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Cty of Massac v. U.s. Fidelity & Guaranty Co.





Appeal from the Circuit Court of Massac County; the Hon. James R. Williamson, JUSTICE WELCH DELIVERED THE OPINION OF THE COURT:

On September 5, 1978, suit was filed in the circuit court of Massac County against Superior Structures Co. and the County of Massac. As ultimately amended, the complaint alleged that on August 27, 1977, plaintiff Mark Krueger was driving south on Old Marion Road in Massac County. His car struck a partially completed bridge being constructed over Mud Creek by Superior Structures and fell into the creek. According to the complaint, Superior Structures acted negligently and in violation of a portion of the road construction injuries act (Ill. Rev. Stat. 1977, ch. 121, par. 314.4) by failing to provide adequate warning signs, barricades or lighting to alert motorists that the Mud Creek bridge was under construction and by failing to replace suitable barriers, signs or barricades which Superior knew or should have known had been removed by vandals. Similar allegations were made against the county, but instead of listing a violation of the road construction injuries act, the complaint asserted that the county had failed to erect suitable barriers or signs or arrange a suitable detour, contrary to section 9-102 of the Illinois Highway Code (Ill. Rev. Stat. 1977, ch. 121, par. 9-102). This action was dismissed on March 17, 1981, pursuant to stipulation, because the plaintiff's claim had been settled.

At the time of Krueger's accident, the county was covered by a policy of "manufacturers' and contractors' liability insurance" issued by U.S. Fidelity and Guaranty Co. and Fidelity and Guaranty Insurance Underwriters, Inc. (collectively referred to here as USF&G). The county forwarded a copy of Krueger's complaint to USF&G, and its Marion, Illinois, office responded by letter dated September 14, 1978. In that letter, USF&G's personnel stated that its policy did not cover the incident described in the complaint, and it would therefore not defend the county in that action.

The county then filed a complaint for a declaratory judgment against USF&G on September 26, 1980, two years after Krueger filed suit against the county, and six months before that action was dismissed. In that pleading, the county averred that USF&G's policy provided coverage for the Krueger accident and that due to USF&G's refusal to defend it, the county had incurred substantial costs and attorney fees. It was requested that the court declare the rights and liabilities of the parties to the contract of insurance, that USF&G be ordered to defend the county in the Krueger action and that the county be awarded its costs and attorney fees previously expended in defense of that action. This complaint was amended on March 30, 1981. The amended complaint, which requested money damages rather than a declaratory judgment, alleged that the county had paid Mark Krueger $10,000 to settle the action against it and that its attorney fees incurred in connection with that suit totaled $1,267.50. Both of these amounts, which the county contended had resulted from USF&G's refusal to defend it, were sought in the complaint.

After a brief evidentiary hearing, the court entered a written judgment in which it was noted that USF&G's policy did not apply "to any construction or repair operations during suspension thereof" or "to omissions or supervisory acts of the insured in connection with work performed for the named insured by independent contractors." The court stated that evidence presented by USF&G at that hearing showed that the Krueger accident fell within those two exclusions. It was found that had USF&G assumed the defense of the Krueger action, a conflict of interest between USF&G and the county would have been created, and thus USF&G's failure to defend the county did not estop it from asserting those exclusions in the county's action against it. (Thornton v. Paul (1978), 74 Ill.2d 132, 384 N.E.2d 335; Maryland Casualty Co. v. Peppers (1976), 64 Ill.2d 187, 355 N.E.2d 24.) According to the principles of Thornton and Peppers, the court held USF&G responsible for the costs of the county's independent counsel, and entered judgment in favor of the county for $1,267.50. From that portion of the judgment denying it relief in the amount of its settlement with Mark Krueger, the county appeals.

The position taken by the county is that the Krueger complaint shows that that incident was potentially covered by USF&G's policy, and no conflict would have been presented had USF&G defended the county in that action. Consequently, the county asserts that USF&G should be estopped from raising policy exclusions against it. USF&G responds: (1) that its duty to defend the county was discharged when the county filed a declaratory judgment against it, (2) that the county waived the estoppel argument by failing to raise it in its complaint for declaratory judgment, (3) that equitable principles should preclude the county from asserting an estoppel against it, and (4) that a conflict of interest prevented it from defending the county in the Krueger action, as the trial court held.

• 1 The insurance policy between USF&G and the county provided that the insurer would defend any suit against the county seeking damages on account of bodily injury or property damage, "even if any of the allegations of the suit are groundless, false or fraudulent." The legal principles applicable to such a clause are not in dispute. If a complaint is filed against the insured which alleges facts giving rise to potential coverage by the policy, the insurer must defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage. Otherwise, the insurer is estopped from raising policy defenses and exclusions from coverage. Murphy v. Urso (1981), 88 Ill.2d 444, 430 N.E.2d 1079.

• 2 In the case at bar, the county states that the trial court found that Krueger's complaint created potential coverage under USF&G's policy. USF&G insists that no such finding was made and argues that the only reason that the court awarded the county its attorney fees was because the court found that a conflict existed between USF&G and the county. However, if the court had found that Krueger's complaint did not give rise to potential coverage under USF&G's policy, USF&G would have been entitled to judgment in its favor in all respects (see Tapp v. Wrightsman-Musso Insurance Agency (1982), 109 Ill. App.3d 928, 441 N.E.2d 145; Graman v. Continental Casualty Co. (1980), 87 Ill. App.3d 896, 409 N.E.2d 387), and the court would not have had to consider the possibility of a conflict of interest nor would the county have been awarded its attorney fees. As a result, even though the judgment did not state, in so many words, that Krueger's complaint presented potential coverage, such a finding was necessary to the ultimate conclusions of the court. A comparison of that complaint with USF&G's policy indicates that this implied finding is correct, because the complaint alleged that Mark Krueger's injuries resulted from the negligence of the county's agents or employees and nothing in that complaint placed the occurrence within one of the stated exclusions.

