IL 1st Dist. – Stays Coverage DJshoke2013
Applicability of Exclusions Requires Determination of Facts in Dispute in Underlying Litigation
On interlocutory appeal, an Illinois court, applying Illinois law, upheld the trial court’s ruling granting a stay on the issue of whether Continental Casualty Company (“Continental”) owed a duty to indemnify Northwestern Medical Faculty Foundation (the “Foundation”) for any liability the Foundation incurred due to lawsuits filed against it because of the failure of the Foundation’s cryogenic tanks. The trial court did not abuse its discretion in granting the stay, because the analysis regarding the application of policy exclusions would require the determination of an ultimate fact in dispute in the underlying lawsuits.
The Foundation owned and operated a cryopreservation and storage tank for semen and testicular tissue. The underlying plaintiffs provided samples to the Foundation for storage and paid a storage fee. The underlying plaintiffs alleged that during a two month period their samples thawed and were irreversibly damaged due to failure of the cryopreservation tank. Approximately 65 lawsuits were filed against the Foundation and Northwestern Memorial Hospital (“Northwestern Memorial”) seeking damages related to damaged samples. The Foundation tendered the lawsuits to its insurer, Sentry Insurance (“Sentry”). Sentry accepted the defense under a reservation of rights. Sentry then filed a lawsuit against the Foundation and the Foundation’s excess insurer, Continental, seeking a declaration that it owed no duty to defend or indemnify the Foundation. In response, Continental filed a counterclaim seeking a declaration that it owed no coverage obligations to the Foundation. Both insurers argued that they had no coverage obligations for the underlying lawsuits due to the “care, custody, or control” and “professional services” exclusions found in their respective policies.
The Foundation filed a motion to dismiss or alternatively to stay the coverage issues, arguing that the resolution of whether the insurers had a duty to defend required the determination of disputed facts at issue in the underlying lawsuit, specifically, whether the Foundation had exclusive possessory control over the samples at the time they were allegedly damaged and the responsibilities of the parties involved with the cryogenic process. The trial court held that it was appropriate to stay the determination of the duty to indemnify until the duty to defend had been determined. The trial court also found that it was premature to determine whether the “care, custody, or control” and “professional services” exclusions applied to deny coverage agreeing with the Foundation regarding the impact as related to facts in dispute in the underlying litigation. Conversely, the trial court ruled that the determination of the duty to defend was ripe for adjudication. The insurers appealed. Sentry ultimately settled with the Foundation, leaving only Continental’s appeal.
On appeal, the court stated that “[u]nder the Peppers doctrine, it is generally inappropriate for a court considering a declaratory judgment action to decide issues of ultimate fact that could bind the parties to the underlying litigation.” The appellate court held that the trial court did not abuse its discretion in deciding to stay the litigation concerning the application of the “care, custody, or control” exclusion: “[A] finding that the Foundation had exclusive possessory control over the specimens at the time of the damage could preclude the underlying plaintiffs’ right to recover under the bailment and negligence theories they alleged in their complaints against [Northwestern Memorial].” Similarly, the appellate court held that the trial court did not abuse its discretion in staying the determination of the application of the professional services exclusion by taking a “cautious approach and choosing not to decide an issue that it believed had the potential to affect the underlying lawsuits.” According to the appellate court, it could not determine whether the Foundation’s conduct constituted “professional services” by only looking at the underlying complaints.
Moreover, the appellate court held that the trial court did not abuse its discretion in ruling that the duty to defend analysis could proceed. Continental had a duty to defend if the allegations of the underlying complaints fall potentially within the policies’ coverage and the court found that analysis could be done without deciding any ultimate facts in the underlying litigation. Sentry Insurance v. Continental Casualty Co., 2017 IL App (1st) 161785 (Mar. 24, 2017).