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05/06/88 Illinois Masonic Medical v. Turegum Insurance Co.

May 6, 1988

ILLINOIS MASONIC MEDICAL CENTER, A CORPORATION, PLAINTIFF-APPELLEE

v.

TUREGUM INSURANCE CO., ET AL., DEFENDANTS-APPELLANTS 1988.IL.690 DATE FILED: MAY 6, 1988



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIFTH DIVISION

APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE ALBERT GREEN, PRESIDING.

Opinion of February 19, 1988 Modified on denial of rehearing.

APPELLATE Judges:

JUSTICE SULLIVAN, PINCHAM and MURRAY, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SULLIVAN

This is an interlocutory appeal from the entry of a preliminary mandatory injunction in a declaratory judgment action.

On June 19, 1985, Yeong Shin filed a medical malpractice complaint (the Shin action) against Jose Salazar, M.D. and Illinois Masonic Medical Center (the Hospital) alleging that defendants provided neurological treatment to her including the performance of various neurosurgical procedures during three separate periods of hospitalization: November 3 through November 12, 1977, January 17-18, 1978, and January 19, 1978 through February 26, 1979; and that as a result of defendants' negligence during one or more of those hospitalizations, she sustained permanent brain damage.

On January 30, 1987, the Hospital filed an amended complaint for declaratory judgment, injunctive relief, attorney fees and costs, alleging that prior to and until December 1, 1977, there was in force a policy of professional liability insurance issued by Turegum providing coverage for damages arising from the Hospital's negligence in rendering medical services; that upon receipt of proper service of summons it forwarded a copy of the Shin complaint to Turegum; that in a letter dated October 7, 1985, counsel from the law firm retained by Turegum acknowledged coverage under the policy for the period between November 11 and December 1, 1977, but further stated that it "would not be liable to defend or pay any claims on behalf of the Hospital for any liability arising from the hospitalizations of [Shin] after the policy termination date of December 1, 1977." Counsel also advised the Hospital that "[w]e have appeared for the Hospital generally, and we are currently defending all claims as a courtesy, pending clarification as to whether [the Hospital] wishes separate counsel to be involved for those claims which are not covered by the Underwriters." In similar letters dated November 22 and December 2, 1985, counsel for Turegum reiterated that "no coverage is afforded for the hospitalizations which began after December 1, 1987, and the Underwriters cannot be responsible for the continued defense of all the allegations. While we will be happy to work as co-counsel with the attorneys designated to defend the Hospital for the period of coverage beginning December 1, 1977 and thereafter, we again ask that you advise us who will be defending the Hospital for the allegations arising after the Underwriter's period of coverage." The complaint further alleged that a demand was made that Turegum's attorneys relinquish control of the case to counsel chosen by the Hospital but that Turegum refused.

On April 3, 1987, Turegum filed a motion to dismiss, which was denied on May 29, 1987. On August 19, 1987, the Hospital filed a motion requesting that the trial court issue a preliminary injunction directing Turegum to relinquish control of the defense of the Shin action to counsel retained by it and to reimburse it for the reasonable costs incurred in that litigation. In support thereof, the Hospital argued, as it does on appeal, that the above-stated facts demonstrate the existence of a conflict of interest between it and Turegum, syllogizing that: Turegum has a legal duty arising out of the insurance contract to defend all claims actually or potentially within the coverage provided by the policy; that aside from a finding of no negligence -- and, hence, no liability -- Turegum's interests would be best served by a finding that the negligence occurred after the expiration of the policy so as to shift any liability from itself to the Hospital and, therefore, by less than vigorously defending those allegations involving occurrences after December 1, 1977; and that in view thereof it (the Hospital) is entitled to be defended by counsel of its own choosing and, by reason of Turegum's duty to furnish a defense, to reimbursement by Turegum of the reasonable costs thereof.

On October 2, 1987, the trial court granted the Hospital's motion, denied Turegum's motion for a stay, and this appeal followed.

