Insurance Coverage Update: Delay in Filing Declaratory Judgment Action Precludes Coverage Defenses

[Editor's Note: The decision discussed below has been withdrawn by the First District Appellate Court due to a settlement between the concerned parties.  Nevertheless, though the decision has been withdrawn, it still provides a preview of the First District's likely handling of similar future cases.  See, Central Mutual Ins. Co. v. Kammerling, 212 Ill.App.3d 744 (1^st Dist., 1991) (because an insurer’s duty to defend is triggered by actual notice of the claim, an insurer’s unexplained delay in complying with its legal obligation to file a declaratory action precludes that insurer from later asserting coverage defenses).]

When disputing coverage under an insurance policy, what is the next step to protect the insurer? Following the “reasonable time” test, the First District recently held that an insurer’s sixteen month delay in filing a declaratory action was unreasonable and precluded the insurer from raising coverage defenses, obligating the insurer to providing a defense. Additionally, the court found that the plaintiff’s claim was sufficiently drafted to allege imputed liability against a general contractor, despite the fact that the complaint made no specific allegations of vicarious liability. Mota Construction Co. and Country Mut. Ins. Co., v. Westfield Ins. Co., No. 1-07-3208 (June 5, 2009). 

Construction worker Fernando Berrera brought a personal injury suit against a subcontractor (not his employer) and the general contractor alleging negligence. In his count I, Berrera contended that the general contractor, Mota Construction Company (Mota), controlled, managed, and supervised construction at the site, and had a duty to maintain a safe work site. A breach of this duty was alleged to have occurred by Mota’s failure to, among other things, “supervise its employees and subcontractors.” Count II alleged Mota retained control over the work and safety at the site and controlled the means and manner of work of the subcontractors and, pursuant to Section 414 of the Restatement of Torts, was liable for entrusting work to an independent contractor. Count III alleged that the subcontractor, Sloan Mosaic Tile Company (Sloan), committed the same negligent failures alleged against Mota in Count I.

Sloan was insured under a policy issued by Westfield Insurance Company, on which Mota was named as an additional insured. Mota tendered its defense to Westfield. However, Westfield refused to defend Mota, contending that additional insureds were only covered for liability imputed on them as a result of the named insured’s actions, not direct liability. Mota was ultimately furnished a defense by the plaintiff employer’s insurance carrier, Country Mutual, under which it was named as an additional insured. Mota and Country subsequently filed a declaratory action against Westfield seeking declaration that Westfield was required to defend and indemnify Mota. Westfield answered and filed a counterclaim seeking declaratory judgment that it did not have a duty to defend Mota, contending that the complaint did not seek to impute liability to Mota, but rather alleged only direct negligence. In support of its argument, Westfield attached its policy which explicitly provided that coverage would be provided to an additional insured only for claims for imputed liability.

The parties then filed cross-motions for summary judgment. In their motion, Mota and Country asserted that the allegations of the complaint fell within the scope of coverage and that Westfield was estopped from denying coverage due to its delay (sixteen months post-refusal to provide defense) in filing for declaratory judgment. Westfield’s position was that the complaint did not allege facts that gave rise to a duty to defend; that no estoppel occurred, as its declaratory action was filed prior to the underlying case going to trial; and that estoppel only applied to bar coverage defenses where an insurer wrongfully refused to defend. The trial court granted summary judgment in favor of Westfield, agreeing with Westfield that the allegations in the complaint were for direct, not imputed, liability, and its theory that estoppel did not apply.

On June 5, 2009, the First District reversed and remanded the lower court decision, finding that an insurer’s duty to defend extends to any claim under the pleadings which might potentially fall within the scope of the policy’s coverage. No matter how many different theories may be alleged in a complaint, the duty to defend arises even if only one such theory is within the potential coverage of the policy. Accordingly, the question of coverage is decided not on the “draftsmanship skills or whims of the plaintiff” but on whether the allegations demonstrate that the plaintiff will be able to prove the insured liable under any theory supported by the complaint.

The First District found that allegations that Mota retained control over the “operative details” or “manner and means” of a subcontractor’s work, particularly Sloan, were adequate to assert a theory of vicarious liability, despite the fact that no such specific allegation was set forth in the complaint. Plaintiff’s allegations of negligence against Sloan, as subcontractor of Mota, left open the possibility that liability might be imputed to Mota for Sloan’s negligence. Had plaintiff only named the general contractor in his complaint, with no allegation of subcontractor negligence, there would be no possibility under the complaint that such negligence might be imputed to the general contractor, and the carrier would have no duty to defend. The liberal reading of the plaintiff’s complaint favored the triggering of Westfield’s duty to defend.

As to estoppel, the court agreed with Mota and Country, finding the sixteen month gap between Westfield’s refusal to defend and filing its declaratory judgment to be unreasonable. Because an insurer’s duty to defend is triggered by actual notice of the claim, an insurer’s unexplained delay in complying with its legal obligation to file a declaratory action precludes that insurer from later asserting coverage defenses. (relying on Central Mutual Ins. Co. v. Kammerling, 212 Ill.App.3d 744 (1^st Dist. 1991)).  The Court further held that the fact that Mota obtained coverage from another insurer, Country, is of no significance and “the contract becomes no less breached because of the fortuitous existence of another insurer who is willing to meet its own obligations.”  Westfield’s “tardiness” was not excused by Country’s defense of Mota. Therefore, the Court held that Westfield was estopped from asserting coverage defenses due to its failure to seek timely adjudication of its rights with regard to the underlying lawsuit.

The Mota decision clarifies liability among insurers of a general contractor and subcontractors when an employee of the subcontractor is injured on the job site. Insurers must heed the following: they may not simply refuse to defend their insured; rather, they must either defend the suit under a reservation of rights or seek declaratory judgment that no coverage exists. Failure to assert coverage defenses in a timely matter may result in the insurer being obligated to defend.

* * *

Stacey Atkins, an associate in our Chicago office, concentrates her practice in municipal liability litigation.  Prior to joining Querrey & Harrow, she worked with a local litigation firm concentrating her efforts in litigation of municipal employment and labor matters, personal injury and professional negligence litigation.

If you have any questions regarding this article, please contact Stacey via 312-540-7656 orsatkins@querrey.com.