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Quarterly Review Newsletter Summer 2015: Insurance

Carrier Not Guilty Of Vexatious Delay Where Bona Fide Dispute Concerning U.M. Coverage Existed

The insured and her 19-month-old son were involved in an auto accident in which the insured died, and her son was injured. There were two possible scenarios to the accident. One was a single-car accident in which the auto spiraled out of control possibly due to a blown out tire or faulty brakes. The second was a hit-and-run scenario in which a second vehicle collided with the insured's auto. Founders denied uninsured motorist coverage believing the facts supported a single-car accident which would not be covered under the policy rather than hit-and-run. The trial court disagreed and entered summary judgment against the carrier and the insured's estate sought fees and costs for vexatious and unreasonable delay in settling the claim. The trial court entered summary judgment for the carrier on the vexatious refusal claim.

The First District affirmed. Where a bona fide dispute concerning coverage exists, costs and sanctions against a carrier are inappropriate. Where an insurer reasonably relies upon evidence sufficient to form a bona fide dispute, it has not acted unreasonably or vexatiously. As Founders had sufficient evidence on which it could reasonably dispute the hit-and-run theory, its conduct was not unreasonable. Illinois Founders Insurance Co. v. Williams, 2015 IL App (1st) 122481.

Auto Carrier Failed To Establish It Exercised Diligence In Obtaining Insured's Cooperation

The insured made a left turn causing another vehicle to swerve and strike another auto. An adjuster spoke with the insured over the telephone, but when he asked to take a recorded statement, the insured hung up. The adjuster called back and left a detailed message regarding the need for additional information. In total, the carrier's efforts to obtain information from the insured spanned 13 days and included five telephone calls and a skip trace. It then filed the present declaratory judgment action against the insured and the other driver holding it had no duty to defend and indemnify the insured because of the insured's breach of the cooperation clause. The trial court granted summary judgment against the carrier on the basis it had not established substantial prejudice.

The First District affirmed. To establish breach of the cooperation clause, the insurer must show that it exercised reasonable diligence in seeking the insured's participation and the insured's failure to participate was due to a refusal to cooperate. An insurer must prove substantial prejudice which will not be presumed. The carrier expended minimal effort to contact the insured personally and much more should have been undertaken to obtain his cooperation. It did not mail any letters, made no attempt to personally visit his known address or pursue alternative methods to talk with the insured. This demonstrated a cursory investigation. Also, the carrier could not prove substantial prejudice when it failed to conduct a proper investigation. American Access Cas. Co. v. Alassouli, 2015 IL App (1st) 141413.

Failure To Defend Or Institute Declaratory Judgment Subjected Carrier To Pay Settlement, Fees And Costs Incurred In Resolving Underlying Case

Artisan's insured was a semi-tractor involved in a collision. Artisan denied coverage because the policy excluded coverage when the insured was driving the tractor on behalf of another person. The tractor displayed placards for Unlimited Carrier. Unlimited Carrier eventually settled, and then filed the present declaratory judgment action against Artisan to recover the amount paid in settlement, attorney's fees and costs. The trial court ruled in favor of Unlimited Carrier holding the denial to defend was wrong.

The Seventh Circuit began its opinion stating: "This case provides a warning for insurance companies who refuse to defend their insureds." It held certain allegations of the complaint were potentially within coverage, and Artisan was wrong in failing to defend its insured. Therefore, it was estopped from asserting defenses under the policy. If a carrier does not defend under a reservation of rights or seek a declaratory judgment, it will be estopped from later raising a policy defense. National American Ins. Co. v. Artisan & Truckers Cas. Co., No. 14-2694, 2015 U.S. App LEXIS 13724 (7th Cir. Aug. 6, 2015).

UIM Coverage Not Intended To Permit Injured Employee To Collect More Than Would Be Received From The Tortfeasor

Plaintiff was injured in an auto accident at work. She received $103,224.02 in workers' compensation benefits. The adverse driver's insurance carrier paid its policy limits of $100,000 to the workers' compensation carrier. Plaintiff then pursued a UIM claim against her employer's insurer, and an arbitration panel awarded $310,000. Travelers then paid plaintiff $210,000, the difference between the arbitration award and the amount paid toward the workers' compensation lien. Plaintiff claimed Travelers owed her $100,000 because the adverse driver's carrier paid the money to her employer rather than her. The trial court disagreed and entered summary judgment for Travelers.

The Seventh Circuit affirmed. The purpose of UIM coverage is to place the insured in the same position as she would have occupied if the tortfeasor carried adequate insurance. UIM coverage is not intended to permit an injured employee to collect more than the employee would have been entitled to received from the tortfeasor alone. Refusing to consider the $100,000 payment as an amount that the employee received would lead to an impermissible double recovery making her better off than she would have been had the other driver had sufficient insurance. Berrey v. Travelers Indemnity Co., 770 F.3d 591 (7th Cir. 2014).

