Appeal from the Circuit Court of Cook County. 99 CH 15524 The Honorable Richard J. Billik, Judge Presiding.
The opinion of the court was delivered by: Presiding Justice Cohen
Plaintiff State Farm Insurance Company (State Farm), assignee of Eleazar and Fernando Buzos' automobile insurance policy, brought this action seeking declaratory judgment against the Buzos' insurer, American Service Insurance Company (American). In its complaint, State Farm pled that American had breached its duty to defend the Buzos in an underlying personal injury lawsuit filed by Linda Josephs, State Farm's insured, and was therefore estopped from denying that the Buzos' insurance policy provided coverage for the accident. State Farm sought reimbursement of the $20,000 it paid under its policy to Josephs, along with costs and attorney fees. Both State Farm and American filed cross-motions for summary judgment. After briefing and a hearing, the trial court granted State Farm's motion for summary judgment, denied American's cross-motion for summary judgment and denied State Farm's request for costs and attorney fees.
On appeal, American argues that the trial court erred as a matter of law in granting summary judgment to State Farm. American asserts that pursuant to the explicit language of the Buzos' insurance policy, American properly declared the policy "null and void" due to a "material misrepresentation" in the insurance application. Because no policy was in existence at the time of the accident, American asserts that the trial court erred in determining that Josephs' loss was covered under the policy thereby estopping American from denying liability under the policy on the ground of misrepresentation.
State Farm filed a cross-appeal contending that the trial court erred in declining to award attorney fees incurred both by the Buzos in defending the underlying personal injury action and by State Farm in prosecuting its subsequent complaint for declaratory judgment. For the following reasons, we affirm the trial court's denial of costs and attorney fees. We reverse the trial court's order granting summary judgment in favor of State Farm and remand this cause for further proceedings.
On June 5, 1995, Eleazar Buzo signed an application for automobile insurance coverage through American for a 1983 Chevrolet Caprice four-door sedan. The application listed Eleazar as the principal driver and Leopoldo and Julia Buzo as resident drivers/regular operators. American accepted Eleazar's application and the policy went into effect December 18, 1995.
On March 7, 1996, an attorney representing Josephs contacted American to report an accident that occurred on March 1, 1996, involving Eleazar's 1983 Chevrolet Caprice. On March 11, 1996, Jack Harnett, an agent of American, spoke to Eleazar, who denied being involved in an accident with Josephs. On October 3, 1997, Josephs filed a personal injury lawsuit against Eleazar and his son, Fernando, in the circuit court of Cook County. In her complaint, Josephs alleged that on the date of the accident Fernando was driving the 1983 Chevrolet Caprice in a Jewel/Osco parking lot located at 3700 South Archer in Chicago, Illinois, when he struck and injured Josephs, a pedestrian. After receiving the summons and complaint from Josephs' attorney, American began investigating the accident.
During American's investigation, Harnett discovered that after the accident Fernando had been ticketed *fn1 as the driver of the 1983 Chevrolet Caprice and that Eleazar had been arrested for permitting an unlicenced driver to drive his car. Both Fernando and Eleazar were later found guilty of the charges. On November 11, 1997, Harnett took a recorded statement from Fernando. In his statement, Fernando admitted that he was only 14 years old on the date of the accident and that he was, in fact, driving Eleazar's car. Fernando claimed that Eleazar was teaching him how to drive at the time. Based on Fernando's admissions, Harnett concluded that American would not have to defend against or pay any claims asserted by Josephs against the Buzos and noted such in his activity log.
On November 17, 1997, American sent a certified letter to Eleazar explaining that because Eleazar had made a material misrepresentation by failing to declare Fernando as a resident driver on his application for insurance coverage, American was rescinding his insurance policy. American also sent Eleazar a $213 check refunding the premium amount Eleazar had paid and suggested that Eleazar take the necessary steps to protect himself and Fernando. Eleazar later cashed the premium refund check. American also sent a letter to Josephs' attorney advising him of the rescission and American's inability to provide coverage for the accident.
The cause proceeded to mandatory arbitration. At no time did American defend either Eleazar or Fernando under a reservation of rights or file a declaratory judgment requesting a finding that Eleazar's insurance policy was void from its inception due to a material misrepresentation and thus did not provide coverage for the accident of March 1, 1996. On August 19, 1999, the arbitration panel awarded $20,000 in favor of Josephs. On September 22, 1999, Eleazar and Fernando assigned all of their right, title and interest in the insurance policy issued by American to State Farm in consideration for a "Covenant Not to Execute Judgment" against them personally. On October 1, 1999, judgment was entered on the award in the amount of $20,000 plus costs.
On October 28, 1999, State Farm filed a complaint for declaratory judgment against American requesting that the trial court find that the insurance policy issued by American to Eleazar provided coverage for the accident of March 1, 1996. In its complaint, State Farm alleged that American breached its duty to defend the Buzos in Josephs' underlying personal injury lawsuit. State Farm further alleged that because American had failed to either defend the Buzos under a reservation of rights or to file its own declaratory judgment action, American was now estopped from denying coverage under its policy.
On January 3, 2000, American filed its answer to State Farm's complaint denying that the insurance policy was in force and effect on March 1, 1996. American asserted, as an affirmative defense, that it had exercised its contractual right under part VI(4) of the policy to declare the policy "null and void from its inception" due to a material misrepresentation in Eleazar's application. American further asserted that it had returned a check for his entire $213 premium payment to Eleazar, a check which Eleazar accepted and later cashed.
Both parties subsequently filed cross-motions for summary judgment and a hearing was held on April 10, 2001. After hearing arguments from both parties, the trial court granted State Farm's motion for summary judgment, denied American's motion for summary judgment and denied State Farm's request for costs and attorney fees. The court determined that the allegations in Josephs' complaint in the underlying personal injury action were "within or certainly potentially within" part B of the insurance policy issued by American to Eleazar and therefore triggered a duty to defend. The court further found that American had breached its duty to defend by failing either to defend the Buzos under a reservation of rights or to file its own declaratory judgment action. Based on this breach, the court determined that American was estopped from asserting that the insurance policy was void ab ...