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11/10/94 SOCIETY MOUNT CARMEL v. NATIONAL BEN

November 10, 1994

SOCIETY OF MOUNT CARMEL, CARMELITE FATHERS, FATHERS OF THE ORDER OF MOUNT CARMEL, INC., CRESPI HIGH SCHOOL, CARMELITE FATHER JOHN KNOERNSCHILD, O. CARM., CARMELITE FATHER JOE ATCHER, O. CARM., PLAINTIFFS-APPELLANTS AND APPELLEES,
v.
NATIONAL BEN FRANKLIN INSURANCE COMPANY OF ILLINOIS AND THE CONTINENTAL INSURANCE COMPANY, DEFENDANTS-APPELLEES AND APPELLANTS.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. THE HONORABLE RICHARD L. CURRY, JUDGE PRESIDING

Released for Publication January 13, 1995. As Corrected January 18, 1995.

Gordon, Cousins, Jr., Murray

The opinion of the court was delivered by: Gordon

JUSTICE GORDON delivered the opinion of the court:

Plaintiffs filed this action seeking a declaration of their rights as insureds and defendants' liabilities as insurers under several insurance policies. In their complaint, plaintiffs alleged that defendants owed them a duty to defend in an action filed in California by Larry Gabriel, a former teacher at plaintiff Crespi High School, who claimed that he had been wrongfully terminated from his position. Plaintiffs also sought attorney fees incurred in defending the Gabriel action and in the filing of this action, alleging that defendants' refusal to defend the Gabriel litigation was in bad faith. The trial court granted plaintiffs' subsequent motion for summary judgment, finding that defendants had breached their duty to defend. In response to plaintiffs' motion for a determination of damages, the trial court awarded plaintiffs attorney fees incurred in defending the Gabrielaction, but refused plaintiffs' request for fees incurred in bringing this action. After the trial court's determination on the issue of fees, plaintiffs sought leave to file an amended complaint which sought a declaration that defendants were estopped from raising any policy defenses to coverage. The trial court denied this motion. On appeal, plaintiffs contend that the trial court erred in denying their request for fees incurred in the filing of this action and in denying their motion to file an amended complaint. Defendants filed a separate appeal challenging the trial court's order granting plaintiffs' motion for summary judgment on the duty to defend issue and the trial court's award of attorney fees to plaintiffs. Plaintiffs' appeal and defendants' appeal were subsequently consolidated.

FACTS

This litigation concerns three insurance policies which were issued to "Society of Mount Carmel and/or Carmelite Fathers" by defendants on or about January 17, 1985. The first policy was a comprehensive business or general liability policy. In its schedule of hazards, this policy listed Crespi High School as one of the hazards covered by the policy. The second policy was a workers' compensation and employer's liability insurance policy. The third policy was an umbrella liability policy which referred to the other two policies as underlying insurance.

On October 3, 1985, Larry Gabriel, who is domiciled in California, filed a five count complaint in a California court naming Fathers of the Order of Mount Carmel, Inc., Crespi High School, Carmelite Father John Knoernschild and Carmelite Father Joe Atcher as defendants. The Society of Mount Carmel and the Order of Mount Carmel are domiciled in Illinois; the remaining defendants in the Gabriel litigation are domiciled in California.

In his complaint, Gabriel alleged that he was wrongfully terminated from his position as a teacher at Crespi High School by the aforementioned defendants, who are plaintiffs in this action. The Gabriel complaint sought recovery under a variety of legal theories: count I alleged breach of an employment contract; count II alleged breach of the covenant of good faith and fair dealing; count III alleged intentional infliction of emotional distress; count IV alleged negligent infliction of emotional distress; and count V alleged fraud. In count IV, Gabriel alleged that as a result of defendants' actions he suffered "extreme emotional distress, including worry, anxiety, embarrassment, loss of sleep and tension, resulting in some permanent disability [to him]."

