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06/04/97 VILLAGE LOMBARD v. INTERGOVERNMENTAL RISK

June 4, 1997

THE VILLAGE OF LOMBARD, PLAINTIFF AND COUNTERDEFENDANT-APPELLANT,
v.
INTERGOVERNMENTAL RISK MANAGEMENT AGENCY (IRMA), DEFENDANT AND COUNTERPLAINTIFF-APPELLEE.



Appeal from the Circuit Court of Du Page County. No. 96--MR--205. Honorable Robert E. Byrne, Judge, Presiding.

Released for Publication July 11, 1997.

Presiding Justice Geiger delivered the opinion of the court. Inglis and McLAREN, JJ., concur.

The opinion of the court was delivered by: Geiger

PRESIDING JUSTICE GEIGER delivered the opinion of the court:

The plaintiff and counterdefendant, the Village of Lombard (Lombard), filed a declaratory judgment action against the defendant and counterplaintiff, Intergovernmental Risk Management Agency (IRMA), seeking a declaration as to the scope of IRMA'S defense obligations under an insurance coverage agreement entered into between the parties. IRMA subsequently filed a counterclaim, seeking a declaration that it was not obligated to defend Lombard and its employees for certain punitive damages claims not covered within the indemnity provisions of the agreement. On September 25, 1996, the circuit court of Du Page County entered an order granting summary judgment on IRMA's behalf as to both the complaint for declaratory judgment and the counterclaim. We affirm.

IRMA is an intergovernmental association consisting of 68 public entities in northeastern Illinois. IRMA is a public insurance pool that exists to provide coverage for claims of injuries to persons or properties made against its members. Lombard is an Illinois municipal corporation and a member of IRMA.

IRMA also extends insurance coverage to the individual officials and employees of each member. The scope of this coverage is defined in policy documents, endorsements, and amendments, which are issued and incorporated on an annual basis in IRMA's coverage package. Coverage provided by IRMA includes not only indemnification for financial losses due to litigation claims but also the duty to defend against such litigation.

IRMA reviews and makes amendments to its coverage documents on an annual basis. In 1992, IRMA amended its coverage documents to include several new exclusions. One such exclusion, entitled the "No Coverage-No Defense" amendment, provided as follows:

"It is agreed that we will not provide a defense or pay attorneys fees or defense costs for any loss, claim proceeding, suit or any other legal or administrative action or part thereof to which this coverage document does not apply and/or for which there is no coverage or indemnification afforded except at the sole discretion of ."

Another exclusion, entitled the "Punitive Damages Exclusion" amendment, provided as follows:

"It is agreed that this coverage does not apply to punitive or exemplary damages. In addition, we will not pay defense costs nor shall we be obligated to provide a defense for claims or legal actions in anyway requesting punitive or exemplary damages, except at our discretion."

A copy of these proposed amendments was distributed to the entire IRMA membership on or before February 22, 1993. After reviewing and considering the proposed amendments, the members of IRMA, including Lombard, unanimously approved their adoption as part of the coverage documents.

After these amendments were approved, IRMA adopted an informal policy whereby, at its sole discretion, it would appoint counsel to defend a member against both the covered and noncovered claims contained in the same lawsuit. This appointment of counsel was contingent upon: (1) a conference between the member, IRMA, and counsel, during which all potential conflicts were discussed and waived; (2) an agreement that if any actual conflict of interest arose during the course of the litigation, it would be immediately identified and disclosed; and (3) an agreement that the existence of an actual conflict having an impact on the handling of the litigation or strategy would require the member to immediately retain separate counsel at its own expense.

On March 4, 1995, Megan Murray, a former Lombard police officer, filed an eight-count complaint in the United States District Court for the Northern District of Illinois naming Lombard and several of its officers and employees as defendants. The complaint alleged violations of federal civil rights and employment laws and sought both compensatory and punitive damages. Lombard tendered the defense of the entire matter to IRMA.

IRMA's executive director accepted the defense of the covered compensatory claims but, pursuant to the "No Coverage-No Defense" amendment, rejected defense of the noncovered punitive claims. IRMA did offer to voluntarily supply Lombard and its employees with the services of an IRMA-appointed counsel to defend the noncovered punitive claims, but only on the condition that they would waive all potential conflicts of interest.

Lombard refused to waive all potential conflicts and appealed the executive director's decision to a three-member IRMA appeals committee. Lombard requested the appeals committee to require IRMA to pay for separate, independent counsel to defend both Lombard and its employees in the entire lawsuit. Despite Lombard's request, the appeals committee unanimously affirmed the executive director's decision. The appeals committee's ruling was then unanimously affirmed by the nine-member IRMA executive board. The executive board's ...


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