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Murphy v. Urso

OPINION FILED DECEMBER 18, 1981.

JOYCE ANN MURPHY, APPELLEE,

v.

MARILYN URSO ET AL., APPELLANTS.



Appeal from the Appellate Court for the First District; heard there on appeal from the Circuit Court of Cook County, the Hon. Daniel P. Coman, and David A. Canel, Judges, presiding.

JUSTICE SIMON DELIVERED THE OPINION OF THE COURT:

Rehearing denied January 29, 1982.

These consolidated cases arose from the same incident — a traffic accident in which Joyce Murphy was injured when the van in which she was riding and which was traveling at excessive speed struck several parked cars. In cause No. 53547, Murphy sued the driver, James Clancey, and the van's alleged owners, Marilyn Urso, operator of the Edgewater Pre-school, and Edgewater Primary School, Inc. She alleged that Clancey was negligent and that he was acting as the agent of the other defendants. Subsequently, Murphy amended her complaint by adding a second count against Urso and her schools alleging wilful and wanton or negligent entrustment of the van to Clancey. The plaintiff obtained a default judgment against Clancey, then brought a garnishment action (cause No. 53425) against the Travelers Indemnity Company of Illinois and the Travelers Insurance Company (Travelers), Urso's business insurer.

The circuit court of Cook County granted summary judgment against Murphy on the grounds that Clancey was not operating the van within the scope of his employment and that Urso had not entrusted the use of the van to him. In the garnishment action, the court found that Travelers was estopped from denying insurance coverage of Clancey under Urso's policy, because Travelers had refused to defend the suit against Clancey. The appellate court reversed Urso's summary judgment and remanded the accident case for trial but affirmed the judgment, with one judge dissenting, against the insurer. (83 Ill. App.3d 779.) This court granted leave to appeal under Rule 315 (73 Ill.2d R. 315).

I

THE INSURANCE CASE: ARE THERE CONFLICTS OF INTEREST?

Chronologically, the first issue the various parties in these cases reached was whether Travelers had to defend Clancey in the suit filed against him by Murphy. The resolution of that issue is tied to the allegations of Murphy's complaint and the potential liability it presented. To best examine the issue it is necessary to explore the procedural background of the two cases.

Clancey did not respond to the initial Murphy complaint, and after the appropriate length of time had passed a $750,095 default judgment was entered against him. Ms. Murphy then filed her garnishment suit against Travelers seeking payment from the business insurance policy issued to Ms. Urso's schools. Ms. Murphy claimed in the garnishment action that Clancey was covered by the policy as a permissive user of the preschool's bus. Travelers tried to deny coverage of Clancey on this ground, but Ms. Murphy urged that Travelers was estopped from denying coverage because it had failed to defend Clancey, its insured, in the underlying suit.

The garnishment suit lay dormant until the circuit court granted summary judgment against Murphy in the underlying accident case. At that point both Ms. Murphy and Travelers moved for summary judgment in the garnishment action. Travelers argued that the judgment in the accident case settled the question of Clancey's authority to use the bus. But the circuit court held that Travelers was estopped from making any policy defenses and awarded the full amount of the default judgment, plus interest, to Ms. Murphy — a total of $854,000. This was in excess of the $100,000 policy limits.

The issue presented in this part of the appeal is whether Travelers was estopped from denying policy coverage. A guide to the levels of contention would be helpful in understanding the arguments and responses of Ms. Murphy and Travelers. First, she claimed that Travelers should pay the judgment against Clancey because, as the driver of the vehicle, he fell under its policy of insurance. Travelers responded that Clancey was not covered because he had no permission to use the bus at the time of the accident. Second, Ms. Murphy retorted that Travelers could not raise that defense because it had failed to provide Clancey with a defense in the accident case. It was therefore estopped from raising the question of permission and denying coverage. Travelers answered that it was not estopped because it had a conflict of interest with Clancey. Under existing Illinois law, such a conflict excused it from taking on Clancey's defense itself. Third, Ms. Murphy claimed that the conflict of interest did not prevent Travelers from determining whether there was permission and thus policy coverage in a declaratory judgment action, and that Travelers should have taken that route rather than simply declining to give Clancey a defense. Travelers answered that such an action was inappropriate for a case like this, because of the procedural shifts that would occur and because of the effect of collateral estoppel. Fourth, Ms. Murphy countered that she did not mind the procedural shifts and that collateral estoppel would not have operated in any event. Travelers disagreed. Such are the four levels of argument involved in this segment of the appeal, although skirmishes occur in addition on every level.

The first level of argument is quickly disposed of. If the policy extended to Clancey, Travelers would be liable; the reason is Clancey's negligence could not be realistically contested. Ms. Murphy, who stood in Clancey's shoes for purposes of the garnishment action, conceded that the accident occurred when Clancey slammed into parked cars while rounding a corner too wide and too fast. No other factor was involved in the accident except perhaps Clancey's sobriety — he and Ms. Murphy had spent 2 1/2 hours in a bar just before the accident. Here, therefore, the only question was policy coverage, and the parties clashed over whether Travelers would be permitted to raise its policy defense that Clancey was using the van without permission.

