MASONIC MEDICAL CTR. v. Turegum Ins. Co.

Citations: 522 N.E.2d 611; 168 Ill. App. 3d 158Docket: 87-3332

Court: Appellate Court of Illinois; May 6, 1988; Illinois; State Appellate Court

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In the case Illinois Masonic Medical Center v. Turegum Insurance Company, the Illinois Appellate Court addressed an interlocutory appeal concerning a preliminary mandatory injunction related to a declaratory judgment action. Yeong Shin had filed a medical malpractice lawsuit against Dr. Jose Salazar and the Hospital, asserting negligence during three hospitalization periods that resulted in her permanent brain damage. The Hospital sought declaratory judgment and injunctive relief from Turegum, its professional liability insurance provider, claiming coverage for incidents up until December 1, 1977. 

Turegum acknowledged coverage for the period immediately before the policy's termination but denied liability for any claims arising from hospitalizations after that date. The insurer's counsel indicated that while they would defend the Hospital as a courtesy, they could not cover claims post-termination and requested clarification on who would represent the Hospital for those claims. Following Turegum's refusal to relinquish control of the defense to the Hospital's chosen counsel, the Hospital filed a motion for a preliminary injunction, arguing a conflict of interest existed between them and Turegum. The court affirmed the injunction, highlighting Turegum's duty under the insurance contract to defend all claims within coverage, and the potential for Turegum to inadequately defend claims occurring after the policy's expiration to shift liability to the Hospital.

The Hospital is entitled to choose its own counsel and be reimbursed by Turegum for reasonable defense costs due to Turegum's obligation to provide a defense. On October 2, 1987, the trial court granted the Hospital's motion and denied Turegum's request for a stay, leading to the current appeal. Under Illinois law, insurers must defend insured parties when claims potentially fall within the policy, regardless of whether allegations are ultimately groundless. The insurer's duty to defend is broader than its duty to indemnify, allowing for defense against claims not covered by the policy. Insurers can defend under reservation of rights or seek declaratory judgments to avoid coverage issues, or they risk being estopped from denying coverage later.

Typically, insurers control the defense to protect their financial interests, while their retained attorneys owe fiduciary duties to the insured. However, conflicts of interest may arise if the insurer's attorney is more aligned with the insurer's interests. In such cases, Illinois courts allow the insured to take control of their defense, with the insurer still obligated to pay reasonable defense costs. A conflict is present when the insurer might provide a less vigorous defense to protect its interests. However, merely having an interest in denying coverage is insufficient to prevent the insurer from assuming control, unless the underlying claims involve both covered and uncovered allegations.

Turegum argues that the trial court incorrectly identified a conflict of interest, explaining that such a conflict in an insured-insurer relationship necessitates separate counsel only when the underlying action's outcome impacts a later declaratory judgment on coverage. The contention emphasizes that conflicts typically arise in cases involving multiple insured parties under the same insurer or intentional torts, where factual issues could lead to uninsured judgments against the insured. 

Turegum references Murphy v. Urso and Maryland Casualty Co. v. Peppers to illustrate instances of conflict. In Murphy, the court determined that both the vehicle owner and driver had conflicting interests—while the driver sought to demonstrate he was acting within the scope of his employment for coverage, the owner aimed to show he was unauthorized. Consequently, the court ruled that the insurer must fund independent counsel due to the conflict. 

In contrast, Clemmons v. Travelers Insurance Co. involved a case where the driver, Reed, was not named as a defendant and thus, Travelers denied liability. The court established that because the allegations in Clemmons fell within the policy's coverage, Travelers had an obligation to defend Reed, paralleling the outcome in Murphy. Both cases highlight the insurer's duty to defend when there are allegations potentially covered by the policy.

The court determined that Travelers had a duty to defend Reed, as there was no conflict of interest similar to Murphy's case. Since the owner was not a defendant, Travelers’ interests were aligned with Reed's; both aimed to demonstrate that no negligence occurred. The court clarified that the case against Reed solely revolved around the driver's negligence, without the complexities of permission affecting the parties’ interests.

Turegum argued that it and the Hospital shared a common interest in proving the absence of negligence, asserting that the timing of any alleged negligence would not be crucial in the underlying case. Thus, no ruling in that tort action would create a conflict of interest necessitating Travelers to withdraw from the defense or reimburse the Hospital.

In contrast, the Hospital contended that a liability finding against it could impact subsequent declaratory judgment proceedings against Turegum, as establishing negligence would likely involve determining when the negligent act occurred. The Hospital also maintained that under Illinois law, a conflict of interest arises whenever the allegations in a complaint and the terms of the policy indicate that the insured might manipulate the proceedings or mount a less vigorous defense to shift liability.

