Insurer Required to Defend Insured

The Seventh Circuit Court of Appeals affirmed in part and reversed in part the district court’s decision regarding insurer’s duty to defend.

Cincinnati Insurance Company brought action seeking declaration that its policy did not apply to the underlying claims against insured, arising out of automobile accident which resulted in death of insured’s wife. The United States District Court for the Central District of Illinois, Richard Mills, J., 2015 WL 4978711, granted in part and denied in part Cincinnati’s motion for summary judgment and granted in part and denied in part insured’s motion for summary judgment. Cincinnati appealed.

In August 2010, Sam Chee was driving with his wife Toni Chee when their car slammed into a tree. Toni was seriously injured, taken to a hospital where she died within a week. Her estate filed two lawsuits: one against Sam accusing him of negligent driving, and the other against the hospital and the attending physicians claiming medical malpractice.

The defendants in the medical malpractice suit filed a third-party action against Sam seeking contribution from him should they be held liable to Toni’s estate. State Farm Mutual Automobile Insurance Co. is defending Sam’s interests as the defendant in the negligence and contribution lawsuits. The policy promised indemnity coverage of $250,000 per person (and $500,000 total) for auto accidents.

The Chees also have an excess insurance policy with a limit of $5 million issued by Cincinnati, which denied Sam’s request for defense and indemnity. Cincinnati filed suit under diversity jurisdiction seeking a declaratory judgment that its policy did not apply.  Cincinnati, on appeal, argued that the policy contained a clause requiring timely notice for claims to be covered and that Cincinnati be notified as soon as practicable of an occurrence which may result in a claim or suit.

The auto accident occurred in August 2010, but Sam did not notify Cincinnati until 26 months later, although Toni’s estate alerted Cincinnati 16 months after the accident that it intended on filing a claim. The Court stated that 16 months is not remotely “as soon as practicable” after Toni’s death. However, the notification requirement is found in a sub-paragraph in a longer provision that specifies the consequences of noncompliance with a list of duties. In that paragraph, the policy provided that Cincinnati had no duty to provide coverage if the insured’s failure to comply with the listed duties is prejudicial.  Cincinnati asserts that the delay could have been prejudicial but failed to identify any concrete prejudice.  Thus, the Court reasoned that the delay did not affect Cincinnati’s duties.

Cincinnati’s second argument asserts that it issued an excess policy and that State Farm is still defending Sam.  Thus, Cincinnati maintains that it is entitled sit on the sidelines until State Farm writes a check.  The Court found this was not remotely what the policy says.  The policy requires the Chees to maintain other coverage or choose self-insurance for the initial layer, of at least $250,000 per person and $500,000 per occurrence, which they did.  Thus Cincinnati is not liable for the first $250,000 per person (or $500,000 in aggregate) of loss. But the policy does not excuse Cincinnati from supplying a defense or from paying any liability exceeding that amount.  To the contrary, the defense clause of Cincinnati’s policy provides:

We will have the right and duty to defend the insured against any suit seeking damages because of bodily injury, personal injury or property damage to which this insurance applies. We will have no duty to defend the insured against any suit seeking damages for bodily injury, personal injury or property damage to which this insurance does not apply. We may, at our discretion, investigate any occurrence and settle any claim or suit that may result when:

a. The applicable limit of the underlying insurance and any other insurance have been exhausted by payment of claims; or

b. Damages are sought for bodily injury, property damage or personal injury to which no underlying insurance or other insurance applies.

The Court determined this language clearly says that if the policy applies to the claim, Cincinnati must defend. Then, once the applicable limit of underlying insurance has been paid out Cincinnati obtains the right to settle the claim or suit. However, neither the duty to defend nor the duty to indemnify depends on payment of the applicable limit, for good reason. If another insurer’s payment “were essential to Cincinnati’s duties, then the bankruptcy—or just the unreasonable conduct—of the primary insurer would leave the insured bereft of coverage.”

Cincinnati next argued that the policy contained an exclusion that the insurance did not apply to any bodily injury or personal injury to any insureds and the Chees were the insureds.  The exclusion reflects a widely held belief that intra-family suits are designed to extract money from third parties – that, but for insurance, there would be no litigation at all.  However, the exclusion has an exception required by 215 ILCS 5/143.01(a) that is triggered when a third-party acquires a right of contribution against the insured or any relative.  Because the hospital and some physicians were seeking contribution against Sam, this exception overrode the exclusion.

Finally, the duty of indemnity, if any, depends on circumstances in the underlying litigation.  Therefore, it is inappropriate to try to resolve a coverage matter in an anticipatory action seeking a declaratory judgment.  Trying to pin down what duties of indemnity Cincinnati might owe in the other suit under various possible outcomes would be premature.

The judgment of the district court is affirmed to the extent that it requires Cincinnati to defend Sam’s interests in the suit between Toni’s estate and the medical defendants, otherwise the judgment is reversed.

Cincinnati Insurance Co. v. Estate of Toni Chee, et al., No. 15-3243, U.S. 7th Cir. Court of Appeals (June 13, 2016).

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