The general rule in Illinois is that an insurer is obligated to defend an action against an insured where the complaint contains allegations which bring the claim actually or potentially within the policy (Clemmons v. The Travelers Insurance Co. (1981), 88 Ill. 2d 469, 430 N.E.2d 1104; Murphy v. Urso (1981), 88 Ill. 2d 444, 430 N.E.2d 1079; 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; Pepper Construction Co. v. Casualty Insurance Co. (1986), 145 Ill. App. 3d 516, 495 N.E.2d 1183; Nandorf, Inc. v. CNA Insurance Cos. (1985), 134 Ill. App. 3d 134, 479 N.E.2d 988), even if the allegations are known to be groundless, false or fraudulent (Thornton v. Paul); and because an insurer's duty to defend is broader than its duty to indemnify, it may be obligated to defend against causes of action and theories of recovery which are not in fact covered by the policy (Conway v. Country Casualty Insurance Co. (1982), 92 Ill. 2d 388, 442 N.E.2d 245). In those circumstances, the insurer may choose to defend under a reservation of rights or seek a declaratory judgment that there is no coverage; otherwise it will be estopped from raising the defense of noncoverage in a subsequent action between it and the insured. Murphy v. Urso (1981). 88 Ill. 2d 444, 430 N.E.2d 1079; Sims v. Illinois National Casualty Co. (1963), 43 Ill. App. 2d 184, 193 N.E.2d 123.

Ordinarily, the duty to defend includes the right to control the defense so as to allow insurers to protect their financial interest in the outcome of the litigation and to minimize unwarranted liability claims (Nandorf, Inc. v. CNA Insurance Cos. (1985), 134 Ill. App. 3d 134, 479 N.E.2d 988). At the same time, the attorney retained by the insurer also owes a fiduciary duty and has the same professional obligations to the insured as would exist had he or she been personally retained by the insured. (Nandorf, Inc. v. CNA Insurance Cos.) It has been recognized, however, that, realistically, the insurer's attorney may have closer ties to the insurer than to the insured and a more compelling interest in protecting the insurer's position, by reason of which there arises a conflict of interests. (Nandorf, Inc. v. CNA Insurance Cos.) In such cases, Illinois courts have invoked a limited exception to the general rule regarding the duty to defend. The exception, as explained by the supreme court, is that where a conflict of interests exists the insured, rather than the insurer, is entitled to assume control of the defense of the underlying action; but by reason of its contractual obligation to furnish a defense, the insurer must underwrite the reasonable costs incurred by the insured in defending the action with counsel of his own choosing. Thornton v. Paul (1978), 74 Ill. 2d 132, 384 N.E.2d 335.

The test of whether a conflict exists is if, in comparing the allegations of the complaint to the terms of the policy, the insurer's interests would be furthered by providing a less than vigorous defense to the allegations (Nandorf, Inc. v. CNA Insurance Cos. ; Peppers v. Casualty Insurance Co. (1986), 145 Ill. App. 3d 516, 495 N.E.2d 1183; City of Massac v. United States Fidelity & Guaranty Co. (1983), 113 Ill. App. 3d 35, 446 N.E.2d 584). The insurer's interest in negating coverage does not in itself create a sufficient conflict to preclude the insurer from assuming control of the defense. (Peppers v. Casualty Insurance Co. ; Nandorf, Inc. v. CNA Insurance Cos. ; O'Bannon v. Northern Petrochemical Co. (1983), 113 Ill. App. 3d 734, 447 N.E.2d 985.) However, conflicts of interest have been found where the underlying complaint asserts claims which are covered as well as others which the insurer is required to defend but asserts are not covered by the policy. Nandorf, Inc. v. CNA Insurance Cos.; Peppers v. Casualty Insurance Co.

Turegum first contends that the trial court's finding of a conflict of interest was erroneous, asserting that "in the context of an insured-insurer relationship, a conflict requiring the retention of separate counsel for an insured occurs only when an adjudication in the underlying action will have a binding effect on the insured in a later declaratory judgment action concerning the insured's coverage position [and that] typically, these situations have involved conflicts in the positions taken by two insured's who are covered by the same insurer" as in Murphy v. Urso (1981), 88 Ill. 2d 444, 430 N.E.2d 1079, or "in cases involving intentional torts where the trier of fact must resolve factual issues (i.e. intent) which could result in a judgment against the insured for damages that would not be reimbursed from insurance coverage," as in Maryland Casualty Co. v. Peppers (1976), 64 Ill. ...


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