Seventh Cir. Strikes Insurer’s Coverage Defenses for Failure to Defend

The Seventh Circuit, applying Illinois law, held that an insurer who repeatedly refused to defend its policyholder breached its duty to defend and, therefore, was estopped from asserting coverage defenses.

In August 2010, Gustavo and Maria Bernal were injured in a car accident caused by a semi-tractor trailer owned by Michael Barengolts and driven by his son, Viktor Barengolts. At the time of the accident, the semi bore a placard with the name Unlimited Carrier. The Bernals sued Unlimited Carrier and the Barengoltses, both in their individual capacities and as agents of Unlimited Carrier. The Barengoltses tendered the claim to Artisan & Truckers Casualty Co. (“Artisan”). Unlimited Carrier tendered the claim to National American Insurance Co. (“National”).

Artisan initially denied the claim on the basis that the Contingent Liability Endorsement excluded coverage because the tractor was being driven on behalf of Unlimited Carrier at the time. However, the Barengoltses were not under dispatch or picking up a load for Unlimited Carrier and did not actually sign a lease with Unlimited Carrier until 8 days after the accident. After being informed of this, Artisan still refused to defend the Barengoltses several additional times. National defended Unlimited Carrier. National also defended the Barengoltses under a reservation of rights. After settlement of the underlying claim, the Barengoltses assigned their rights under the Artisan policy to National. National filed suit against Artisan seeking a judgment that Artisan breached its duty to defend and indemnify and seeking equitable contribution.

The District Court granted summary judgment in favor of National, finding that Artisan breached its duty to defend and, therefore, was estopped from asserting defenses under its policy, and ordering Artisan to reimburse National for the amount of the settlement and the costs of defending the Barengoltses. Artisan appealed.

The Seventh Circuit affirmed summary judgment in favor of National, finding that Artisan’s duty to defend was triggered because, in addition to the agency counts, the Bernals’ complaint pled individual counts against the Barengoltses, which put Artisan on notice that there was, at a minimum, a possibility that the accident was within the scope of coverage. The court reasoned that, under Illinois law, an insurer’s duty to defend is broad and is triggered when a complaint alleges facts that are fall even potentially within policy’s coverage. The court also reasoned that the duty to defend extends to cases where some of the allegations fall outside of coverage, as long as at least one cause of action is potentially within coverage. The court held that, by repeatedly refusing to defend the Barengoltses, Artisan breached its duty to defend.

The court rejected Artisan’s argument that it had no duty to defend based on its belief that Unlimited Carrier was ultimately liable to the Bernals. First, the court said that Artisan was conflating the duty to defend with the duty to indemnify:

The duty of an insurance company to defend against a suit against its insured is determined by the allegations of the complaint in that suit rather than by what is actually proved…By contrast, the duty to indemnify is determined once liability has been affixed…While Artisan’s concept of “ultimate liability” may translate to its duty to indemnify the Barengoltses, it has no application to its duty to defend them.

Second, the court rejected Artisan’s theory by finding that Artisan’s interpretation of liability based on the fact the semi had an Unlimited Carrier placard was incorrect: “Just because a plaintiff can quickly identify and sue the company whose placard appeared on the vehicle…does not mean that the same plaintiff cannot sue – and recover from – others who may also be at fault.”

The Seventh Circuit also affirmed the district court’s decision estopping Artisan from raising coverage defenses. The court reasoned that, under Illinois law, to avoid estoppel, Artisan had to defend under a reservation of rights or seek a declaratory judgment regarding coverage, and Artisan did neither. The court noted, “Estoppel incentivizes action over inaction, which ultimately inures to the benefit of the insured….an insurer that believes an insured is not covered under a policy cannot simply refuse to defend the insured….” Nat’l Am. Ins. Co. v. Artisan & Truckers Cas. Co., No. 14-2694 (7th Cir. Aug. 6, 2015).