CBA Record January 2018

A client sends you a multi-count complaint that was served on her. She tells you to offer nothing in settlement to that rotten plaintiff who had the audacity to sue her. You read the complaint carefully and realize that while the client certainly has no liability insurance coverage for most of the claims, there might be coverage for at least one. What do you do?

Y OUMUSTTENDERTHEDEFENSEOFTHEENTIRECASE to the client’s liability insurer to see if they will defend and indemnify. The standard of care requires that. You will likely find yourself plodding through the client’s insurance policy and coming across the usual provision that the insurer controls the defense. You know what that means: One of the regular insurance defense attorneys in town is going to get this business, not you. The client tells you she would prefer to be represented by you, her trusted adviser for years, but if the insurance company’s attor- ney is not going to cost her anything, well, so much for loyalty. Is there anything you can do that is in both the best interest of yourself and your client? Yes, there is. You can read Maryland Casualty Co. v. Peppers, 64 Ill.2d 187 (1976), and its progeny. The Peppers doctrine may be your salvation. But first, a little insurance law background: The Duty to Defend v. the Duty to Indemnify Every liability insurance policy contains two contractual promises made to the insured by the insurer: first, to defend the insured in the litigation at the insurer’s expense, i.e., to pay defense coun- sel’s bills and expenses of litigation; and second, to indemnify the insured if she loses, i.e., to pay to the plaintiff any judgment entered against the defendant-insured up to the amount of the policy limit. Those two promises are at the core of every liability policy, but they operate quite differently. A liability insurer may not justifiably refuse to defend an action against its insured unless it is clear from the face of the complaint that the allegations fail to state facts which bring the case within, or potentially within, the policy’s coverage. United States Fidelity & Guaranty Co. v.Wilkin Insulation Co., 144 Ill.2d 64, 73 (1991); Conway v. Country Casualty Insurance Co., 92 Ill.2d 388, 393 (1982); Country Mutual Insurance Co. v. Bible Pork, Inc., 2015 IL App (5th) 140211, ¶ 16. The duty to defend is much broader than the duty to indemnify. Pekin Insurance Co. v. Wilson, 237 Ill.2d 446, 456 (2010); Pekin Insurance Co. v. Martin Cement Co., 2015 IL App (3d) 140290, ¶ 12. This is so because the duty to defend is triggered if the underly- ing complaint merely potentially or possibly falls within a policy’s coverage, whereas the duty to indemnify is triggered only when the resulting loss or damage actually comes within a policy’s coverage. General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146, 154-55 (2005); Stoneridge Develop- ment Co., Inc. v. Essex Insurance Co., 382 Ill.App.3d 731, 741 (2d Dist. 2008); Bible Pork, 2015 IL App (5th) 140211, ¶ 16. There need only be a possibility of recovery, not even a probability, to create a duty to defend. Zurich American Insurance Co. v. Wilcox

& Christopoulos, LLC, 2013 IL App (1st) 120402, ¶ 28; Illinois Municipal League Risk Management Ass’n v. City of Genoa, 2016 IL App (4th) 150550, ¶ 13. Under this standard, finding a duty to defend can sometimes be a no-brainer. “[T]he bar to finding a duty to defend is low.” Panfil v. Nautlius Insurance Co., 799 F.3d 716, 722 (7th Cir. 2015); Wilcox & Christopoulos, 2013 IL App (1st) 120402, ¶ 28. “The question of whether a claim against an insured is potentially covered is so close in so many cases that the benefit of the doubt goes to the insured.” Skolnik v. Allied Property Casualty Insurance Co., 2015 IL App (1st) 142438, ¶ 25. Crucially, the duty to defend extends to cases in which the complaint contains several theories or causes of action against the insured and only one of the theories or causes of action is within the policy’s coverage limits. International Insurance Co. v. Rollprint Packaging Products Inc., 312 Ill.App.3d 998, 1011, 728 N.E.2d 680, 692 (1st Dist. 2000); Bible Pork, 2015 IL App (5th) 140211, ¶ 16. Because the duty to defend is so much broader than the duty to indemnify, the insurer may readily become obligated to defend against causes of action and theories of recovery that the policy does not actually cover. Stoneridge Development, 382 Ill.App.3d at 741. Unlike many other jurisdictions, Illinois follows the complete- defense rule, not the allocation rule. Peppers, 64 Ill.2d at 194; Bedoya v. Illinois Founders Insurance Co., 293 Ill.App.3d 668, 674-75 (1st Dist. 1997). That means that in this state, if a com- plaint alleges several causes of action or theories of recovery against an insured, at least one of which is potentially within the policy’s coverage, the insurer must defend all of the counts, covered and non-covered–but it will indemnify only on the covered counts. If the insured ultimately loses on a covered count, the liability insurer pays, but if the insured loses on a non-covered count, the insured pays, even though she was being defended by the insurer throughout the life of the lawsuit. As an aside, there may be an exception to the complete-defense rule for title insurance. Philadelphia Indemnity Insurance Co. v. Chicago Title Insurance Co., 771 F.3d 391, 394 (7th Cir. 2014). The Intolerable Conflict The complete-defense rule (requiring the liability insurer to defend both covered and non-covered counts) can sometimes create an intolerable conflict of interest for the defense attorney hired by the insurer. Everyone on the defense side–the defendant, the insurer and the defense attorney–wants to win the case. But things don’t always turn out that way. Sometimes the plaintiff wins and the defendant loses. When that happens and there are covered counts

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