APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FOURTH DIVISION
543 N.E.2d 228, 187 Ill. App. 3d 358, 134 Ill. Dec. 945 1989.IL.1230
Appeal from the Circuit Court of Cook County; the Hon. Morton C. Elden, Judge, presiding.
PRESIDING JUSTICE JIGANTI delivered the opinion of the court. JOHNSON, J., concurs. JUSTICE McMORROW, specially Concurring.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE JIGANTI
This appeal centers upon the concept of estoppel as applied to cases involving an insurer's failure to defend its insured. The specific issue presented is whether an insurer which refused to defend its insured is estopped from raising, as a defense in a subsequent garnishment action, the question of whether its failure to defend constituted a breach of the insurance contract.
The insurance policy provided that the insurer, Merit Insurance Company, was to indemnify the insured, John Perricone, d/b/a Gourmet Vending, for property damage arising from the use of the insured's automobile. The policy also provided that the insurer had the right and duty to defend any suit brought against the insured even if the allegations of the suit were "groundless, false or fraudulent." It obligated the insured to give written notice of an occurrence "as soon as practicable." The insured was involved in an accident with the plaintiff, M/A Com, Inc., on September 24, 1985. Notice was not given to the insurer until five months later, on February 26, 1986. On July 10, 1986, the plaintiff filed suit against the insured. The insurer refused to defend the lawsuit. The plaintiff's motion for summary judgment was granted, and a judgment was entered in favor of the plaintiff and against the insured for $1,135.38.
The plaintiff then filed the instant garnishment action against the insurer. The insurer filed an affirmative defense alleging that the insurance contract had been breached by the insured because he failed to give notice of the accident as soon as practicable. The insurer took the position that the insured's breach relieved the insurer of all obligations under the policy, including the duty to defend. The plaintiff responded by alleging that the insurer's failure to defend the lawsuit under a reservation of rights or to file a declaratory judgment action to determine the scope of its duty to defend served to estop it from raising any defenses regarding policy coverage. For this reason the plaintiff asked the trial court to strike the insurer's affirmative defense. The trial court estopped the insurer from raising that defense by striking the affirmative defense and entered a judgment in favor of the plaintiff. The insurer has appealed contending that it should not have been estopped from raising the insured's alleged breach of a policy condition as an affirmative defense to the garnishment proceeding.
The concept of estoppel has its genesis in cases where the insurer refused to defend its insured on the grounds that the claim was not covered by the terms of the policy. (Maryland Casualty Co. v. Peppers (1976), 64 Ill. 2d 187, 355 N.E.2d 24; Sims v. Illinois National Casualty Co. (1963), 43 Ill. App. 2d 184, 193 N.E.2d 123.) Typical of those cases, and contained in the policy involved here, is a provision stating that the insurer has the right and duty to defend any suit brought against the insured even if the allegations are "groundless, false or fraudulent." In interpreting such a provision, the supreme court in Murphy v. Urso (1981), 88 Ill. 2d 444, 430 N.E.2d 1079, stated that the insurer's duty to defend its insured is broader than the duty to indemnify and held that the duty to defend arises where the allegations of the complaint against the insured, regardless of their truth or accuracy, bring the claim potentially within the coverage of the policy. The duty to defend exists even where the insurer has facts in its possession which establish that it has no duty to indemnify. An insurer which fails to defend its insured against claims coming potentially within the coverage of the policy will be estopped from relying upon any policy defenses in a subsequent action against it. As stated in Murphy v. Urso (1981), 88 Ill. 2d 444, 451, 430 N.E.2d 1079, 1082:
"An insurer taking the position that a complaint potentially alleging coverage is not covered by a policy which provides that the insurer has the right and duty to defend any claims brought against the insured cannot simply refuse to defend the insured. It must defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage. If the insurer fails to do this, it is estopped from later raising policy defenses to coverage and is liable for the award against the insured and the costs of the suit, because the duty to defend is broader than the duty to pay. (Sims v. Illinois National Casualty Co. (1963), 43 Ill. App. 2d 184, 199.)"
The plaintiff in the case at bar notes that there is no dispute that the claim here is within the coverage of the policy and argues that the doctrine of estoppel set forth in Murphy v. Urso (1981), 88 Ill. 2d 444, 430 N.E.2d 1079, should therefore bar the insurer from raising any defenses in the instant garnishment proceeding.
To assess the validity of the plaintiff's argument, it is necessary to examine the rationale underlying the concept of estoppel in cases involving an insurer's failure to defend its insured. The case which best states this rationale is Sims v. Illinois National Casualty Co. (1963), 43 Ill. App. 2d 184, 193 N.E.2d 123. In Sims, the complaint filed against the insured alleged that the plaintiff was a "passenger" in the insured's automobile when the accident occurred. The policy provided for indemnity and stated that the insurer would defend all suits against the insured even if groundless, false or fraudulent. The insurance policy excluded coverage for employees of the insured. Based upon facts discovered during its investigation, the insurer refused to defend the lawsuit on the grounds that the injured plaintiff was an employee of the insured. In a subsequent garnishment action brought against the insurer by the plaintiff, the insurer attempted to raise the defense that because the plaintiff was an employee, there could be no recovery under the policy. The appellate court held that the plaintiff's allegation that he was a passenger brought the claim potentially within the coverage of the policy and that the insurer had a duty to defend all claims potentially within policy coverage. Because the insurer breached its duty to defend, it was estopped from asserting as a defense to the garnishment action the policy provision which excluded coverage for employees. In the words of the court:
"hat is really meant is that the insurer has no right to insist that the insured be bound by the provisions of the insurance contract inuring to its benefit, i.e., the 'Exclusions' provisions, when it has already breached the contract by violating the provisions inuring to the benefit of the insured, i.e., the defense provisions." Sims, 43 Ill. App. 2d at 197, 193 N.E.2d at 129.
The case at bar represents a departure from the typical policy coverage case exemplified by Sims. This case involves an alleged breach of contract not by the insurer, but rather by the insured. In our estimation, this difference does not affect the proposition of law to be applied. The essential proposition of law stated in Sims is that an insurer which has breached its duty under the policy to defend the insured is estopped from later asserting any provision of the policy as a defense. That proposition is based upon the general principle of contract law that a party which has itself breached the terms of a contract ...