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August 5, 1997


Appeal front the Circuit Court of Cook County. Honorable Thomas Durkin, Judge Presiding.

As Corrected August 18, 1997. Released for Publication September 11, 1997.

Presiding Justice McNULTY delivered the opinion of the court. Rakowski and Tully, JJ., concur.

The opinion of the court was delivered by: Mcnulty

PRESIDING JUSTICE McNULTY delivered the opinion of the court:

Defendant, Federal Kemper Insurance Company (Kemper), appeals from the trial court order granting plaintiff Insurance Company of Illinois' (ICI) motion for summary judgment in its declaratory judgment action. In granting ICI's motion for summary judgment, the trial court found that plaintiff was not required to pay uninsured motorist benefits to the estate of David Aguirre and that Federal Kemper was required to indemnify Matthew Duggan for up to $300,000 of the $500,000 default judgment entered against him. Federal Kemper appeals, claiming that the trial court erred in estopping it from asserting policy defenses to coverage of Matthew Duggan. We affirm.

On March 1991, 17-year-old Matthew Duggan was living with his mother, Noreen Duggan, in her Wheeling, Illinois, home. When Noreen awoke on the morning of March 10, 1991, her car was no longer in the driveway. Suspecting that her son had taken her keys and stolen her car, Noreen called the police. Matthew, along with two of his friends, David Aguirre and Stacey Mueller, were located and led the Indiana State Police on a high speed chase. In an effort to avoid a police roadblock, Matthew drove Noreen's vehicle into the median, causing the vehicle to strike an earthen embankment and enter a creek bed. David Aguirre died as a result of this car accident.

On March 22, 1991, Terry Panzke, as special administrator of the estate of David Aguirre, filed suit against Matthew for the wrongful death of David Aguirre (Panzke suit). Federal Kemper had issued to Matthew's mother, Noreen, an automobile liability policy that was effective on March 11, 1991, the date of the automobile accident. Matthew never tendered the Panzke suit to Federal Kemper. Nonetheless, on August 29, 1991, Federal Kemper sent Matthew a letter stating that it had received a report of the automobile accident and was denying Matthew defense and indemnity since the policy excludes coverage for anyone using a vehicle without the owner's permission. Federal Kemper also suggested in the letter that Matthew retain counsel to investigate this accident and defend him in the event that any suits or actions are brought against him.

On March 2, 1993, the Panzke complaint was amended, adding Noreen as a defendant. The complaint alleged that Noreen, by express or implied permission, negligently allowed Matthew to operate her car on March 11, 1991, when she knew or should have known that he was not a competent driver. Noreen tendered the complaint to Federal Kemper on March 10, 1993, and Federal Kemper assumed Noreen's defense.

On July 19, 1994, the circuit court granted Noreen's motion for summary judgment as to the count brought against her in the Panzke complaint. The court found as a matter of law that Noreen did not negligently entrust her vehicle to Matthew, since she never gave him permission, either express or implied, to use the vehicle.

Neither Matthew nor anyone on his behalf entered an appearance in the Panzke matter. On June 9, 1995, after hearing testimony from Terry Panzke on damages, the circuit court entered a default judgment against Matthew in the amount of $500,000.

Terry Panzke then sought under/uninsured motorist benefits from her insurance carrier, plaintiff ICI. ICI filed a declaratory judgment action seeking a declaration that David Aguirre was not covered under his mother's insurance policy with ICI. ICI also sought a declaration that Federal Kemper owed a defense and indemnity to Matthew under Noreen's policy with Federal Kemper. ICI alleged that, because Federal Kemper owed a defense and indemnity to Matthew and denied such a defense, it is now estopped from asserting policy defenses to coverage. ICI requested to have Federal Kemper indemnify Matthew for $300,000 of the $500,000 judgment entered against him.

ICI and Federal Kemper brought cross-motions for summary judgment. The circuit court granted ICI's motion for summary judgment and denied Federal Kemper's motion for summary judgment. The trial court found that ICI owes no obligation to Terry Panzke as administratrix of the estate of David Aguirre for the injuries arising from the March 11, 1991, accident and that Federal Kemper must indemnify Matthew up to its policy limit of $300,000 for the $500,000 judgment entered against Matthew in the Panzke suit and shall pay the $300,000 to Terry Panzke.

Federal Kemper first claims on appeal that the trial court improperly determined that Federal Kemper was estopped from asserting its policy defenses. It is well settled that, if a complaint alleges facts potentially within policy coverage, the insurer is obligated to defend even if the allegations are groundless, false or fraudulent. Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, 355 N.E.2d 24 (1976). If a complaint raises the possibility of coverage, and an insurer believes that a defense to the policy exists, the insurer has two options available. The insurer can either (1) seek a declaratory judgment as to its obligations and rights under the policy prior to trial or settlement of the underlying action, or (2) defend under a reservation of its rights and adjudicate its coverage in a supplemental suit. Fidelity & Casualty Co. v. Envirodyne Engineers, Inc., 122 Ill. App. 3d 301, 461 N.E.2d 471, 77 Ill. Dec. 848 (1983). Generally, if the insurer fails to exercise either of these two options and refuses to defend an insured who ultimately incurs an ...

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