On May 3, 1989, plaintiffs filed a complaint in Illinois againstNational Ben Franklin Insurance Company of Illinois and Continental Insurance Co. (herein referred to collectively as defendants), which sought a declaratory judgment that defendants owed a duty to defend under the three policies. Plaintiffs' complaint alleged that "despite repeated demands, defendants have repeatedly refused to provide a defense to the claims and allegations made in [Gabriel's] complaint." This complaint alleged that defendants' refusal to defend was in bad faith and asked for attorney fees and costs.

On September 15, 1989, defendants filed a motion to dismiss plaintiffs' complaint under section 2-615 of the Illinois Code of Civil Procedure (Ill. Rev. Stat. 1989, ch. 110, par. 2-615 now codified at 735 ILCS 5/2-615 (West 1992)), alleging among other things that plaintiffs' complaint should be dismissed because Larry Gabriel, the plaintiff in the underlying action, was a necessary party and had not been joined in the declaratory judgment action. In an order entered November 6, 1989, the trial court denied defendants' motion to dismiss for failure to join a necessary party.

On January 22, 1990, plaintiffs filed a motion for summary judgment asking that the trial court find in its favor on the issue of whether defendant had a duty to defend the underlying Gabriel litigation. On May 11, 1990, the trial court granted plaintiffs' motion for summary judgment, finding that defendants owed such a duty. The court found that the Gabriel complaint's allegation of negligent infliction of emotional distress sounded in tort and was therefore potentially within the policy's coverage.

On July 10, 1990, plaintiffs filed a motion for a determination of damages which asked the trial court for attorney fees and costs incurred in defending the Gabriel litigation and for fees and costs incurred in bringing this declaratory judgment action. On September 7, 1990, the trial court awarded plaintiffs $56,647.85 in attorney fees incurred in defense of the Gabriel litigation for the period up until June 11, 1990, which covered discovery and preparation for the trial. The trial court denied plaintiffs' request for attorney fees incurred in bringing this declaratory judgment action. On January 10, 1991, plaintiffs filed a supplemental motion for a determination of damages for fees incurred after June 10, 1990. In an order entered March 7, 1991, the trial court awarded plaintiffs $51,605.63 for attorney fees incurred during the period between June 10, 1990, and November 30, 1990, which included the actual trial of the Gabriel litigation.

The Gabriel litigation had proceeded as follows. On June 4, 1990, the California court dismissed the counts in Gabriel's complaint which alleged intentional and negligent infliction of emotional distress. Trial was commenced on the three remaining counts onJuly 23, 1990. On August 24, 1990, the jury rendered a verdict in favor of Gabriel on counts I and II which alleged breach of contract and breach of the covenant of fair dealing and awarded Gabriel $198,311.57 in damages. The jury was unable to reach a verdict on the fraud count.

On April 23, 1991, plaintiffs filed a motion to add Gabriel as a necessary party. On April 30, 1991, plaintiffs filed a motion for leave to file a second amended complaint naming Gabriel as an additional plaintiff and seeking a declaration that because defendants breached their duty to defend they were estopped from raising policy defenses with respect to their duty to indemnify. The trial court denied plaintiffs' motion for leave to file their second amended complaint on May 23, 1991. On June 19, 1991, plaintiffs filed a motion to reconsider and clarify, for purposes of res judicata, the court's May 23, 1991 order. On July 2, 1991, the court denied plaintiffs' motion to reconsider and denied plaintiffs' request for alternative relief.

Plaintiffs filed a notice of appeal challenging the orders of May 23, 1991 and July 2, 1991, and that portion of the court's earlier order of September 7, 1990, which denied plaintiffs request for fees incurred in bringing the declaratory judgment action. Defendants filed a separate appeal challenging the trial court's order of May 11, 1990, which granted plaintiffs' motion for summary judgment on the duty to defend issue, and the trial court's orders of September 7, 1990 and March 7, 1991 which awarded plaintiffs attorney fees incurred in defending the Gabriel litigation.

