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06/30/97 SOCIETY MOUNT CARMEL v. NATIONAL BEN

June 30, 1997

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



APPEAL FROM THE CIRCUIT COURT COOK COUNTY. No. 89 CH 03629. THE HONORABLE, LESTER FOREMAN, JUDGE PRESIDING.

Rehearing Denied August 5, 1997. Released for Publication August 21, 1997.

Presiding Justice Cousins delivered the opinion of the court. Gordon and Cahill, JJ., concur.

The opinion of the court was delivered by: Cousins

PRESIDING JUSTICE COUSINS delivered the opinion of the court:

Plaintiffs, Society of Mount Carmel, Carmelite Fathers, Fathers of the Order of Mount Carmel, Inc., Carmelite Father John Knoernschild, Carmelite Father Joe Atcher, and Larry Gabriel, filed this declaratory action seeking coverage from defendant insurers under a workers' compensation and employers' liability policy for claims brought by Larry Gabriel from an alleged wrongful termination from his teaching position at a California high school. Defendants, National Ben Franklin Insurance Company of Illinois (National Ben Franklin) and the Continental Insurance Company (Continental), appeal from an order granting summary judgment in favor of all plaintiffs except Larry Gabriel in which the trial court found that the insurers had waived or were estopped from asserting coverage defenses and from an order in which the trial court awarded plaintiffs $5,224,254.72, consisting of the judgment awarded to Gabriel in California.

On appeal, defendants contend that: (1) the trial court erred in holding, as a matter of law, that the plaintiffs who were named as defendants in the underlying action were "insureds" under the workers' compensation and employers' liability policy; (2) even assuming that the plaintiffs were insureds, the trial court erred in holding that the defendant insurers owed a duty to defend the underlying action under the workers' compensation and employers liability policy; (3) even assuming the plaintiffs were insureds, the trial court erred in holding, as a matter of law, that defendant insurers waived their right to deny coverage and were estopped from denying coverage under the workers' compensation and employers' liability policy; and (4) the trial court erred in finding coverage where the underlying judgment was based on the willful acts of plaintiffs and includes an award of punitive damages otherwise not insurable.

BACKGROUND

On October 3, 1985, Larry Gabriel, a teacher at Crespi High School in California, filed a five-count complaint in the superior court of the State of California for the County of Los Angeles for wrongful termination against Fathers of the Order of Mount Carmel, Inc., Crespi High School, Carmelite Father John Knoernschild, and Carmelite Father Joe Atcher. The Fathers of the Order of Mount Carmel is domiciled in Illinois; the remaining defendants are domiciled in California. Count I alleged breach of 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.

After receiving the Gabriel complaint, the defense of the action was tendered to the defendant insurers pursuant to three policies issued by the insurers to plaintiffs. These policies were: (1) the comprehensive business policy, No. CBP 418775 (the CGL policy); (2) the umbrella liability policy, No. LX 2104669 (the umbrella policy); and (3) the workers' compensation and employers' liability policy, No. WC 3048779 (the workers' compensation and employers' liability policy). On May 21, 1986, an agent from Continental sent a response in which he explained that the Gabriel suit was not covered under Continental's CGL policy. The agent explained why the action was not covered and stated in pertinent part:

"Liability policies, as in Continental's, contain employee exclusions because such coverage is normally provided through separately procured employer's liability insurance. Continental protects against liability to third parties, such as invitees, visitors or consumers who are not employees of the society of Mount Carmel; coverage for employee related injuries and claims is available through the Society's Workers Compensation [sic] carrier, which ordinarily protects not only against employee's compensation claims, but against their tort actions as well. (In this particular instance, Continental also writes the workers' compensation policy, policy number WC 3048779. And, as this appears to fall within the parameters of their coverage, we are advising the worker's [sic] compensation division of this loss and are requesting they respond directly to you.)

On October 3, 1986, plaintiffs' attorney wrote to Continental because he had not received a response from the workers' compensation division. Counsel also informed Continental of the status of the Gabriel litigation in that depositions had been taken and scheduled.

On October 3, 1986, Continental's workers' compensation division sent plaintiffs' counsel a handwritten memo asking him to forward all pertinent information that would "help get the ball rolling." Relevant documents were then sent to Continental on October 20, 1986.

Having received no response from Continental, plaintiffs' counsel again wrote to the insurer on November 17, 1986, and December 8, 1986. Correspondence exchanged between the parties between December 8, 1986, and April 14, 1988, addressed the CGL and umbrella liability policies issued by defendants.

Meanwhile, in the underlying action, a judgment was reached in favor of Gabriel consisting of $198,311.52 for loss of earnings, $2,672,200 in compensatory damages and $700,000 in punitive damages, for a total of $3,570,511.52.

On May 3, 1989, plaintiffs filed suit in Illinois against defendants for a declaration of rights under the three policies of liability insurance issued by defendants. Plaintiffs sought a defense in connection with Gabriel's wrongful termination action as well as attorney fees and costs for the defendants' alleged bad-faith refusal to defend the claims and allegations in the Gabriel complaint.

On September 15, 1989, defendants moved to dismiss the declaratory complaint pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1992)) based on plaintiffs' failure to join Larry Gabriel as a necessary party and Crespi High School's lack of standing to sue for the reason that it was not a legal entity. On November 6, 1989, the trial court denied defendants' motion to dismiss for failure to join a necessary party but granted their motion with respect to Crespi High School, striking it as a party to this action.

Plaintiffs moved for summary judgment on January 22, 1990, asking the trial court to find in its favor that the defendants had a duty to defend the underlying Gabriel action. The trial court granted plaintiffs' motion after finding that defendants owed such a duty and after finding that the Gabriel complaint's allegation of negligent infliction of emotional distress sounded in tort and was potentially within the coverage of the CGL policy. By two later orders, the trial court awarded plaintiffs attorney fees incurred in the defense of the Gabriel action for $56,647.85 and $51,065.63, respectively.

Plaintiffs filed a motion to add Gabriel as a necessary party on April 23, 1991. Thereafter, plaintiffs also filed a motion for leave to file a second amended complaint naming Gabriel as an additional plaintiff and alleging that defendants were estopped from raising coverage defenses. On May 23, 1991, the trial court denied plaintiffs' motion for leave to file the complaint and on July 2, 1991, denied plaintiffs' motion to reconsider.

Both parties thereafter appealed to this court. On appeal, plaintiffs sought a declaration of their rights as insureds and defendants' liabilities as insurers. Plaintiffs argued that the trial court erred in denying their request for fees incurred in the filing of the action and in denying their motion to file an amended complaint. Defendants challenged the trial court's order granting plaintiffs' motion for ...


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