Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79 C 3731 -- Marvin E. Aspen, Judge .
Before Pell and Wood, Circuit Judges, and Spears, Senior District Judge.*fn*
The plaintiff, Victor Maneikis, assignee of the insured, Manuel Solotke, appeals from the district court's grant of summary judgment in favor of the defendant insurance company, St. Paul Insurance Company of Illinois (St. Paul), and denial of the plaintiff's cross-motion for summary judgment. Jurisdiction is based upon diversity of citizenship.
The present case originated from a separate lawsuit filed by Maneikis against Solotke and two other persons on December 31, 1974, in federal district court. Maneikis charged the defendants in that suit with fraud, false representation, breach of fiduciary duty, and the violation of Solotke's duties as Maneikis' attorney. These charges allegedly arose out of Solotke's efforts to induce Maneikis to enter into an unpropitious licensing arrangement for the production and sale of carburetor performance boosters.
Solotke was insured by St. Paul under a professional liability policy which covered actions taken in his capacity as an attorney, but excluded liability for dishonest, fraudulent, criminal, or malicious acts or omissions. Solotke failed to notify St. Paul at the time Maneikis first filed suit apparently because Solotke believed that the acts charged fell within the policy's exclusions.
On June 20, 1978, Maneikis filed a pretrial memorandum which clearly indicated that he sought recovery on theories of fraud and simple malpractice. The following day, Solotke's attorney advised St. Paul of the lawsuit for the first time and requested St. Paul to defend Solotke. After reviewing the complaint and a portion of the pretrial memorandum, counsel for St. Paul informed Solotke by letter dated August 1, 1978, that the complaint did not allege acts covered by the policy. He further suggested that Solotke file a motion to strike that part of the pretrial memorandum referring to malpractice "as not conforming with the pleadings," and declared that "(t)his type of motion would not jeopardize Mr. Solotke's malpractice coverage." Finally, counsel for St. Paul requested that Solotke keep him informed of the progress of the case.
Solotke's attorney replied, on September 14, 1978, that he would not move to strike as the insurance company had suggested, but he welcomed St. Paul to enter into the case and make any motion it deemed appropriate to protect its interests. He further advised St. Paul that he would seek from St. Paul indemnification on behalf of Solotke and payment of fees incurred in Solotke's defense. The insurer, however, failed to answer or take any action in the case.
Solotke's counsel again got in touch with St. Paul on July 24, 1979, to report a proposed settlement agreement of $200,000 to be satisfied by a payment of $50,000 cash and the assignment to Maneikis of Solotke's rights against St. Paul under the professional liability policy. Solotke's attorney advised St. Paul that Solotke would conclude this settlement unless the insurer agreed to defend and indemnify Solotke according to the terms of the policy.
On August 2, 1979, St. Paul reiterated that it would neither defend nor indemnify Solotke, and for the first time asserted that Solotke's failure to give St. Paul timely notice as required by the policy precluded any rights he might have had under the policy. The company also claimed that the policy prohibited any assignment of rights to third parties without the consent of the insurer.
The parties subsequently executed the settlement agreement thereby dismissing Solotke from the suit.*fn1 On September 10, 1979, Maneikis filed the present lawsuit against St. Paul. Both parties filed motions for summary judgment.*fn2 The trial court granted St. Paul's motion and denied Maneikis' cross-motion.
In this appeal the plaintiff contests the court's findings that (1) St. Paul had not waived its right, nor was it estopped, to assert the late notice policy defense, and (2) Solotke failed to give timely notice which barred recovery. The insurer defends these findings and reasserts additional arguments not ruled upon by the district court.
Under well-settled Illinois law, only three options are available to a liability insurer requested to defend an insured against claims which the insurer believes exceed policy coverage. The insurer can (1) seek a declaratory judgment regarding its obligations before or pending 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. Once an insurer violates its duty to defend, it is estopped to deny policy coverage in a subsequent lawsuit by the insured or the insured's assignee.*fn3 See, e. g., Thornton v. Paul, 74 Ill.2d 132, 23 Ill.Dec. 541, 384 N.E.2d 335, 340 (1978); La Rotunda v. Royal Globe Insurance Co., 87 Ill.App.3d 446, 42 Ill.Dec. 219, 408 N.E.2d 928, 935 (1980); Murphy v. Clancy, 83 Ill.App.3d 779, 38 Ill.Dec. 863, 404 N.E.2d 287, 296-97, 298 (1980); Associated Indemnity Co. v. Insurance Co. of North America, 68 Ill.App.3d 807, 25 Ill.Dec. 258, 386 N.E.2d 529, 540 (1979); Reis v. Aetna Casualty & Surety Co., 69 Ill.App.3d 777, 782-83, 25 Ill.Dec. 824, 828-29, 387 N.E.2d 700, 704-05 (1978); Solo Cup Co. v. Federal Insurance Co., 619 F.2d 1178, 1184 (7th Cir.), cert. denied, 449 U.S. 1033, 101 S. Ct. 608, 66 L. Ed. 2d 495 (1980) (applying Illinois law). This equitable estoppel is based upon the principle that "the insurer has no right to insist that the insured be bound by the provisions of the insurance contract inuring to its benefit, ... when it has already breached the contract by violating the provisions inuring to the benefit of the insured ...." Sims v. Illinois National Casualty Co., 43 Ill.App.2d 184, 197, 193 N.E.2d 123, 129 (1963), quoted in Associated Indemnity, supra, 386 N.E.2d at 540. The estoppel arises at the moment the insurance company wrongfully refuses to defend. Murphy v. Clancy, supra, 38 Ill.Dec. 863, 404 N.E.2d at 298; Associated Indemnity, supra, 25 Ill.Dec. 258, 386 N.E.2d at 541; Sims, supra, 193 N.E.2d at 128-29.
The appropriate inquiry in a subsequent lawsuit against the insurer, therefore, is whether the insurer's initial refusal to defend breached the insurance contract. Since an insurer's duty to defend is broader than its duty to indemnify in Illinois, an insurer's refusal to defend is wrongful if the allegations in the underlying lawsuit are even potentially within the scope of the policy, see, e. g., La Rotunda, supra, 42 Ill.Dec. 219, 408 N.E.2d at 933; Solo Cup, supra, 619 F.2d at 1183, with any doubts as to coverage to be resolved in favor of the insured. La Rotunda, supra, 42 Ill.Dec. 219, 408 N.E.2d at 933; Reis v. Aetna Casualty, supra, 25 Ill.Dec. 824, 387 N.E.2d at 706. Even if recovery in the underlying suit is premised upon several theories of liability, some of which are excluded from policy coverage, the insurer still is obligated to defend if even one theory falls within the policy's coverage. Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 28 (1976); Solo Cup, supra, 619 F.2d at 1183.
In the case at bar, the district court found that Solotke's failure to notify St. Paul of the lawsuit against him in a timely fashion precluded recovery. Although the court acknowledged the existence of case law forbidding an insurer to raise policy defenses once it wrongfully refuses to defend its insured, the court applied what it identified as a second line of authority purportedly providing "that an insurer may waive a policy provision only if it possesses knowledge of all relevant facts, clearly expresses an intent to waive that provision, and the insured relies on the waiver to his detriment." The court found that the first two requirements of this test ...