We thus move to the second level and begin our analysis of the case with the familiar general rule of estoppel. An insurer taking the position that a complaint potentially alleging coverage is not covered by a policy which provides that the insurer has the right and duty to defend any claims brought against the insured cannot simply refuse to defend the insured. It must defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage. If the insurer fails to do this, it is estopped from later raising policy defenses to coverage and is liable for the award against the insured and the costs of the suit, because the duty to defend is broader than the duty to pay. (Sims v. Illinois National Casualty Co. (1963), 43 Ill. App.2d 184, 199.) But, this case turns on an exception to the general rule. An insurer must decline to defend where there is a conflict of interest between it and the insured. (Thornton v. Paul (1978), 74 Ill.2d 132, 152; Maryland Casualty Co. v. Peppers (1976), 64 Ill.2d 187, 198-99.) Instead of participating in the defense itself, the insurer must pay the costs of independent counsel for the insured. (74 Ill.2d 132, 162; 64 Ill.2d 187, 199.) And, had Clancey requested a defense, Travelers would have been obligated to pay the costs. The starting point of analysis under either the general rule of estoppel or the exception is the same — the allegations of the complaint and the policy issued by the insurer. To these we turn.

Travelers issued a comprehensive insurance policy, including both general liability and automobile insurance sections, to the schools. The policy obligated the insurer to pay on behalf of the insured all damages due to bodily injury arising out of the use of, among other things, the van involved in the accident. The policy's coverage extended to persons using the van with permission of the named insured. Travelers was given the right and duty to defend any suits against the insureds.

Ms. Murphy filed her initial complaint on August 10, 1972. Characterizing Clancey as the agent of Ms. Urso and the preschool, she charged the defendants, including Clancey, with wilful and wanton or negligent conduct, primarily due to Clancey's driving. The default judgment against Clancey, who was served through the Secretary of State, was entered when he made no appearance.

Although an amended complaint was later filed which for the first time added a count alleging negligent entrustment, it was the first complaint that was on file when the failure to present any defense resulted in the default against Clancey. Thus it is that complaint alone to which we turn our attention. (La Rotunda v. Royal Globe Insurance Co. (1980), 87 Ill. App.3d 446, 452.) It alleged that Murphy's injury was caused by faulty driving of the preschool's bus by an agent — therefore one with permission — of the named insured. The complaint presented the issues of negligence, causation, and the relationship between Clancey and Urso. Of these, the relationship between Clancey and Urso — raising the question of whether Clancey had permission to use the van — was the principal contested issue. The complaint presented a case of potential coverage, and the general rule of estoppel was triggered. Travelers learned of the suit against Clancey when Ms. Urso tendered the preschool's defense to it, and it then had a duty to provide a defense to its insured, Clancey and the schools.

But which one? An analysis of the possibilities reveals the dilemma in which Travelers found itself. It controlled both defenses. To best defend the preschool, it would try to show that Clancey did not have permission to use the bus at the time of the accident. To do this, it had to show either that he had been discharged or in any event was not operating within the scope of his employment, or that he had no explicit or implicit approval to use the bus. This would sever any connection between the preschool and Clancey, place all the liability on Clancey, and exonerate the school. But to best serve Clancey, Travelers had to try to show that he did have permission to use the bus. This would spread the liability to the schools. It was in Clancey's interest, then, to show that he had not been fired and that his use of the bus was within the scope of his employment, or that he had received approval for the use of the bus to help Ms. Murphy move.

The interests of Ms. Urso's schools and Clancey in how the suit was to be defended were diametrically opposed, creating an ethical conflict for Travelers, which was charged with providing a full and vigorous defense to each. (See 79 Ill.2d, Code of Professional Responsibility, R. 5-105.) In order to defend either the schools or Clancey, Travelers had to resolve the conflict and pick a strategy of defense. How could it do so for one without harming the other?

But Travelers had an even more fundamental problem — the conflict between its own interests and Clancey's. If it could prove Clancey had not been negligent, or did not cause the accident, strategies which would probably be unsuccessful, Travelers could sidestep the conflict of interest and proceed with a defense of both the schools and Clancey. But failing that, Clancey's interest lay in siding with the plaintiff and shifting liability to Ms. Urso's schools so that the insurance would pay any judgment Ms. Murphy was awarded against Clancey. Travelers' interest lay in separating Clancey from the schools so that he would bear the entire liability. The balance hung, again, on what could be proved about permission — the scope of Clancey's employment and the extent of his approval to use the bus. The permission issue presented a fundamental conflict between the insurer and the putative insured (Clancey) whose interest it controlled. (See 79 Ill 2d, Code of Professional Responsibility, R. 5-101.) How could Travelers control Clancey's defense, acting on his behalf, when Travelers' interest would be best served by placing all the blame on Clancey?

