APPEAL from the Circuit Court of Winnebago County; the Hon.
FRED J. KULLBERG, Judge, presiding.
MR. PRESIDING JUSTICE MORAN DELIVERED THE OPINION OF THE COURT:
Rehearing denied November 18, 1971.
Aetna Insurance Company, a third party defendant, (hereinafter referred to as Aetna) appeals from a summary judgment entered on behalf of Preston Construction Company, a third party plaintiff (hereinafter referred to as Preston).
Preston, a sewer contractor, entered into an agreement with the City of Rockford, whereby it agreed to install water mains for the City. Pursuant to this contract, Preston, in December 1967, installed a water main which was to provide service for a department store under construction. On January 6, 1968, the water was turned on in the main. A defectively installed shut-off valve did not function properly, resulting in the escape of water which poured upon the construction site. Fragman Construction Company, the contractor who was building the store, (hereinafter referred to as Fragman) brought a two count complaint against Preston and the City seeking recovery for damages to the construction site caused by the water. Subsequently, Rockford was dismissed from the suit and Fragman filed an amendment to the complaint. Upon a bench trial Fragman received a judgment against Preston in the amount of $15,694.80 plus costs.
Preston had been issued a comprehensive general liability policy by Aetna which policy was in effect from October 1, 1967, until October 1, 1968. After Preston had been notified of the Fragman claim, it notified Aetna and demanded defense of the suit under the terms of the insurance contract. Aetna denied coverage, alleging that its investigation indicated that the damages occurred after Preston had completed its job and that the policy did not provide for completed operations insurance. After Fragman's suit was commenced, counsel for Preston tendered all of the pleadings to Aetna and demanded performance. Aetna again stated that there was no coverage and that it, consequently, did not have to provide a defense.
On May 8, 1970, after the judgment had been entered in favor of Fragman, Preston was granted leave to file a third party complaint against Aetna, alleging that Aetna was liable to Preston under the insurance policy. On July 27, 1970, Preston filed a motion for summary judgment, alleging: that the Fragman complaint stated a cause of action which was potentially covered by the Aetna policy; that, under Illinois law, if a complaint alleges facts which indicate potential coverage under a liability policy, the insurer has the duty to defend the action brought against the insured; that Aetna did not defend, even though there was potential coverage and consequently is now estopped from asserting non-coverage defenses. The motion for summary judgment was granted; Aetna was ordered to pay Fragman the amount of the judgment and to pay Preston its attorney's fees. Aetna appeals from that order.
• 1-3 The law in Illinois concerning the insurer's duty to defend a suit brought against an insured party is articulated in three principle cases. (Country Mut. Ins. Co. v. Murray (1968), 97 Ill. App.2d 61; McFadyen v. North River Ins. Co. (1965), 62 Ill. App.2d 164; Sims v. Illinois Nat. Cas. Co. of Springfield (1963), 43 Ill. App.2d 184.) These cases develop the rule that the insurer has the duty to defend the insured when a complaint has been filed against the insured and when the allegations in the complaint "state facts which bring the case within, or potentially within, the coverage of the policy * * *." (McFadyen v. North River Ins. Co., supra, 170-171.) Unless the complaint alleges facts which, if true, would exclude coverage, the potentiality of coverage is present and the insurer has a duty to defend. (Country Mut. Ins. Co. v. Murray, supra, 72.) This rule is based upon the principle that the insurer's duty to defend is broader than its duty to pay. If there is potential coverage but the insurer believes it has valid exclusionary coverage defenses, it must: (1) secure a declaratory judgment of its rights while defending the potential insured under a reservation of rights, or (2) defend the potential insured under a reservation of rights and adjudicate its coverage in a supplemental suit. (Country Mut. Ins. Co. v. Murray, supra, 73.) If the insurer refuses to defend or seek a declaratory judgment in a case where there is potential coverage, it is estopped from raising exclusionary defenses in a subsequent action against the carrier by the insured.
Consequently, the issue before us is whether Fragman's complaint, filed against Preston, alleged facts which brought the action within, or potentially within, the coverage of the Aetna policy. If potential coverage was present, Aetna breached its duty to defend and is estopped from raising any exclusionary coverage defenses, and summary judgment was properly entered in Preston's behalf, since there would be no material issues to be tried.
We must now examine the "four corners" of the complaint and the policy to determine if the contents of the complaint, when taken at face value, alleged a cause of action which is potentially covered by the policy. (Country Mut. Ins. Co. v. Murray, supra 71.) Count 1 of the complaint in part stated:
"6. That pursuant with its contract to the CITY OF ROCKFORD the said PRESTON CONSTRUCTION CO., INC., installed said 12 inch water main * * * to the premises in question, affixed a shut-off valve at the southerly terminus of said water main; that on or about January 6, 1968, the CITY OF ROCKFORD, without notice to PRESTON CONSTRUCTION CO., INC., turned the water into said main under such pressure that the shut-off valve installed by PRESTON CONSTRUCTION CO., INC., broke, slipped or separated from its intended connection. * * *
7. That at and prior to said time and place the defendant, PRESTON CONSTRUCTION CO., INC., was guilty of one or more of the following negligent acts or omissions, to-wit:
a) That it attached and affixed a shut-off valve to the 12 inch water main or an extension therefrom, in such manner that when subjected to water pressure it broke, slipped or separated from said main or extension, * * *
b) That it improperly attached said shut-off valve to water main * * *;
c) That it attached and connected a shut-off valve to said water main or extension without properly ...