The opinion of the court was delivered by: Chief Justice McMORROW
Docket No. 92056-Agenda 27-January 2002
Two principal issues are presented in this case: (1) whether an insurer who mails notice to its insured of a material change in an insurance policy, as required under section 143.17a(b) of the Illinois Insurance Code (215 ILCS 5/143.17a(b) (West 1992)), must maintain proof of the mailing on a recognized "U.S. Post Office" (hereinafter, Postal Service) form or form acceptable to the Postal Service or other commercial delivery service; and (2) whether the plaintiff, by virtue of an assignment given by the insured in this case, obtained a right to indemnification from the defendant insurance company.
In May 1996, the plaintiff, Denise Guillen, a minor, by her father and next friend, Suamy Guillen (Guillen), filed a complaint against her former landlords, Ezequiel and Maria Ortiz, in the circuit court of Cook County. In her complaint, Guillen alleged that she was a tenant in an apartment owned by the Ortizes for approximately the first two years of her life, from October 19, 1993, until September 1995. During this time, Guillen alleged, she was exposed to deteriorating lead-based paint and paint dust, which was present in the apartment. Guillen asserted that, as a result of this exposure, she suffered severe lead poisoning and permanent developmental injuries. Guillen further alleged that her injuries were proximately caused by the Ortizes' negligent failure to inspect for or remove the lead-based paint.
Shortly after receiving Guillen's complaint, the Ortizes tendered Guillen's claims to their insurer, defendant Potomac Insurance Company of Illinois (Potomac). Potomac refused the tender and denied any obligation to defend or indemnify the Ortizes. According to Potomac, an endorsement that had recently been added to the Ortizes' commercial liability policy contained a lead exclusion which precluded coverage for Guillen's claims. After refusing the tender and denying coverage, Potomac took no further action with respect to Guillen's complaint. Potomac did not defend under a reservation of rights or file suit seeking a declaration of the rights of the parties.
In July 1997, Guillen and the Ortizes entered into a settlement agreement. Under the terms of the settlement, the Ortizes agreed to pay Guillen the sum of $600,000 in exchange for a release from liability for any claims relating to Guillen's lead poisoning. Importantly, however, the Ortizes' obligation to pay the $600,000 was subject to the condition that it would "be satisfied solely through the assignment" to Guillen of the Ortizes' right to payment from Potomac. The assignment of the Ortizes' right to payment from Potomac was included within the terms of the settlement agreement. No other payment obligation was imposed upon the Ortizes and no judgment was entered against them.
In March 1998, Guillen, as the assignee of the rights of the Ortizes, filed an amended declaratory judgment complaint against Potomac in the circuit court of Cook County. In this action, which is the subject of the instant appeal, Guillen sought a declaration that Potomac was obligated to pay Guillen the $600,000 settlement amount agreed to by the Ortizes. Potomac filed an answer to Guillen's complaint in which it raised numerous affirmative defenses. The parties thereafter filed cross-motions for summary judgment.
In her motion for summary judgment, Guillen alleged that Potomac had failed to comply with the statutory notice requirements that governed the addition of the lead exclusion. Guillen argued that, under section 143.17a(b) of the Illinois Insurance Code (Code) (215 ILCS 5/143.17a(b) (West 1992)), when an exclusion that materially alters insurance coverage is added to a renewal insurance policy, the insurer must give the policyholder 60 days written notice and must "maintain proof of mailing or proof of receipt [of notice]" to make the alteration effective. Guillen contended that Potomac had failed to maintain the required proof of mailing or proof of receipt and, as a result, could not establish that the Ortizes had been notified of the change in coverage affected by the lead exclusion. Thus, according to Guillen, the lead exclusion never became part of the Ortizes' insurance policy. Because the lead exclusion was not part of the Ortizes' insurance policy, Guillen maintained that Potomac had breached its duty to defend and should be estopped from raising policy defenses to coverage for Guillen's claims against the Ortizes. Finally, Guillen alleged that Potomac's wrongful refusal to defend made it responsible for any reasonable settlement amount agreed to by the Ortizes. And, since the Ortizes had assigned to Guillen their right to recovery from Potomac, Guillen argued that she was entitled to recover the $600,000 settlement amount from Potomac.
In its motion for summary judgment, Potomac disputed Guillen's contention that it had not provided proper notice to the Ortizes regarding the addition of the lead exclusion. Potomac argued that it had notified the Ortizes in writing about the lead exclusion 75 days prior to renewal and that it had maintained sufficient proof of mailing. In support of this contention, Potomac provided the circuit court with an unsigned copy of a letter which was purportedly sent to the Ortizes, and an affidavit from an employee of Potomac that described Potomac's custom and practice with respect to mailing notices of material changes in insurance policies to its insureds.
Potomac additionally argued in its motion for summary judgment that, even if it had breached its duty to defend, it was not required to pay the $600,000 settlement amount agreed to by the Ortizes. According to Potomac, it was under no obligation to pay Guillen because the Ortizes' assignment to Guillen of their right to recovery against Potomac was invalid. Potomac pointed out that under the terms of the Ortizes' insurance policy, Potomac was required to pay "those sums that the insured becomes legally obligated to pay as damages." Potomac argued that the Ortizes were never "legally obligated" to pay anything under the terms of the settlement agreement with Guillen. In support of this contention, Potomac noted that, since the Ortizes' payment obligation under the settlement agreement was limited solely to an assignment of the Ortizes' right to recover under their insurance policy, the Ortizes were never personally obligated to pay any money and, indeed, were never placed in any personal financial risk by the agreement. Potomac argued, therefore, that the Ortizes were not "legally obligated" to pay damages to Guillen in any practical sense of the term and, thus, had no right to indemnification from Potomac. Potomac further noted that Guillen, as the assignee of the Ortizes' rights against Potomac, "stood in the shoes" of the Ortizes. Therefore, Potomac argued, since the Ortizes had no right to recover from Potomac, neither did Guillen.