The exception to the general rule of estoppel provided a way out of Travelers' ethical labyrinth. As stated above, it provides that, because of the serious ethical problems involved, the insurer facing a conflict of interest with its insured in the conduct of the insured's defense is not obligated or permitted to participate in the defense. (Thornton v. Paul (1978), 74 Ill.2d 132, 152; Maryland Casualty Co. v. Peppers (1976), 64 Ill.2d 187, 198.) Travelers had only to underwrite the costs of whatever defense Clancey chose to make. (74 Ill.2d 132, 152.) It makes no difference that here the conflict was with a putative insured instead of directly with the named insured, as in Thornton and Peppers. An argument over exclusion from policy coverage is, for these purposes, really no different from an argument over inclusion. The particulars of the conflict of interest do not matter, only the fact that there is a conflict at all. The insured has the right to be defended by counsel of his own choosing. A ruling that required an insured to be defended by what amounted to his enemy in the litigation would be foolish.

But the plaintiff, at the third level of argument, claims that the insurer should still have been estopped here, because she contends that this is not the kind of case the exception was created for. She asserts that while the conflict of interest may have foreclosed a defense under a reservation of rights, the insurer could still have resolved the question of coverage prior to choosing a strategy of defense by bringing a declaratory judgment action. This would have resolved whether Clancey had permission to use the van, and the reasons for the conflict with Clancey would have disappeared, allowing Travelers to then undertake his defense in the suit brought by Ms. Murphy. Because it did not seek a declaratory judgment and did not defend Clancey, the plaintiff asserts, Travelers should now be estopped from denying that Clancey was covered by the policy.

But a declaratory judgment action was not an acceptable vehicle here. Where the issues in an underlying suit and a declaratory judgment action are separable, deciding the question of coverage in a collateral proceeding prejudices no party. The situation changes when the issues are substantially the same, as in this case where the principal contested issue is Clancey's permission to use the van. (Note, Use of the Declaratory Judgment to Determine A Liability Insurer's Duty To Defend — Conflict of Interests, 41 Ind. L.J. 87, 106 (1965).) The doctrine of collateral estoppel would be applicable, and consequently the result of the declaratory judgment would be controlling in the underlying suit, especially on the issue of whether Urso and her schools could be held liable on the only theory alleged in the original complaint — agency. (Williams v. Madison County Mutual Automobile Insurance Co. (1968), 40 Ill.2d 404, 407.) Declaratory judgment would be only a forerunner of the accident trial, and would resolve nothing different.

There is no reason in such a case to require the insurer to engage in a useless and unnecessary exercise. Declaratory judgment in this setting would be premature. (Allstate Insurance Co. v. Gleason (1964), 50 Ill. App.2d 207, 215, cited in Maryland Casualty Co. v. Peppers (1976), 64 Ill.2d 187, 197.) It would also prejudice the insurer by forcing upon it, as plaintiff, the burden of proof. Normally an insurer is not forced to take on this burden, but has the option as well of electing instead to defend under a reservation of rights, an option that is closed to the insurer here because of the conflict of interest.

As Thornton put it:

"In such a proceeding, an issue crucial to the insured's liability in the personal injury action * * * would be determined in a purely ancillary proceeding with the plaintiff and defendant in the personal injury action both aligned on the same side as defendants in the declaratory judgment action. Also, the order and burden of proof would be oriented to and dictated by the declaratory judgment action and not by the primary litigation, the personal injury suit." (74 Ill.2d 132, 159.)

The plaintiff would also be prejudiced by losing the opportunity to control the venue and timing of the suit, an important consideration where court calendars are clogged. Because the doctrine of collateral estoppel would preclude relitigation of the only issue in the case which could realistically be contested, whether Clancey had permission to use the van when the accident occurred, Travelers should not have been required to institute a declaratory judgment action.

The plaintiff says that she would have accepted the procedural disadvantages. To buttress her contention that Travelers was obligated either to resolve the question of coverage through a declaratory judgment action or defend Clancey, she advances to the fourth and final level of argument, contending that collateral estoppel would not have operated here because the issues would not be the same in both proceedings.

She is mistaken. Collateral estoppel operates at least where there is an identity of parties and issues. (Smith v. Bishop (1962), 26 Ill.2d 434, 437.) Those requirements would have been satisfied here. The parties in a declaratory judgment action would have been the insurer, Ms. Murphy, Clancey, Ms. Urso and the schools. In the accident case the parties are the same except for the insurer. But because the insurer has the duty to control the defenses of its putative and named insured, it too would have been estopped by a declaratory judgment. (See Greenlee v. John G. Shedd Aquarium (1977), 66 Ill.2d 381, 385; Smith v. Bishop (1962), 26 Ill.2d 434, 439 (Schaefer, J., dissenting).) There was, therefore, identity of parties.

There was also identity of issues. A declaratory judgment action would have decided whether Clancey was covered by the policy. That depended on whether he had permission to drive the bus at the time of the accident, and would hinge on whether he had been fired, the scope of his employment if he had not been fired, and whatever approval he had obtained to use the bus to help Ms. Murphy move. The principal issue in the accident case was ...


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