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American Standard Insurance Company of Wisconsin v. Gnojewski

April 4, 2001

AMERICAN STANDARD INSURANCE COMPANY OF WISCONSIN, PLAINTIFF,
v.
RICHARD S. GNOJEWSKI, ESTATE OF PAMELA GNOJEWSKI, DECEASED, ESTATE OF JOSEPH FRASIER, DECEASED, AND MICHAEL FALCETTI, DEFENDANTS.
MELVIN FRASIER, ADMINISTRATOR OF THE ESTATE OF JOSEPH FRASIER, DECEASED, AND MICHAEL FALCETTI, THIRD-PARTY PLAINTIFFS-APPELLEES,
v.
GALLANT INSURANCE COMPANY, F/K/A ALLIED AMERICAN INSURANCE COMPANY, THIRD-PARTY DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Madison County. No. 96- MR-362 Honorable David R. Herndon and Honorable Ann Callis, Judges, presiding.

The opinion of the court was delivered by: Justice Goldenhersh.

Rule 23 Order filed February 16, 2001; Motion to publish granted April 4, 2001. Opinion filed April 4, 2001.

The third-party defendant, Gallant Insurance Company (Gallant), appeals the May 7, 1999, summary judgment order denying its motion for summary judgment and granting the motion for summary judgment of the third-party plaintiffs, Melvin Frasier, administrator of the estate of Joseph Frasier (Frasier), and Michael Falcetti. The trial court found that Gallant had a duty to defend the underlying action and failed to discharge its duty to defend. Gallant filed a motion to reconsider, which was denied on June 29, 1999. Gallant filed a timely notice of appeal on July 9, 1999. On appeal, Gallant presents three issues for review: (1) whether the Illinois Insurance Code (215 ILCS 5/1 et seq. (West 1994)) requires an insurer who cancels an insurance policy for the nonpayment of a premium to notify lienholders actually unknown to the insurer, (2) whether an insurer is required to obtain a declaratory judgment as to its obligations under a policy or to defend under a reservation-of-rights approach where the policy was canceled prior to the loss without notice to a potential lienholder, and (3) whether there can be a question as to the existence of insurance coverage, or a potential for coverage, where the subject policy was canceled prior to the loss without notice to a potential lienholder. For the reasons that follow, the judgment of the trial court is affirmed.

I. FACTS

On March 23, 1995, Pamela Gnojewski signed and submitted an application for an automobile insurance policy to be issued by Gallant. The application covered three separate automobiles owned by Gnojewski: (1) a 1992 Chevrolet S10 pickup truck, (2) a 1992 Chevrolet Cavalier, and (3) a 1991 Ford Escort GT. The policy coverage was to run for six months, from March 24, 1995, through September 24, 1995. The total premium due for coverage on all three automobiles for the six-month policy period was $1,227. Gnojewski submitted with her application a down payment in the amount $478. Additional premium payments were to be due on April 24, 1995, on May 24, 1995, and on June 24, 1995. However, the only premium payment ever received by Gallant was the initial payment of $478, which was submitted with the application.

On May 26, 1995, Gallant mailed a notice of cancellation to Gnojewski informing her that coverage under the insurance policy would be canceled effective June 10, 1995, due to the nonpayment of the premium.

On August 1, 1995, Frasier was a passenger in the 1991 Ford Escort GT owned and operated by Gnojewski. Gnojewski's automobile was involved in an accident with an automobile driven by Falcetti. As a result of the accident, both Gnojewski and Frasier were killed. Falcetti was injured but survived.

On November 28, 1995, Frasier's estate filed a lawsuit against Gnojewski's estate in Madison County, alleging that Gnojewski's negligence proximately caused Frasier's death. Falcetti later intervened in that lawsuit, alleging that Gnojewski's negligence proximately caused his injuries. Gallant declined to defend Gnojewski's estate in that action, based upon its cancellation of Gnojewski's automobile insurance policy for the nonpayment of the premium on June 10, 1995, approximately seven weeks prior to the accident.

