Appeal from the Appellate Court for the Third District; heard
in that court on appeal from the Circuit Court of La Salle
County, the Hon. William P. Denny, Judge, presiding.
JUSTICE WARD DELIVERED THE OPINION OF THE COURT:
Rehearing denied November 24, 1982.
On December 4, 1973, the plaintiff, Philip A. Conway, was driving an automobile that collided with a vehicle operated by Hayfa Assalley. Ms. Assalley was injured in the accident. At the time of the accident Conway was insured under a family combination insurance policy issued by the defendant, Country Casualty Insurance Company (Country Casualty). The insurance policy had a bodily injury liability limit of $10,000 for each injured person and a property damage liability limit of $5,000 per accident. Country Casualty, under an advanced payment program, began to reimburse Ms. Assalley for expenses that were a direct result of her injuries and to compensate her for lost income. She received a total of $9,736.79 through October 24, 1974, on the advanced payment program. On February 19, 1975, Ms. Assalley filed suit against Conway for personal injuries she received. On March 11, 1975, Country Casualty and Ms. Assalley, with the approval of Conway, agreed that Country Casualty would pay Ms. Assalley a total of $10,742.35, representing the bodily injury liability limit of $10,000 under the policy and property damage of $742.35. The insurer paid Ms. Assalley $900.21 that day, completing its payment of $10,742.35. However, Ms. Assalley did not execute a release in favor of Conway or Country Casualty in exchange for the payment, and her personal injury suit against Conway remained in an active status. Subsequently, Conway requested Country Casualty to defend him in the suit. When Country Casualty refused, Conway obtained his own counsel. On January 3, 1977, a settlement was reached with Ms. Assalley, and Conway paid her an additional $10,000 in exchange for a release for himself and Country Casualty. Conway was given a statement by his attorney for $2,386.95 to cover his services in defense and settlement of the suit.
On January 6, 1977, Conway brought the action involved here against Country Casualty to recover the $10,000 and for attorney fees for both the suit for reimbursement and Ms. Assalley's suit against him. The circuit court of La Salle County, following a bench trial on a stipulation of facts, entered judgment in favor of Conway. The judgment was for $10,000, representing his settlement payment, plus $2,386.95 for attorney fees for defense of the personal injury action, and interest at the rate of 5% in the amount of $2,167.72. ($1,750 represented 5% on the additional $10,000 settlement and $417.72 represented 5% interest on the $2,386.95 of attorney fees.) The appellate court affirmed (97 Ill. App.3d 768) and we allowed Country Casualty's petition for leave to appeal. 73 Ill.2d R. 315.
The questions presented are: whether the insurer's payment to the extent of the liability limits of its policy to the claimant discharges its duty under the policy to defend its insured in the personal injury action; if not, whether the insured can recover the amount he pays in excess of the liability limits of the policy to settle a suit by the claimant; and, if the insurer's duty to defend is not discharged, whether the insured is entitled to interest on any part of the damages awarded.
The policy issued to Conway states that Country Casualty agrees "[t]o pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of [bodily injury or property damage] caused by accident arising out of the ownership, maintenance or use, * * * of a Vehicle * * * and the Company shall defend any suit alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent; but the Company may make such investigation and settlement of any claim or suit as it deems expedient." The next paragraph provides that "[t]he Company shall not be obligated to pay any claim or judgment or to defend any suit or prosecute or maintain any appeal after the applicable limits of the Company's liability have been exhausted by payment of any judgments or settlements."
In this jurisdiction an insurer's duty to defend an action against its insured is determined by the allegations of the complaint. (Maryland Casualty Co. v. Peppers (1976), 64 Ill.2d 187; Reis v. Aetna Casualty & Surety Co. (1978), 69 Ill. App.3d 777.) An insurer may not justifiably refuse to defend an action against its insured unless it is clear from the face of the complaint that the allegations fail to state facts which bring the case within, or potentially within, the policy's coverage. (Murphy v. Urso (1981), 88 Ill.2d 444; Sheppard, Morgan & Schwaab, Inc. v. United States Fidelity & Guaranty Co. (1976), 44 Ill. App.3d 481; Elas v. State Farm Mutual Automobile Insurance Co. (1976), 39 Ill. App.3d 944; Solo Cup Co. v. Federal Insurance Co. (7th Cir. 1980), 619 F.2d 1178.) Country Casualty has not questioned the sufficiency of the personal injury complaint to show potential or actual coverage. Instead, Country Casualty contends that its payment of the entire property damage, together with its payment to the extent of the policy's bodily injury liability limit, discharges it from its duty to defend. Country Casualty argues that it would be anomalous to require it to defend an action where no further amount is payable under the terms of the policy and where it no longer has an interest in the outcome of the personal injury action.