Contingent Auto Policy Did Not Provide Excess Coverage

A truck delivering road resurfacing material struck and killed a road construction flagger. Decedent's wife sued the driver and the trucking company that employed him. The truck driver had a $1,000,000 auto policy. The truck broker was an additional insured under that policy but also had a "Contingent Automobile Liability" policy. The policy provided that its coverage would not apply if the insured had "valid and collectible Automobile Liability insurance of any nature." The trial court held the contingent policy did not provide coverage.

The First District affirmed. It rejected plaintiff's argument that the policy should apply as excess coverage over the underlying policy. The policy language "shall not apply" if there is other insurance is different than saying that coverage will apply only in excess of the primary policy. As plaintiff could collect from the primary insurance, the contingent policy did not apply. Bartkowiak v. Underwriters at Lloyds, 2015 IL App (1st) 133549.

Wind Shear From Passing Semi Is Not Physical Contact Under UM Policy

The insured and his wife were riding the insured motorcycle when a semi coming from the opposite direction crossed over into his lane of travel. The insured swerved to the right to avoid contact, but his motorcycle was propelled off the roadway by a wind shear of the passing semi onto a gravel shoulder and into a ditch. The policy required the hit and run vehicle either strike the insured or the insured's vehicle. The trial court granted the insured summary judgment holding the wind shear was sufficient physical contact.

The First District reversed. There was no ambiguity in the physical contact requirement of the policy. Illinois courts allow recovery for an indirect physical contact when an object from the hit-and-run vehicle strikes the insured's vehicle. However, "contact" with air generated by a passing vehicle does not equate to indirect physical contact like a lug nut flying off a hit-and-run vehicle. State Farm Mut. Auto. Ins. Co. v. Benedetto, 2015 IL App (1st) 141521.

UM Policy Language Ambiguous As To Whether Coverage Extended For Hit-And-Run Accidents Involving No Physical Contact

Cincinnati sought a declaration that it had no obligation to pay a UM claim because the insured's accident did not involve physical contact between his truck and the hit-and-run vehicle. The insured claimed a car cut in front of him causing him to slam on his brakes, swerve to the right, hit a curb and roll over. A few eye witnesses said there was no other vehicle near the insured's truck. The policy language said: "If there is no physical contact with the hit-and-run vehicle, the facts of the 'accident' must be proved." The trial court certified for interlocutory appeal the question of whether the policy language was ambiguous.

The Third District held the policy language was ambiguous. While the policy required that the hit-and-run vehicle must hit, or cause an object to hit, the insured auto, the language also said if there is no contact, the facts of the accident must be proven. Those requirements were in conflict, and therefore, the policy was ambiguous. Cincinnati Ins. Co. v. Pritchett, 2015 IL App (3d) 130809.

Auto Liability Policy Did Not Cover Damage To Insured's Rental Car

The insured rented a car from Enterprise and was involved in a collision. Enterprise sued the insured for the damage. Founders filed the present declaratory judgment action on the basis that it issued only a liability policy which did not include collision coverage. The trial court agreed and entered summary judgment for Founders.

The First District affirmed. It noted the insured could have liability to Enterprise for damage to the rental vehicle. However, the fact that the damaged vehicle was owned by someone other than the insured did not automatically invoke liability coverage. The policy excluded injury or destruction of "property rented to or in charge of the insured…" Founders Ins. Co. v. Walker, 2015 IL App (1st) 141301.

Captive Insurance Agent Has Duty To Place Requested Insurance Coverage

Through its agent, Country issued an auto policy to its insured. The insured requested his fiancée be named as an insured, but that was not done. The fiancee's minor son was struck by an auto and seriously injured. They made a UIM claim which was denied on the basis that neither fiancée nor her son were listed as an insured. Plaintiff then filed the present negligence action against the agent and Country. The trial court dismissed the claims against the agent on the basis that he did not owe the insured the duty of care in procuring the requested insurance coverage because he was not a broker. The Fourth District reversed.

The Supreme Court affirmed holding the agent had a duty to exercise reasonable care in obtaining the requested coverage. Section 2-2201 of the Insurance Code requires an "insurance producer" to exercise ordinary care in procuring requested insurance. The case turned on whether a captive agent would be considered an "insurance producer." It determined a person required to be licensed to sell insurance has a duty to exercise care in obtaining coverage requested by the insured regardless of whether an independent broker or captive agent. Skaperdas v. Country Casualty Ins. Co., 2015 IL 117021.

© 2020 Heyl, Royster, Voelker & Allen, P.C


About this Author

Success in litigating insurance coverage issues hinges on understanding both the interpretation of insurance policies and the handling of claims. These key elements pervade every phase of the business from taking the application, through underwriting, and policy issuance. The members of our firm's insurance coverage practice group understand these elements and the important role they play in risk management.