judge(s) in form indicated in the margin:
APPEAL from
the Circuit Ct. of              The Honorable              Rita M. Novak                                , Judge Presiding.
Cook County,
Criminal Div.

                                        Indicate if attorney represents APPELLANTS or APPELLEE S and include
For                                          attorneys of counsel. Indicate the word NONE if not represented.
APPELLANTS,
John Doe, of
Chicago.                 Attorneys for Plaintiffs-Appellants:       James T. Derico, Jr. & Mary K. Schulz, of counsel
                                                                    Derico & Associates, P.C.
                                                                    77 W. Washington Street, Suite 500
                                                                    Chicago, IL 60602
                                                                    Phone: (312) 553-9253

                         Attorneys for Defendant-Appellee:          Zacarias R. Chacon, Leena Soni
                                                                    Lewis Brisbois Bisgaard & Smith LLP
                                                                    550 W. Adams Street, Suite 300
                                                                    Chciago, IL 60661
                                                                                   Phone: (312) 345-1718
For
APPELLEES,
Smith and Smith
of Chicago,
Joseph Brown,
(of Counsel)

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