District Court Makes Illi-noise Whether Policy Language Can Alter A Long-Standing Duty To Defend Rule

District Court Makes Illi-noise Whether Policy Language Can Alter A Long-Standing Duty To Defend Rule

Court Prevents Insurer From De-fending For Itself

Randy Maniloff   Randy J. Maniloff, White and Williams, LLP

This is the first issue of Binding Authority in over a month.  That's a long time between issues, as the publication schedule in 2012 has generally been an issue every 7 to 10 days.  But, simply put, there have not been any cases that have met the publication criteria.  And Binding Authority's long-standing promise to it readers has been to never send an issue just for the sake of it.  No irrelevant e-mails.  Period.  Apparently, according to those I live with, I save my irrelevant comments for home.

As someone who reads a lot of coverage cases, it is unusual for me to pick up a new decision and say - "Gee whiz, I've never seen that issue addressed before."  Seeing a new take on an issue, sure.  Unique policy language, of course.  But coming across an entirely new issue is not typical.  However, that's what happened when I read the Northern District of Illinois's decision in Philadelphia Indemnity Insurance Company v. Chicago Title Insurance Company.

Chicago Title is complicated and involves lots of issues.  But for purposes of discussing the one that matters here, we can skip over most of that, including even the facts.  At issue was this - Chicago Title had a duty to defend an insured in an underlying action.  It is well-settled under Illinois law - and the law in most places - that if an insurer has a duty to defend one count of a complaint, it has a duty to defend all counts of the complaint.  The court referred to this as Illinois's default rule for purposes of duty to defend.  Chicago Title at 9-10.  So far, nothing controversial.

But here's the rub - The Chicago Title policy contained a provision that discussed certain duty to defend issues, and then went on to state: "[Chicago Title] will not pay any fees, costs or expenses incurred by the insured in the defense of those causes of action which allege matters not insured under the policy."  Id. at 3.

In other words, at issue was this - Did Chicago Title's policy language, which limits the duty to defend to solely potentially covered claims, trump Illinois's long-standing rule that if an insurer has a duty to defend one count of a complaint, it has a duty to defend all counts of the complaint?

The court held that it did not, stating that Chicago Title could not "contract around" its duty to provide a complete defense, so long as one count of a complaint is potentially covered.  Id. at 15.  Put another way, a policy cannot "undo a default rule imposed by law."  Id. at 19.  As such, Chicago Title had a duty to provide its insured with a complete defense. 

The rationale for the Chicago Title court's decision was this.  The Illinois Supreme Court, in Maryland Casualty v. Peppers (1976), adopted these duty to defend rules:  (1) "If the complaint alleges facts within the coverage of the policy or potentially within the coverage of the policy the duty to defend has been established."  (2)  "This duty to defend extends to cases where the complaint alleges several causes of action or theories of recovery against an insured, one of which is within the coverage of a policy while the others may not be."  Id. at 14.  What's more, the Chicago Title court noted, other Illinois cases have used this same 2-step process for determining if an insurer has a duty to defend.  Id.

The Chicago Title court concluded that (here's the money paragraph):

[f]or both of these propositions, the court made no reference to the policy language, instead citing a large number of Illinois cases and secondary sources. This strongly indicates that, like courts in Ohio, Illinois courts impose the complete defense rule as a matter of law, turning to the policy language only to determine whether any facts in a complaint bring a case within the scope of coverage.

Id. (emphasis added).  "No case that Chicago Title has cited or that the Court has found suggests that the duty to provide a complete defense arises based on the terms of an insurance policy rather than as a matter of law.  The Court therefore concludes that Chicago Title may not contract around this duty."  Id. at 15.

As an unpublished federal District Court opinion, Chicago Title is certainly not the last word on the ability of insurers to draft, and uphold, policy language that conflicts with case law.  But with more and more manuscript forms and endorsements in use, insurers may face challenges - freedom of contract notwithstanding - in upholding such policy provisions, if they conflict with coverage rules that are deemed to exist as a matter of law or fundamental principle, as opposed to having been created based on policy language.

A free copy of the Northern District of Illinois's May 11th decision can be accessed here: Philadelphia Indemnity Insurance Company v. Chicago Title Insurance Company.

Sign in with your Lexis.com ID to access the full text of the Lexis enhanced version of the Phila. Indem. Ins. Co. v. Chi. Title Ins. Co., 2012 U.S. Dist. LEXIS 66595 (N.D. Ill. May 11, 2012) decision with case summary, headnotes, and Shepard's.

Please let me know if you have any questions.

Randy J. Maniloff
White and Williams LLP
1800 One Liberty Place | Philadelphia, PA 19103-7395
Direct Dial: 215.864.6311 | Direct Fax: 215.789.7608

The views expressed herein are solely those of the author and not necessarily those of the firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. The term "Binding Authority" is used herein for literary purposes only and is not an admission that any case discussed herein is in fact binding authority on any court.

Randy J. Maniloff is a Partner at White and Williams, LLP in Philadelphia.  He concentrates his practice in the representation of insurers in coverage disputes over various types of claims.  He writes frequently on insurance coverage topics for a variety of industry publications.  Maniloff's views on coverage issues have been quoted by numerous media including The Wall Street Journal, The New York Times, USA Today, Associated Press and Dow Jones Newswires.  Randy is co-author of "General Liability Insurance Coverage - Key Issues In Every State," a book addressing the law in all 50 states on twenty key liability insurance coverage issues (Second Edition; Oxford University Press 2012) (with Professor Jeffrey Stempel of the University of Nevada Las Vegas Boyd School of Law).

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