Legion Insurance v. Empire Fire & Marine Insurance

Citations: 354 Ill. App. 3d 699; 290 Ill. Dec. 719; 822 N.E.2d 1; 2004 Ill. App. LEXIS 1539Docket: No. 1-03-2833

Court: Appellate Court of Illinois; December 23, 2004; Illinois; State Appellate Court

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Legion Insurance Company (Legion) initiated a contribution and declaratory judgment action against Empire Fire & Marine Insurance Company (Empire) regarding their mutual insured, Barreo Industries, Inc. (Barreo). Empire counterclaimed for a declaratory judgment, asserting it had no duty to defend or indemnify Barreo. The trial court ruled in favor of Empire, prompting Legion to appeal. Legion contended that Empire's policy provided coverage for Barreo and that it was entitled to seek contribution from Empire. However, the court determined that Barreo had deactivated its previous defense tender to Empire, thus Empire's policy was not applicable, leading to the affirmation of the trial court's decision.

Background details include that Joseph J. Duffy Co. (Duffy) was the general contractor at a Chicago construction site where Barreo, a subcontractor for Ozark Steel Sales, was involved. After an employee of Unified Management, Inc. (leased to Barreo), Ronald Stone, was injured on site, he sued Duffy and Ozark. Duffy and Ozark then filed third-party contribution claims against Barreo. Ozark claimed that Barreo waived its Kotecki cap on contribution liability through their subcontract, and Barreo asserted this cap as a defense. The trial court agreed with Ozark that Barreo waived its Kotecki cap.

At the time of Stone's injury, Barreo held two insurance policies: a workers’ compensation policy from Legion and a commercial general liability policy from Empire. Barreo initially tendered its defense to both insurers, with Legion providing a defense under a reservation of rights. However, Barreo later requested to withdraw the tender to Empire. Empire subsequently refused coverage and filed for a declaratory judgment regarding its obligations. The related lawsuits were settled for $2,040,000, with Barreo's share being $640,000, which Legion paid, also waiving a workers’ compensation lien. The original lawsuit and contribution actions were then dismissed.

On October 8, 2002, Legion initiated a four-count complaint against Empire for indemnification, contribution, declaratory judgment, and estoppel, asserting that Empire was obligated to defend and indemnify Barreo in a third-party action and contribute to the settlement costs. Legion sought damages and attorney fees for defending Barreo. In response, Empire argued that Barreo rescinded its request for defense via a letter dated July 20, 2000, which indicated that Barreo did not intend to seek coverage from Empire. Empire subsequently filed a counterclaim for a declaratory judgment asserting no duty to defend or indemnify Barreo due to policy exclusions, again referencing the July 20 letter.

On February 19, 2003, Empire moved for summary judgment, citing exclusion (e)(1) of its commercial general liability (CGL) policy, which excludes coverage for employee injuries sustained during employment. Empire contended that the exception for liabilities assumed under an "insured contract" did not apply to the Barreo-Ozark subcontract, referencing the case of Hankins v. Pekin Insurance Co. Additionally, Empire maintained that Barreo's July 20 letter nullified any prior tender of defense, negating Empire's duty to provide coverage. Conversely, Legion filed a cross-motion for summary judgment, arguing that Empire's policy covered losses exceeding the Kotecki limit and contended Empire owed $640,000 and half of the defense costs to Legion.

The court ruled in favor of Empire, concluding that the CGL policy's exclusions applied, thereby negating any duty to defend or indemnify Barreo, and consequently, Legion could not seek contribution from Empire. Empire's motion for summary judgment on both the complaint and counterclaim was granted, while Legion's motion was denied. Legion subsequently appealed the ruling. The court's decision was based on established legal standards for summary judgment, affirming that no genuine issue of material fact existed and that the case involved only questions of law.

Summary judgment is reviewed de novo, allowing affirmation of the trial court's ruling on any basis in the record. A key issue is whether Barreo sought coverage under Empire's policy, which the court found it did not. Under the "selective tender" rule, an insured has the right to choose among multiple insurance policies and may decline an insurer's participation in a claim for various reasons, such as concerns over premium increases or policy cancellations. This right extends to deactivating coverage with one insurer to invoke exclusive coverage with another. An insurer is only liable for defense and indemnity costs when its policy is triggered. If an insured explicitly instructs an insurer not to participate in litigation, the insurer is relieved of its obligations regarding that claim. In this case, Barreo initially tendered its defense to Legion, which provided a defense under a reservation of rights, and later tendered its defense to Empire, formally notifying them of the situation.

Dewayne Bates of Barreo Industries, Inc. sent a letter to Lambert on July 20, 2000, indicating that Barreo did not wish to tender third-party actions for contribution from Ozark Steel Fabricators, Inc. and Joseph J. Duffy Co. to Empire Fire and Marine Insurance Company. The letter clarified that Barreo was only notifying Empire of potential claims due to a reservation of rights letter from Legion Insurance Company and an 'Alternate Employer' endorsement. Barreo emphasized the need for proper indemnification and coverage for defense costs and stated that it would inform Empire if it needed to tender the defense should Legion deny coverage. Importantly, Barreo's letter deactivated any prior tender to Empire and explicitly instructed that Legion should undertake its defense in these matters.

Legion argued that Barreo’s letter did not deactivate Empire's coverage, citing the case of Dearborn Insurance Co. v. International Surplus Lines Insurance Co., where a letter from an insured was deemed to trigger the insurer's duty to defend. However, the court found the cases distinguishable, noting that Barreo's letter provided clear instructions not to defend, unlike the ambiguous communication in Dearborn. Barreo's unequivocal language indicated its desire for Legion to manage its defense, thus negating any obligation for Empire to provide defense in the third-party actions.

Barreo had the legal right to cancel coverage with Empire for the Duffy and Ozark contribution actions, as established by relevant case law. His letter dated July 20, 2000, served as a formal deactivation of Empire’s coverage, demonstrating his intent to seek coverage solely from Legion. Consequently, Legion assumed full responsibility to defend and indemnify Barreo against these claims, relieving Empire of any such obligations. Empire's only remaining duty was to provide standby coverage if Legion failed to defend, which it did not. As a result, Empire was not required to defend or indemnify Barreo for the claims, and Legion was not entitled to contribution from Empire. The trial court's decision to grant summary judgment to Empire and deny Legion’s motion for summary judgment was appropriate and upheld. Empire later dismissed its declaratory judgment action without prejudice on September 14, 2001.