The Hospital cited Murphy, emphasizing that any conflict, regardless of specifics, undermines the insured's right to choose their counsel. It referenced letters from Turegum’s counsel declining to defend against claims outside the scope of the policy, reinforcing the notion of a conflict. The Hospital further argued that the case of Pepper Construction Co. v. Casualty Insurance Co. was more relevant than Clemmons v. Travelers Insurance Co., as Pepper involved similar issues surrounding liability and defense obligations following an incident leading to substantial damages.

Pepper sought a defense from Casualty, which agreed to provide it but reserved its rights under the policy. Casualty confirmed it would indemnify Pepper for subcontractor work but denied coverage for Pepper's own work, advising Pepper to hire separate counsel for claims against the subcontractors. In response, Pepper filed a lawsuit against Casualty, claiming a conflict of interest and asserting its right to control its defense. Pepper requested that Casualty allow its chosen counsel to take over the defense and reimburse the associated costs. Casualty contended that since it acknowledged liability for damages regardless of fault, there was no conflict of interest. However, the court disagreed, stating that if Pepper was found vicariously liable for subcontractor work, coverage would apply to the full amount, but if found liable for its own work, coverage would not extend to repair costs. This established a conflict of interest that entitled Pepper to select its own counsel and seek reimbursement.

Similarly, in a related case involving Turegum and a malpractice claim against Shin, the court found that Turegum's best interests aligned with asserting that any malpractice occurred during periods when the insurance policy was not in effect. This created a conflict of interest requiring Turegum to cede control of the defense to the Hospital's chosen counsel. Turegum's argument that its selected counsel would not compromise the defense was rejected, as the Code of Professional Responsibility mandates that a lawyer must represent clients with undivided loyalty, thus precluding the possibility of adequately defending conflicting interests without full consent and disclosure from all parties involved.

The supreme court intended to eliminate conflicts between the interests of the insured and the insurer, establishing that the insured is entitled to representation by counsel whose loyalty is unequivocally undivided in such cases. Turegum's argument regarding potential prejudice from the Hospital's counsel overlooks that the Hospital is the defendant in the underlying action, and its broader goal is to mount a vigorous defense against all allegations, not solely to evade financial liability for malpractice. Turegum contends that the trial court erred in requiring it to relinquish defense control to the Hospital's attorneys and to reimburse the Hospital for legal fees. It asserts that this decision conflicts with the precedent set in Maryland Casualty Co. v. Peppers, where the court found that a conflict of interest entitled Peppers to independent counsel while also allowing the insurer to participate in the litigation. However, subsequent rulings in Murphy v. Urso and Thornton v. Paul clarified that when an actual conflict exists, the insurer cannot partake in the defense.

Turegum argues that the insurer's right to participate in the defense is not directly addressed in the cases of Murphy and Thornton, and that the phrase "or permitted" is merely dicta that does not alter established law, which asserts that an insurer can participate in the defense even amidst conflicts. Turegum distinguishes this case from typical conflicts between an insured and insurer concerning a single claim under one policy, positing that it is more akin to situations involving multiple policies from different carriers or a dramshop action where coverage overlaps. Turegum claims that the Hospital had other coverage through a self-insurance program during Shin's hospitalizations and argues that the Hospital should not be favored over a commercial insurer, which would typically need to cooperate with other carriers in a joint defense and cover its own legal fees. Although the underlying suit involves negligence that may have occurred during or after the policy period, it asserts that the insurer's obligations are triggered by events occurring while the policy was in effect, regardless of other insurance. The courts in Thornton and Murphy did not explore the reasoning behind prohibiting insurer participation in defense. Turegum acknowledges that, as per Maryland Casualty, even if allowed to participate, its involvement would ultimately depend on the Hospital's attorney, who could determine that Turegum's participation might be detrimental to the Hospital's interests. The Hospital's attorney indicated a refusal to allow Turegum's attorneys to participate under the current circumstances.

The trial court correctly identified a conflict of interest between the Hospital and Turegum, granting the Hospital control over the defense in the Shin action and the right to be reimbursed for related costs. The court's discretion in issuing a preliminary injunction was justified, as it sought to prevent irreparable harm to the Hospital from being defended by an insurer with opposing interests. Turegum's suggestion that the ruling could imply it would be bound by a judgment in the Shin case was clarified, with both the Hospital and the court agreeing that Turegum would not be bound by such a judgment. The Hospital maintained that Illinois law allows Turegum to initiate a declaratory action after covering defense costs and that Turegum would not be estopped from asserting a non-coverage defense due to any judgment in the Shin case. The trial court's order for a preliminary injunction was affirmed. Judges Pincham and Murray concurred. A referenced case, Home Insurance Co. v. Lorelei Restaurant Co., illustrated the potential complications and prejudice that could arise from allowing opposing interests to participate in the defense.