We first address the issues raised in defendants' appeal since plaintiffs' primary appeal on the estoppel and fee issues is predicated upon a determination that the trial court properly found that a duty to defend existed. In their appeal, defendants challenge the validity of the trial court's order that they had a duty to defend on the grounds that Gabriel, the underlying tort plaintiff, was a necessary party and that his nonjoinder was fatal. Defendants also challenge the trial court's substantive finding that a duty to defend exists under the policies in question. In addressing the issues, we turn at the outset to defendants' contention that the failure to join Larry Gabriel below was error and would require reversal.

Under Illinois law, a necessary party "is one who has a legal or beneficial interest in the subject matter of the litigation and will be affected by the action of the court." ( Zurich Insurance Co. v. Raymark Industries, Inc. (1986), 144 Ill. App. 3d 943, 946, 494 N.E.2d 630, 98 Ill. Dec. 508; see also Oglesby v. Springfield Marine Bank (1944), 385 Ill. 414, 52N.E.2d 1000.) Courts have identified three situations where a party is considered necessary:

"A necessary party is one whose presence in a lawsuit is required for any one of three reasons: (1) to protect an interest which the absentee has in the subject matter which would be materially affected by a judgment entered in his absence; (2) to reach a decision which will protect the interests of those who are before the court; or (3) to enable the court to make a complete determination of the controversy." Brumley v. Touche, Ross & Co. (1984), 123 Ill. App. 3d 636, 644, 463 N.E.2d 195, 201, 79 Ill. Dec. 57.

Specifically, in a declaratory judgment action, "all persons legally interested in the subject matter of the litigation who may be affected by the judgment should be made parties" in order to effectuate complete relief. Zurich Insurance Co. v. Raymark Industries, Inc., 144 Ill. App. 3d at 946, 494 N.E.2d at 633; see also Bezin v. Ginsburg (1978), 59 Ill. App. 3d 429, 375 N.E.2d 468, 16 Ill. Dec. 595.

Illinois courts have consistently determined that the tort claimant in an underlying action is a necessary party to a declaratory judgment action brought to determine insurance coverage for that claim. (See M.F.A. Mutual Insurance Co. v. Cheek (1977), 66 Ill. 2d 492, 495, 363 N.E.2d 809, 811, 6 Ill. Dec. 862 (plaintiffs in underlying action alleging injuries resulting from car accident were necessary parties to declaratory judgment action brought by insurers to determine insurance coverage); Williams v. Madison County Mutual Automobile Insurance Co. (1968), 40 Ill. 2d 404, 407, 240 N.E.2d 602, 604 ("injured claimants are proper parties to such an action and have been held to have been necessary parties to such suit"); see also Reagor v. Travelers Insurance Co. (1980), 92 Ill. App. 3d 99, 415 N.E.2d 512, 47 Ill. Dec. 507; General Casualty Co. v. Olsen (1977), 56 Ill. App. 3d 986, 372 N.E.2d 846, 14 Ill. Dec. 567.) Courts have based the determination that the claimant in the underlying action is a necessary party on the idea that such claimants have a "substantial right in the viability of the policy," ( M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d at 495, 363 N.E.2d at 811), or that they are "a real party in interest to the liability insurance contract" whose rights "vest at the time of the occurrence giving rise to his injuries." ( Reagor v. Travelers Insurance Co., 92 Ill. App. 3d at 103, 415 N.E.2d at 514.) In so doing, courts have noted that a declaration of non-coverage would eliminate a source of funds. ( Flashner Medical Partnership v. Marketing Management, Inc. (1989), 189 Ill. App. 3d 45, 545 N.E.2d 177, 136 Ill. Dec. 653.) It is therefore clear under these cases that Gabriel is a necessary party. The question which remains is what effect the failure to join Gabriel had on the validity of the trial court's order finding that a duty to defend existed.

Plaintiffs contend that it is unnecessary to reverse and remand this cause for the joinder of Gabriel because the trial court's ruling that a duty to defend existed was, in fact, favorable to Gabriel and adequately protected his interest in the litigation. Such a hindsight oriented analysis, however, is not proper in this instance. Our supreme court addressed the proper legal perspective that a reviewing court must take in determining whether a party is ...


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