Appeal from the Appellate Court for the Second District; heard
in that court on appeal from the Circuit Court of Lake County,
the Hon. Lawrence D. Inglis, Judge, presiding.
JUSTICE MORAN DELIVERED THE OPINION OF THE COURT:
Rehearing denied March 29, 1985.
This declaratory judgment action involves the construction of a general comprehensive liability insurance policy issued by the Western Casualty & Surety Company (Western) to the insured, Mark III Development Company, a corporation (Mark III). Western filed a two-count complaint for declaratory judgment in the circuit court of Lake County alleging that the policy in question did not apply to a property damage claim brought against the insured by Richard and Marita Brochu (Brochus). The complaint, which named the Brochus, Mark III's president, Sig L. Bjerga, and Mark III as defendants, alleged that the insurance policy was not applicable to the Brochus' claim by virtue of exclusions (n) and (o) of the policy. In response, the Brochus filed a motion for summary judgment arguing that Western's policy did provide coverage. Mark III joined in this motion and, in a memorandum in support thereof, additionally argued that Western had waived any policy defenses by accepting defense of the claim in a letter dated October 28, 1980, and by the subsequent acts of counsel for Western.
Based on the pleadings, exhibits, contractual recitals, applications for insurance, and actual insurance contracts, the trial court concluded that no genuine issue as to any material fact existed and that the defendants were entitled to judgment in their favor as a matter of law. The court, found that, when read in its entirety, the policy was ambiguous and, therefore, construed it against the insurer. The court also found that Western had waived its opportunity to assert a policy defense.
On appeal, the appellate court reversed the decision of the circuit court in part and remanded the cause. (122 Ill. App.3d 125.) It found that the Brochus' claim was not covered under the Western policy. It further found that the trial court had erred in regard to its finding that Western had waived its right to assert a policy defense. Nevertheless, since a question of fact remained as to the issue of estoppel, it remanded the cause for determination of that issue. We granted the Brochus leave to appeal (No. 59865). Bjerga's and Mark III's petition for leave to appeal was also granted (No. 59930), and the causes have been consolidated for the purpose of review.
Three questions are raised: (1) Under the terms of the policy, must Western defend and, upon a finding of liability, indemnify Mark III for the property damage claim brought against the insured by the Brochus? (2) Should Western be precluded from asserting a defense of noncoverage by virtue of its conduct? and (3) Did Western's attorney's transmittal of a reservation of rights letter give rise to a conflict of interest?
The record reveals that on May 1, 1976, Sig Bjerga, who was then doing business as Bjerga and Son Construction Company, purchased a comprehensive liability policy from Western for which he paid a premium of $643 per year.
In September of 1976, Bjerga, who had begun operating as Mark III, entered into a written home-purchase agreement whereby Mark III agreed to construct a home for the Brochus. The agreement expressly provided that "[t]he house shall be completed in a good and workmanlike manner substantially in accordance with the plans prepared by Mark III." The plans, which were incorporated by reference into the contract, provided for soil bearing pressure of "3000 P.S.F. min," which was to be verified at the site. The purchase price of the home was $100,300.
On October 2, 1976, Bjerga amended his insurance policy with Western to reflect the incorporation of Mark III. He also increased his coverage under the policy to include both independent contractors and completed-operations coverage. The policy's premium, as amended, was $2,080 per year. This amended policy was renewed every May 1 thereafter up to and including May 1, 1980.
On January 5, 1977, the Brochus took possession of the house. However, due to the rate of settlement, it wasn't until sometime thereafter that they realized the house was sinking into the ground. As a result, on August 8, 1980, the Brochus filed a two-count complaint against Bjerga and Mark III for breach of contract. The first count of the complaint alleged that Bjerga had breached an express warranty that the home be built in a good and workmanlike fashion and that Bjerga had also breached a specific provision of the contract requiring an on-site soil test. The second count alleged fraud in the inducement. Under this count, the Brochus claimed that they had relied upon the contractual representations concerning the performance of soil tests and that such representations were false.
The Brochus' complaint sought recovery for property damages to the house. Specifically, it alleged that the sinking had caused the foundation to crack, the support beams to sag, the doors and frames to be out of synch, and the interior fixtures to separate from the walls.
Upon receiving notice of the suit, Mark III retained private counsel and also forwarded the complaint to Western. Western sent the complaint to its local attorney, Leo Sullivan. In a letter addressed to Sullivan and dated October 28, 1980, Western stated:
"We were denying coverage because of exclusion (n) and (o) in our policy * * *. After further discussion with the insured and his attorney, the company has decided that we will go ahead and accept the defense * * *. Our policy provides products and completed operations coverage and there ...