On June 10, 1996, American Standard Insurance Company of Wisconsin (American Standard) filed a complaint for declaratory judgment naming as the defendants, Gnojewski's estate, Frasier's estate, and Falcetti. In that complaint American Standard sought a declaration that it had no obligation or duty to provide a defense or coverage to Gnojewski's estate under an automobile insurance policy it had previously issued to Gnojewski's surviving husband, Richard S. Gnojewski. American Standard filed a motion for summary judgment asserting that, under the terms of the policy it had issued to Richard S. Gnojewski, Pamela Gnojewski was not an "insured person" and, therefore, her estate was not entitled to coverage or a defense. Frasier's estate filed a cross-motion for summary judgment, arguing that American Standard had waived any policy defenses by failing to defend the underlying action. Judge David R. Herndon granted American Standard's motion for summary judgment, finding that no coverage existed for Pamela Gnojewski on the American Standard policy and that there was no duty to defend. Judge Herndon specifically rejected the argument of Frasier's estate that American Standard had waived its policy defenses by not defending the underlying action, noting that the accident involving Gnojewski was "something clearly not within its policy responsibility."

On November 21, 1996, just four days before granting American Standard's motion for summary judgment, the trial court granted Frasier's estate's motion for leave to file a third-party claim for declaratory judgment against Gallant, seeking a declaration that the automobile insurance policy issued by Gallant to Gnojewski obligated Gallant to provide coverage to Gnojewski's estate for the underlying wrongful death lawsuit filed by Frasier's estate against Gnojewski's estate. Falcetti later filed a similar third-party claim for declaratory judgment against Gallant, seeking a declaration that the automobile insurance policy issued by Gallant to Gnojewski obligated Gallant to provide coverage to Gnojewski's estate for Falcetti's underlying personal injury lawsuit filed by Falcetti against Gnojewski's estate.

In the third-party complaints for declaratory judgment, both Frasier's estate and Falcetti argued that the automobile insurance policy issued by Gallant to Gnojewski did not lapse prior to the August 1, 1995, automobile accident, because of Gallant's failure to provide notice of cancellation to Laclede Credit Union (Laclede), which perfected its lien interest in Gnojewski's 1991 Ford Escort GT pursuant to section 3-202 of the Illinois Vehicle Code (625 ILCS 5/3-202 (West 1994)). The complaints alleged that the failure to notify Laclede rendered the cancellation ineffective and that, as a result, the policy was still in effect at the time of the August 1, 1995, automobile accident.

Gallant responded to the third-party complaints by asserting that the June 10, 1995, policy cancellation was proper according to section 143.14(a) of the Illinois Insurance Code (215 ILCS 5/143.14(a) (West 1994)). Gallant noted that the requirement of mailing notices of cancellation to mortgagees or lienholders applied not to all lienholders, as alleged by the third-party plaintiffs, but only to those mortgagees or lienholders "if known" to an insurer. Gallant argued that the application for the Gallant insurance policy signed by Gnojewski contained a section entitled "loss payee," which was left blank by Gnojewski when the application was submitted to Gallant. Gallant claimed that, as a result, it was unaware of any lienholders with regard to Gnojewski's 1991 Ford Escort GT.

After discovery, Gallant filed a motion for summary judgment based upon its contention that the policy had been canceled effective June 10, 1995. Both Frasier's estate and Falcetti filed cross-motions for summary judgment, which raised a new argument that even if the policy was canceled effective June 10, 1995, Gallant nevertheless had a duty to defend the Gnojewski estate because at the time the estate's defense was tendered to Gallant, a question existed as to whether the policy was properly canceled. On May 7, 1999, the trial court entered an order denying Gallant's motion for summary judgment and granting the motions for summary judgment of Frasier's estate and Falcetti. Gallant's motion to reconsider was denied. The trial court ruled: "[W]hether or not the ...


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