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April 20, 1995


Appeal from the Circuit Court of Madison County. No. 92-MR-9. Honorable Wendell Durr, Judge, presiding.

The Honorable Justice Goldenhersh delivered the opinion of the court: Welch and Chapman, JJ., concur.

The opinion of the court was delivered by: Goldenhersh

JUSTICE GOLDENHERSH delivered the opinion of the court:

Plaintiff, Shell Oil Company, filed this declaratory judgment action against defendants, National Union Fire Insurance Company of Pittsburgh, PA (National Union), Transamerica Insurance Company (Transamerica) (hereinafter defendants), AC&S, Inc. (AC&S), and Sachs Electric Company (Sachs), seeking a determination of whether defendants had a duty to defend plaintiff in a suit by Gerald Neels, an employee of AC&S, for injuries sustained by Neels while working on plaintiff's premises. Gerald Neels, AC&S, Sachs, and Transamerica are not parties to this appeal.

Defendants appealed from a summary judgment order issued by the circuit court of Madison County in favor of plaintiff. The underlying cause of action filed by Neels was a personal injury suit based upon theories of premises liability. Plaintiff filed a declaratory judgment in response to defendants' failure to tender defense of the underlying claim to plaintiff. The trial court found that defendants had a duty to defend plaintiff in the underlying cause of action.

Defendants appealed the trial court's order, raising several issues, the thrust of which concerns whether defendants had a duty to defend plaintiff in a lawsuit for injuries sustained by an employee of AC&S while he was on plaintiff's property. Transamerica Insurance Company's appeal was later dismissed. We affirm and remand for further proceedings.


Plaintiff filed a complaint for declaratory judgment against AC&S and Sachs and their insurance carriers, National Union and Transamerica, alleging that defendants had a duty to defend, as well as indemnify, plaintiff as a result of a lawsuit filed against plaintiff by Neels for injuries he sustained while in the process of performing work on the premises of plaintiff. Neels was an employee of AC&S, a subcontractor of Sachs, which in turn was a subcontractor of Bechtel Constructors Corporation (Bechtel), plaintiff's general contractor for this project. The Sachs-AC&S contract incorporated by reference the Shell-Bechtel contract. Pursuant to their contractual requirements, AC&S and Sachs each obtained comprehensive general liability and workers' compensation insurance that named plaintiff as an additional insured. AC&S obtained insurance coverage with National Union as the carrier. Transamerica provided coverage for Sachs.

The acts that are the subject matter of the underlying complaint occurred on January 26, 1988. Neels, an AC&S employee, was at plaintiff's Alkylation Unit to perform some insulation work as part of his employment for AC&S pursuant to AC&S's agreement with Sachs. Neels, while walking back to the AC&S work trailer, tripped over a pipe and sustained injuries. As a result of the injuries incurred, Neels filed a workers' compensation claim against AC&S. Subsequently, Neels filed a complaint against plaintiff, alleging in part that Neels was an employee of AC&S and was on the premises of plaintiff in the course of and in furtherance of his employment.

Plaintiff tendered defense of the underlying claim to Sachs and to AC&S and their insurance carriers in November 1991. Transamerica denied a defense on the basis that Illinois is an "anti-indemnity" state. National Union failed to respond to plaintiff's tender of defense. In response to Transamerica's denial of a defense and National Union's failure to respond to the tender of defense, plaintiff filed this declaratory judgment action, seeking a determination that Transamerica and National Union owed plaintiff, an additional insured, a defense and coverage for the Neels lawsuit. The parties filed a stipulation of facts, and later plaintiff and defendants submitted the cause on separate motions for judgment on the pleadings or, in the alternative, motions for summary judgment.

The court heard arguments on the summary judgment motions filed by plaintiff and defendants and on November 25, 1992, entered an order denying the motions for summary judgment filed by defendants. The trial court found that under the reasoning of Maryland Casualty Co. v. Chicago & North Western Transportation Co. (1984), 126 Ill. App. 3d 150, 466 N.E.2d 1091, 81 Ill. Dec. 289, defendants had a duty to defend plaintiff based on the pleadings filed in the underlying action by Neels against plaintiff. The court then granted summary judgment to AC&S and Sachs, dismissing them from the case. The court deferred ruling on the duty to indemnify, pending the outcome of the Neels lawsuit.

Contrary to the trial court's ruling that defendants were required to defend plaintiff in the Neels' lawsuit, defendants did not provide or participate in the defense of plaintiff when the underlying cause proceeded to trial. Rather, defendants filed motions to reconsider the trial court's order granting summary judgment in favor of plaintiff. In the interim, the Neels trial resulted in a verdict for defendant, plaintiff in the instant case, in December 1992. The trial court denied defendants' motions to reconsider on February 11, 1993. Defendants appealed from the trial court's denial of their motions to reconsider. Transamerica's appeal was later dismissed.


National Union first asserts that it had no duty to defend plaintiff in the Neels lawsuit because the underlying complaint did not allege any facts that would bring it within the scope of potential coverage. We disagree.

Under Illinois law, when a liability insurer questions whether the insured's claim might possibly fall within the scope of the policy coverage, the insurer must either (1) seek a declaratory judgment as to its rights and obligations before or pending trial or (2) defend the insured under a reservation of rights. ( La Rotunda v. Royal Globe Insurance Co. (1980), 87 Ill. App. 3d 446, 445, 408 N.E.2d 928, 935, 42 Ill. Dec. 219.) When an insured tenders defense to an insurer, the insurer may not simply refuse to participate in the litigation and wait for the insured to institute litigation against the insurer to determine the insurer's respective rights and duties. ( Trovillion v. United States Fidelity & Guaranty Co. (1985), 130 Ill. App. 3d 694, 698, 474 N.E.2d 953, 956, 86 Ill. Dec. 39.) Further, when the insurer refuses to tender a defense to its insured or fails to take either of the aforementioned actions, the insurer is barred from disputing policy coverage in a subsequent lawsuit by the insured. La Rotunda, 87 Ill. App. 3d at 453, 408 N.E.2d at 935.

National Union did not respond to plaintiff's tender of defense in the underlying lawsuit. National Union only responded upon plaintiff's institution of the declaratory judgment action at issue here. National Union, which insured AC&S under both a workers' compensation policy and a general comprehensive policy, now states, as the reason for its failure to respond and tender a defense to plaintiff, that the comprehensive general liability coverage for plaintiff's tort liability cannot be triggered solely by the filing of a workers' compensation claim by Neels against AC&S and that plaintiff made no claim against the comprehensive general liability policy within the effective policy dates. Consequently, since there was never any claim brought against the comprehensive general liability policy during the policy period, the Neels lawsuit against plaintiff cannot "relate back" to the workers' compensation claim brought under a completely different insurance policy. Furthermore, National Union states that the "arising out of" ...

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