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Hartford Accident and Indemnity Co. v. Gulf Insurance Co.

decided: January 15, 1988.


Appeal from the United States District Court for the Central District of Illinois, No. 82 C 1198 -- Michael M. Mihm, Judge.

Wood, Posner, and Manion, Circuit Judges.

Author: Manion

MANION, Circuit Judge.

In this diversity action, plaintiff The Hartford Accident and Indemnity Company ("Hartford"), appeals from a district court order granting summary judgment to defendant Gulf Insurance Company ("Gulf"). The district court granted a summary judgment to Gulf based upon this court's reversal and remand of a summary judgment the district court had previously entered in Hartford's favor.


In 1979, the City of Peoria, Illinois ("City"), as part of a program to cut spending, decided to stop cutting trees itself and to transfer its forestry operations to a more efficient provider of those services. Pursuant to a written agreement ("Shade Tree Agreement"), the Pleasure Driveway and Park District of Peoria ("Park District") agreed to prune or remove trees determined dangerous by the City. The Shade Tree Agreement referred to the City as "a municipal corporation" and the Park District as "a unit of local government," but the record does not disclose their precise relationship.

In the Shade Tree Agreement, the Park District agreed to obtain insurance "to cover the program." The Park District obtained that coverage by adding a general purchase endorsement to its comprehensive general liability policy from defendant Gulf. That endorsement designated the City as an additional insured "as their interest may appear for this operation" and covered "operations of Tree Trimming performed in conjunction with the [Shade Tree] agreement." The policy elsewhere imposed upon Gulf a "duty to defend any suit" to which its insurance applied. The City reimbursed the Park District for the modest $132 premium Gulf charged for the additional coverage.

On December 24, 1979, Laurence Lovell was killed when a tree located on City property fell on his car. The City had never asked the Park District to work on that tree, nor had the Park District done so voluntarily. Lovell's estate sued both the City and the Park District in an Illinois state court for wrongful death. The complaint alleged that the City and the Park District negligently failed to inspect and maintain the tree, and that the City negligently failed to "properly supervise" the Park District's work under the Shade Tree Agreement. The complaint did not allege that the City had determined the tree to be dangerous or that the Park District had touched it.

Gulf accepted defense of the Park District in state court, but decided internally not to defend the City (who had not asked Gulf to defend it). Gulf did not communicate this decision to the City. The City tendered its defense to Hartford, its general liability carrier.

Ten months after the lawsuit began, Hartford's attorney, David Mueller, wrote to Gulf and asked Gulf to defend the City. Gulf refused on the grounds that its policy did not apply to all trees but only those which the City designated as dangerous and told the Park District to correct.

After Gulf refused to defend the City, Hartford settled the underlying lawsuit on the City's behalf for approximately $190,000. Its attorney's fees and costs were approximately $7,000. Gulf settled on behalf of the Park District for $15,000. Hartford, believing that it covered the City only for the excess over any coverage provided by Gulf, then began this diversity action to recover against Gulf.


Under governing Illinois insurance law, then and now, "[a]n insurer which contracts to defend its insured must defend any action brought against the insured if the complaint sets forth allegations that bring the claim within or potentially within the risks covered by the policy." L aRotunda v. Royal Globe Ins. Co., 87 Ill. App. 3d 446, 408 N.E.2d 928, 933, 42 Ill. Dec. 219 (1980) [collecting cases]. Accord Burlington N. R.R. Co. v. Illinois Emcasco Ins. Co., 158 Ill. App. 3d 783, 511 N.E.2d 776, 778, 110 Ill. Dec. 599 (1987). If -- after the insured tenders its defense -- the insurer does not defend its insured against claims its policy possibly covers, then it is "estopped" from denying coverage to its insured should the insured be forced to pay damages through a judgment or a settlement. An insurer may avoid that predicament by defending under a reservation of rights or by seeking a declaratory judgment on coverage. LaRotunda, 408 N.E. 2d at 934-35.

An insurer's duty to defend, however, does not arise and "there is no estoppel where the insurer was given no opportunity to defend . . . ." LaRotunda, 408 N.E.2d at 934. Timely tender is what gives the insurer an "opportunity to defend." The parties have proceeded throughout on the implicit assumption that when an insured sues its insurer for breaching a duty to defend, under Illinois law the insured must prove in its case-in-chief that it timely tendered its defense. We will not now disturb their assumption. But see City of West Haven v. Liberty Mut. Ins. Co., 639 F. Supp. 1012, 1017-19 (D. Conn. 1986) (applying Connecticut law) (holding that an insured's failure to ask its insurer to defend is an affirmative defense for the insurer to raise).

In its complaint, Hartford sought a declaratory judgment that Gulf was obligated to indemnify it (or at least to contribute in proportion to the limits in the respective policies which apply where other insurance exists) for the sums it had paid on the City's behalf to settle the state court action, plus its costs and attorney's fees. Hartford alleged that Gulf's policy with the Park District covered the policy's insureds-including the City -- for the occurrences alleged by the estate. Hartford further alleged:

[D]espite demands . . . made by the City . . . and its counsel, the defendant, GULF INSURANCE COMPANY, denied coverage to the plaintiff and refused to undertake its defense . . . .

Therefore, Hartford alleged, Gulf breached its duty to defend. Gulf answered with one paragraph denying all these allegations.

The district court set a trial date and the parties prepared for the pretrial conference. According to its pretrial memorandum, Hartford expected to prove at trial that Gulf "wrongfully refused the tendered defense of the City" and that Gulf "is presently estopped to deny coverage to the City . . . ." Gulf itself, in its pretrial memorandum, did not focus on who tendered the City's defense; it offered to stipulate "[t]hat the defense of the City in the Lovell action was tendered to and refused by Gulf." The final pretrial order, however, contained a stipulation which specified who tendered the City's defense:

6. That the defense of the City in the foregoing action was tendered by Hartford to Gulf and was refused by Gulf.

Gulf in its pretrial memorandum also listed the following broadly worded issue as ...

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