In a written order dated June 26, 2000, the circuit court found that, with respect to the lead exclusion, Potomac had not satisfied the notice requirements of section 143.17a(b) of the Code. The court concluded that the unsigned letter and employee affidavit offered by Potomac failed to show that Potomac had "maintain[ed] a contemporaneous proof of mailing" as required under the statute. The court further reasoned that, because of Potomac's failure to comply with the notice requirements of the Code, the lead exclusion never became a part of the Ortizes' insurance policy. Consequently, the circuit court found that Potomac had a duty to defend the underlying lawsuit brought by Guillen, that Potomac had breached that duty, and that Potomac was estopped from raising policy defenses to coverage.
The circuit court further found, however, that Guillen had failed to establish the elements of a prima facie claim for indemnification against Potomac. The circuit court concluded that, because the Ortizes' payment obligation under the settlement was limited to the assignment, the Ortizes had not "incurred any liability for damages with respect to the Guillen lawsuit" and therefore had no right to assert a cause of action for indemnity against Potomac. The circuit court also noted that Guillen, as the assignee of the Ortizes' rights against Potomac, could have no greater claim against Potomac than the Ortizes themselves had. Thus, because Potomac owed no duty to indemnify the Ortizes, the court concluded that Potomac was not liable to Guillen. The circuit court therefore granted Potomac's motion for summary judgment.
On appeal, the appellate court reversed the circuit court's grant of summary judgment in favor of Potomac. 323 Ill. App. 3d 121. Initially, the appellate court addressed whether Potomac had established that it provided the Ortizes with notice of the lead exclusion. In deciding whether Potomac had adhered to the notice requirements of section 143.17a(b) with respect to the lead exclusion, the appellate court turned to subsection (a) of the statute, which governs an insurer's notice obligations when it chooses not to renew an insurance policy. Subsection (a) states that "proof of mailing" notice of non-renewal shall be maintained on "a recognized U.S. Post Office form or a form acceptable to the U.S. Post Office or other commercial mail delivery service." 215 ILCS 5/143.17a(a) (West 1992). Subsection (b), which deals with notice of a material policy change, also states that the insurer must maintain "proof of mailing" but does not repeat the definition of that term which is set forth in subsection (a). Concluding that the words "proof of mailing" should be given the same meaning throughout the statute, the appellate court held that an insurer who attempts to prove that it mailed notice of a material policy change under subsection (b) must show that it maintained proof of mailing on a form acceptable to the Postal Service or other commercial mail delivery service. Since Potomac failed to show proof of mailing on such a form with respect to the lead exclusion, the appellate court concluded, like the circuit court, that the exclusion never became part of the Oritzes' insurance policy and that Potomac had therefore breached its duty to defend. 323 Ill. App. 3d at 131.
However, the appellate court reversed the circuit court's holding that Guillen had failed to state a prima facie claim for indemnification against Potomac. Potomac argued before the appellate court, as it did in the circuit court, that because of the nature of the settlement agreement between the Ortizes and Guillen, the Ortizes were under no "legal obligation" to pay any damages to Guillen. Therefore, according to Potomac, the Ortizes had no right to indemnification from Potomac and had nothing to assign to Guillen. The appellate court rejected these arguments and held that the Ortizes had a right to indemnification from Potomac and that they had properly assigned this right to Guillen. In so holding, the appellate court emphasized that the issue of the Ortizes' right to indemnification and the validity of their assignment to Guillen could not be considered "in a vacuum" but had to be considered in light of the fact that Potomac had breached its duty to defend. 323 Ill. App. 3d at 135.
Finally, the appellate court observed that courts have raised concerns about the possibility of collusion between an insured and an injured plaintiff who agree to settle a claim following an insurer's breach of the duty to defend. 323 Ill. App. 3d at 132-33, citing United States Gypsum Co. v. Admiral Insurance Co., 268 Ill. App. 3d 598, 637 (1994). Thus, the appellate court noted, an insurer may challenge a settlement made in its absence-even though the insurer's absence was caused by its own breach of the duty to defend-on the basis that either the decision to settle or the settlement amount was unreasonable. 323 Ill. App. 3d at 133. Applying these principles to the case at bar, the appellate court concluded that the Ortizes' decision to settle with Guillan was made "in reasonable anticipation of liability" and was not subject to challenge by Potomac. However, the appellate court remanded the cause to the circuit court for a hearing to determine whether the settlement amount agreed to by the Ortizes was reasonable. 323 Ill. App. 3d at 137-38.
Potomac subsequently filed a petition for leave to appeal, which we allowed (177 Ill. 2d R. 315).
The circuit court's entry of summary judgment is subject to de novo review. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102 (1992). The construction of an insurance policy, which is a question of law, is also reviewed de novo. American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 479-80 (1997).
At the outset, Guillen acknowledges the general rule which holds that, in the absence of a breach of the duty to defend, an insured must obtain the consent of the insurer before settling with an injured plaintiff. See, e.g., Thornton v. Paul, 74 Ill. 2d 132, 144 (1978); Alliance Syndicate, Inc. v. Parsec, Inc., 318 Ill. App. 3d 590, 600 (2000). Guillen concedes that in this case, if Potomac did not breach its duty to defend the Ortizes, then the Ortizes' decision to settle with Guillen has no binding effect ...