The opinion of the court was delivered by: Justice Heiple
Plaintiff-appellant, State Farm Fire and Casualty Company (State Farm), filed a declaratory judgment action in the circuit court of Madison County seeking a determination of whether it owed its insured, Gregory Lee Martin, Sr. (Martin), a defense and indemnification in two underlying wrongful death suits. The trial court found that State Farm had a duty to defend and indemnify Martin, and State Farm appealed. The appellate court affirmed the decision of the trial court (296 Ill. App. 3d 466), and we granted leave to appeal.
This case originated with an arrangement between Martin and Delaney Gordon, Sr., to destroy a building owned by Martin. Gordon was one of Martin's tenants, and in exchange for his participation, Martin offered him a reduced rental rate. On October 24, 1992, at approximately 2 a.m., Gordon ignited the fire by leaving an unattended candle in a hamper in the basement. An accelerant was also used. During the ensuing blaze, firefighters Timmie Lewis and Gary Porter were killed. Thereafter, Martin was indicted by a federal grand jury for "maliciously damaging and destroying by means of fire, [Martin's] building ***, and as a direct and proximate result of this conduct, death resulted to Gary Porter and Tim Lewis, both firemen in Alton, Illinois; all in violation of Title 18, United States Code, Section 844(i)."
In June and July of 1993, respectively, Scott Lewis, special administrator of the estate of Timmie Lewis, and Ethelyn J. Gorham, executrix of the estate of Gary Porter, each filed wrongful death suits against Martin in the circuit court of Madison County. Martin tendered defense of both complaints to State Farm under his rental dwelling insurance policy. Because of Martin's arson, however, State Farm denied coverage under the policy and refused to defend Martin. State Farm then filed a complaint seeking a declaration that it owed no duty to defend or indemnify Martin. The complaint named Martin, Lewis, and Gorham as defendants. In the complaint, State Farm alleged that the underlying actions did not constitute a covered "occurrence" as defined in the policy and that Martin's action triggered two coverage exclusions. Defendant Gorham sought a stay of the declaratory judgment proceedings pending resolution of the federal criminal cases then pending against Martin and Gordon (defendant Lewis had not yet answered State Farm's declaratory judgment petition and thus did not file a motion to stay).
Over State Farm's objection, the trial court granted the stay on February 23, 1994. The court's order provided that any party could move to lift the stay after the criminal cases had been resolved. In September 1994, Martin was found guilty on the criminal charge, and in December 1994, Martin was sentenced to 50 years' imprisonment. Although the record contains no order lifting the trial court's stay in the declaratory judgment action, State Farm filed a motion for summary judgment in that action on April 18, 1995. In an order dated August 30, 1995, the trial court found that coverage existed and denied State Farm's motion. On October 4, 1995, the trial court granted summary judgment in favor of defendants and against State Farm.
In the meantime, on August 8, 1995, the trial court in the wrongful death case entered a default judgment against Martin on Gorham's complaint in the amount of $10 million. On September 5, 1995, the trial court entered a default judgment against Martin on Lewis' complaint in the amount of $9 million.
State Farm appealed the decision of the trial court in the declaratory judgment action. The appellate court opined that State Farm was estopped from denying coverage because the company had failed to secure a declaratory judgment before default judgments were entered in the wrongful death suits. 296 Ill. App. 3d at 470. Nevertheless, the appellate court declined to decide the case on an estoppel theory, but rather went on to hold that State Farm's policy substantively did require the company to indemnify Martin for his liability arising from the deaths of the two firemen. Accordingly, the appellate court affirmed the judgment of the circuit court.
Now before this court, State Farm maintains that the circuit and appellate courts erred in finding that State Farm had a duty to defend and indemnify Martin. State Farm argues that Martin's actions in hiring his tenant to set fire to the building are outside the scope of coverage under its rental dwelling policy. In addition, State Farm contends that the allegations of the wrongful death complaints trigger two coverage exclusions contained in the policy. Accordingly, State Farm argues that it had neither a duty to defend nor a duty to indemnify Martin. As an initial matter, however, the parties disagree over whether State Farm is entitled to deny coverage at all. Defendants Gorham and Lewis argue that State Farm should be estopped from denying coverage because the company breached its duty to defend Martin.
As this court has repeatedly held,"[w]hen a complaint against the insured alleges facts within or potentially within the scope of the policy coverage, the insurer taking the position that the complaint is not covered by the policy must defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage." Clemmons v. Travelers Insurance Co., 88 Ill. 2d 469, 475 (1981); Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d 178, 207-08 (1991); Murphy v. Urso, 88 Ill. 2d 444, 451 (1981); see also Sims v. Illinois National Casualty Co., 43 Ill. App. 2d 184, 199 (1963). If the insurer fails to take either of these actions, it will be estopped from later raising policy defenses to coverage. Clemmons, 88 Ill. 2d at 475; Waste Management, 144 Ill. 2d at 207-08; Murphy, 88 Ill. 2d at 451; see also Sims, 43 Ill. App. 2d at 199. In the instant case, the parties do not dispute that State Farm did, in fact, seek a declaratory judgment as to its duties to Martin under its insurance policy. Nevertheless, defendants Gorham and Lewis argue that the rule cited above should be construed so as to require an insurance company to actually secure a declaratory judgment or defend under a reservation of rights. In support of their position, defendants cite Country Mutual Insurance Co. v. Murray, 97 Ill. App. 2d 61 (1968), in which the appellate court held:
"[I]n a situation where the personal injury action reaches judgment before the declaratory judgment action achieves fruition and finality *** [the insurance company] must;"
"(1) Secure a declaratory judgment of its rights and obligations while defending its potential insured on a reservation of rights, or"
"(2) Defend its potential insured on a reservation of rights and adjudicate its coverage in a supplemental suit." (Emphasis in original.) ...