Insurer May Seek a Declaratory Judgment or Defend a Suit Against Insured Under a Reservation of Rights
In Grinnell Mutual Reinsurance Company v. Hubbs, the insurance company, Grinnell Mutual Reinsurance (“Grinnell”), brought a declaratory judgment against Larry and Leeann Hubbs (“Hubbs”) and John Mercer (“Mercer”). Mercer brought an action against the insured and alleged damage to his cropland caused by the insured’s alternation of the flow and level of surface groundwater caused by the Hubbs’ construction of a holding pond. The Hubbs tendered Mercer’s claim to Grinnell for defense. By letter, Grinnell denied coverage based upon the following policy exclusions: “We do not cover property damage resulting from diversion or obstruction of streams or surface water, or from interference with natural drainage to or from the land of others.”
The court addressed the question of whether the language of the policy is so clear and unambiguous as to exclude Mercer’s claim from coverage. Illinois law has long recognized that insurance policies, including exclusionary provisions, will be applied as written unless they violate public policy. The policy at issue excluded coverage for damage that resulted from “divergence or obstruction of streams of surface water” or property damage that resulted from “interference with natural drainage to or from the land of others.” The insured maintained that: (1) there was no proof in the record that the construction of the retention pond “resulted” in damage to Mercer’s property; and (2) the term “drainage” in the exclusion is ambiguous since it could be read as to apply only to “surface” drainage and not “subsurface” drainage. The insured further maintained that if the construction interfered with the drainage of Mercer’s property, it only impaired “subsurface” drainage, and the policy can be read to provide coverage for Mercer’s alleged property damage.
The court stated, however, that the insured’s argument fails as a matter of law. In Illinois, the term “drainage” applies to both surface and subsurface drainage patterns. Therefore, as a matter of law, the term drainage in the policy exclusion must be read to include both surface and subsurface. The court reviewed the pleadings and supported attachments and found no genuine issue of material fact. The record clearly established that construction of the retention pond interfered with the natural drainage on Mercer’s land and resulted in damage to Mercer’s property. The insured also argued that the trial court erred in considering testimony of experts, because a trial court may not consider any evidence beyond the four corners of the insurance policy when determining whether a duty to defend exists under the policy. The Illinois Supreme Court had rejected that notion. All evidence properly before the court may be considered when determining whether an insurance company has a duty to defend the insured under the policy. The court, therefore, determined that it was appropriate to consider the testimony of the witnesses. Insured’s final argument was that Grinnell’s declaratory judgment should be denied because it can defend the claim under a reservation of rights. The court determined that that argument lacked merit. It is well settled that an insurer may either seek a declaratory judgment or defend the suit against its insured under a reservation of rights. The court determined that no authority has been offered to support the proposition that an insurer must defend a claim under a reservation of rights.
Grinnell Mutual Reinsurance Company v. Hubbs, 988 N.E.2d 761 (Ill.App. 3 Dist., 2013).
