Insurer who Wrongfully Denies Coverage is Estopped from Raising Policy Defense to Coverage
In Mt. Hawley Ins. Co. v. Certain Underwriters at Llyod’s London, 311 Lincolnway Properties, LLC (owner of the property) and Builders, Inc. (general contractor) (Collectively, the “311 Entities”) were defendants in a worker’s personal injury suit following an accident on its construction site. The 311 Entities hired Toji Engineering, Ltd. (“Toji”) as a subcontractor to perform work on their project. Certain Underwriters at Llyod’s London (“Underwriters”) was an insurer that provided coverage to Toji, as named insured, under the CGL policy (the “Policy”). In this Policy, the 311 Entities were also named as “additional insureds.” Mt. Hawley Ins. Co. (“Mt. Hawley”) was an insurer that provided coverage for the 311 Entities under a separate CGL policy.
Mt. Hawley claimed that Underwriters had a duty to defend and indemnify the 311 Entities in the personal injury suit and breached this duty. Underwriters claimed that 311 Entities had waived its right to seek coverage under the Policy based on the law of the underlying personal injury case. Underwriters also claimed that the 311 Entities’ potential exposure to a liability caused by Toji, or on its behalf, was extinguished by the time the 311 Entities renewed its tender in 2012. Underwriters ultimately asserted that it had no duty to defend or indemnify the 311 Entities in the personal injury suit.
The court reviewed whether Underwriters’ defense, which stated that it owed no duty to indemnify the 311 Entities under the Policy because Toji was awarded summary judgment and found not liable in the personal injury suit, constituted a “policy defense” that triggers the estoppel doctrine. The court held that Underwriters’ defense fails to offer any persuasive reason showing that its proposed defense should not be considered a “policy defense” subject to estoppel. As a result, the court found that the circuit court properly applied the estoppel doctrine to bar Underwriters from asserting the “policy defense” that the summary judgment ruling in favor of Toji in the personal injury suit extinguished any duty of Toji to indemnify the 311 Entities under the terms of the Policy.
Illinois Insurance Law: An insurer who believes an insured is not covered under a policy cannot simply refuse to defend the insured. Instead, it must either defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage. If the insurer fails to take either of these steps and is later found to have wrongfully denied coverage, the insurer is estopped from raising policy defense to coverage.
Mt. Hawley Ins. Co. v. Certain Underwriters at Lloyd’s, London, 2014 IL App (1st) 133931.