The general holding in this State is that an insurer's duty to defend and its duty to indemnify are separate and distinct and that the former duty is broader than the latter. (Murphy v. Urso (1981), 88 Ill.2d 444; Aetna Casualty & Surety Co. v. Coronet Surety Co. (1976), 44 Ill. App.3d 744; Elas v. State Farm Mutual Automobile Insurance Co. (1976), 39 Ill. App.3d 944; Palmer v. Sunberg (1966), 71 Ill. App.2d 22; Sims v. Illinois National Casualty Co. (1963), 43 Ill. App.2d 184; Solo Cup Co. v. Federal Insurance Co. (7th Cir. 1980), 619 F.2d 1178; Western Chain Co. v. American Mutual Liability Insurance Co. (7th Cir. 1975), 527 F.2d 986.) Thus, since the insurer's duty to defend its insured is not dependent upon a duty to indemnify, but arises from the undertaking to defend stated in the policy, an insurer's payment to its policy limits, without more, does not excuse it from its duty to defend. (Maneikis v. St. Paul Insurance Co. (7th Cir. 1981), 655 F.2d 818; see also Western Chain Co. v. American Mutual Liability Insurance Co. (7th Cir. 1975), 527 F.2d 986.) It would appear that whether an insurer, which has agreed to defend any suit "seeking damages under the terms of this policy," is discharged from its duty to defend its insured simply by the payment of the policy limits has not been expressly decided by a court in this State.
While the courts> of jurisdictions where the question has been considered have not been unanimous in their decisions, we consider that the better view is that the insurer is not discharged. See Allstate Insurance Co. v. Novak (1981), 210 Neb. 184, 313 N.W.2d 636; Kocse v. Liberty Mutual Insurance Co. (1978), 159 N.J. Super. 340, 387 A.2d 1259; Ursprung v. Safeco Insurance Co. of America (Ct. App. Ky. 1973), 497 S.W.2d 726; Landando v. Bluth (N.D. Ill. 1968), 292 F. Supp. 975; Simmons v. Jeffords (E.D. Pa. 1966), 260 F. Supp. 641.
Country Casualty's reliance on Denham v. La Salle-Madison Hotel Co. (7th Cir. 1948), 168 F.2d 576, and Oda v. Highway Insurance Co. (1963), 44 Ill. App.2d 235, to support its contention that its duty to defend was extinguished by payment of the policy limits is misplaced. Although the court in Denham decided the case under what it deemed the law of this State to be, there had been no express decision on the question. Also, Denham is inapplicable for the additional reason that the holding was based on different policy language.
Oda, too, is distinguishable. There, the insurer defended the personal injury action against its insured and paid the plaintiff to the limits of its policy. Thereafter, a suit was filed for loss of consortium arising out of the same injury. The insurer refused to defend the second action. The appellate court, relying on Denham, held that after the insurer had made payments to its policy's limits it had no further duty to defend its insured. The court did not hold that the insurer was discharged from its duty to defend its insured in the original personal injury action against him. The decision was that once the insurer had defended its insured in that action, the insurer did not have to defend subsequent actions based on the same injury, having already made payment to the extent of its liability limit.
Our holding that an insurer cannot discharge its duty to its insured simply by making payments to the claimant to the extent of its policy's limits is clearly supported by the language of the policy here. As we have noted above, the policy provided that the insurer could terminate its obligation to defend and pay by payments to the policy's limits of "any judgments or settlements." The insurer here, of course, made no payment pursuant to a judgment or a settlement agreement.
Turning to the question of the consequences of Country Casualty's refusal to defend Conway, the insurer agrees that an insurer's failure to defend, when it is under obligation to do so, makes it liable for reasonable attorney fees and the costs incurred by its insured. Conway contends that the insurer is liable for the entire judgment rendered against the insured or a settlement made by him, even if it exceeds the policy's limits. Both the trial court and the appellate court accepted Conway's position. In doing so, the ...