USF&G further argues that, even if Krueger's complaint gave rise to potential coverage, it did not breach its duty to defend the county. It notes that that duty would have been satisfied had it filed a declaratory judgment action to construe the policy, and contends that, since the county filed a declaratory judgment action to construe the policy, it should not have been required to file a duplicate action in order to preserve its policy defenses. The existence of a declaratory judgment complaint on file, USF&G asserts, is significant, while the identity of the plaintiff is not.

• 3 USF&G's argument was rejected by this court in Consolidated Rail Corp. v. Liberty Mutual Insurance Co. (1981), 92 Ill. App.3d 1066, 416 N.E.2d 758. In that case, the insured was sued by six employees of a subsidiary who claimed that they had been injured on the job. The insured tendered the defense of these cases to the insurer, which accepted the defense of two claims but refused to defend the remaining four claims. The insured then filed a declaratory judgment complaint to determine its rights under the policy. While that action was pending, five more employees sued the insured, the insurer declined to defend those actions, and those claims were added to the declaratory judgment action. This court held that the insurer was estopped to deny coverage under the policy in each of the nine claims, even though the insured had filed a declaratory judgment action covering all nine claims which the insurer had refused to defend. As we noted, "An insurance company who suspects that it has no duty to defend cannot remain immobile and refuse to participate in the litigation." (92 Ill. App.3d 1066, 1072-73, 416 N.E.2d 758, 764.) In this case, the insurer has done exactly that, and cannot now rely upon the insured's action in filing suit to discharge its own duty to the insured. The clause requiring USF&G to defend the county gave rise to an obligation by USF&G in return for the county's payment of premiums. It would destroy the mutuality of this clause to hold that the county itself had discharged USF&G's obligations by filing its own declaratory judgment action.

We recognize, as USF&G points out, that another district of the appellate court has reached a different result. In Ayers v. Bituminous Insurance Co. (1981), 100 Ill. App.3d 33, 424 N.E.2d 1316, the insurer refused to defend the named insured, Ayers, who then brought a declaratory judgment action against the insurer. The insurer filed an answer and third-party complaint joining the plaintiff in the original tort action against Ayers. In both of these pleadings, the insurer sought the issuance of a favorable declaratory judgment. The court held that the insurer was not estopped to assert policy defenses because it had requested a judicial determination of its rights under the policy. In a footnote, the court observed, "We do not see any significance in the fact that Ayers first sought a declaratory judgment. It is the fact of the proceeding itself, and not the identity of the party initiating the proceeding, that is of legal import." 100 Ill. App.3d 33, 35 n. 1, 424 N.E.2d 1316, 1318 n. 1.

• 4, 5 In the case at bar, USF&G never indicated to the trial court that it desired a determination of rights under the policy. Its answer to the county's declaratory judgment complaint sought only a dismissal of the county's action. Unlike the insurer in Ayers, USF&G thus remained immobile after refusing to defend the county, and, in fact, even contested the county's efforts to determine the rights and obligations of the parties to the policy. It is the duty of an insurer to secure a declaratory judgment determination of its obligations and rights under the policy (Country Mutual Insurance Co. v. Murray (1968), 97 Ill. App.2d 61, 73, 239 N.E.2d 498, 505), not to take action to prevent such a conclusive and binding determination from being obtained. Under these facts, we continue to adhere to our position in Consolidated Rail and hold that the county's declaratory judgment action did not discharge USF&G's duty to defend it, thereby preventing the county from arguing that USF&G was estopped from asserting policy defenses.

Auto-Owners Insurance Co. v. Corrie (1981), 102 Ill. App.3d 93, 429 N.E.2d 883, also cited by USF&G does not support its argument. Although the court in Corrie cited Ayers for the proposition that the identity of the plaintiff in a declaratory judgment action is not significant, Corrie presented the situation in which two insurance companies contested the coverage of the insured. All that Corrie stands for is that a declaratory judgment brought by one of two insurers contesting coverage inures to the benefit of the other insurer so as to satisfy the second insurer's duty to defend its insured.

• 6 Next, USF&G insists that the county waived its estoppel argument by not presenting it in its original complaint for a declaratory judgment. It directs our attention to Ayers. However, the waiver of the estoppel argument in Ayers was based upon the plaintiff's failure to present that argument to the trial court at any time. This is not the case here, for the record indicates that the county's request for damages, which was substituted for the declaratory judgment complaint, was based upon the estoppel of USF&G to raise police defenses. That argument cannot be considered waived as not having been presented at trial.

Estoppel, USF&G maintains, is an equitable doctrine which should be invoked "to insure fair play between parties regarding a dispute between them." It is asserted that estoppel should not arise against the insurer in this case, essentially because the county settled the suit against it before the declaratory judgment action could be determined. The record sheet in Krueger's action against the county shows that that suit and the county's declaratory judgment action were assigned to the same judge, who indicated, in a docket entry on January 8, 1981, that the declaratory judgment action should be heard before Krueger's action. It would be inequitable, according to ...

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