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Delatorre v. Safeway Ins. Co.

2013 IL App (1st) 120852 (Ill. App., 2013)

Words & Phrases

Duty To Defend: Estoppel

Trial Judge

Honorable Mary Brigid McGrath

Appellate Judge

Justice Hyman


Despite appointing defense counsel for its insured, insurer breached its duty to defend and was liable for default judgment in excess of the policy limits, where it failed to actually provide a defense.

Fact Summary

Delatorre was a passenger in a car driven by Ruben when they were involved in an accident in which plaintiff was injured.  The driver of the other car, Thomas Zentefis, as well as his passenger, William Zenko, were also injured. Plaintiff, Zentefis and Zenko each filed suit against Ruben, seeking recovery for personal injuries allegedly caused by Ruben's negligent conduct.

At the time of the accident, Ruben was insured under a personal automobile insurance policy issued by defendant. The policy carried a bodily injury liability limit of $20,000 per person and $40,000 per accident.

In December 1991, plaintiff made a demand for the policy limits, which defendant refused; however, after learning of the negligence suits brought against Ruben, defendant agreed to defend Ruben under a reservation of rights. In November 1992, it informed Ruben via letter that it had retained attorney I.R. Strizak to undertake his defense in the negligence suit brought by plaintiff.

Strizak filed an appearance and answer on behalf of Ruben on December 15, 1992, but there is no evidence that he took any further action to defend Ruben after that date. Defendant admitted that it paid no fees to Strizak in connection with his defense of Ruben, nor did Strizak submit statements for work he performed on Ruben's behalf. The plaintiff moved for sanctions, and the court eventually entered an order of default against Ruben on October 4, 1994. The order specified that the basis for the default was Ruben's "failure to comply with outstanding discovery."  A prove-up hearing on the default judgment was held and plaintiff was awarded $250,000 in damages.

At the same time this litigation was proceeding, Safeway was pursuing a declaratory judgment action against Delatorre, Ruben, Zentefis and Zenko. Specifically, defendant sought a declaration that it was not liable for damages alleged against Ruben in the negligence actions due to the fact that Ruben had misrepresented his marital status on his application for insurance, rendering his policy void. The trial court granted summary judgment against defendant on the basis that it was bound by its agent's actual knowledge of Ruben's marital status. This ruling was affirmed on appeal on March 20, 1998. Safeway Insurance Co. v. De La Torre, No. 1-96-0739 (Mar. 20, 1998) (unpublished order under Supreme Court Rule 23).

Several days after learning of the appellate court's ruling, defendant tendered the policy limits to plaintiff, but the tender was rejected. Then, in September 1999, defendant paid the policy limits of $20,000 to both Zentefis and Zenko.

In the meantime, Ruben assigned the cause of action he had against defendant arising out of the contract of insurance to plaintiff for unspecified "value received." Shortly thereafter, plaintiff, as Ruben's assignee, filed suit against defendant.  After several rounds of amendment and dismissal, the complaint contained three counts: breach of an insurance contract; vexatious and unreasonable delay in settling a claim; and punitive damages. The count seeking punitive damages was dismissed.  In count I, plaintiff alleged that defendant breached its duty to defend when it ignored notice that Strizak was not providing Ruben with a meaningful defense. Plaintiff went on to allege that as a result of defendant's failure to provide an adequate defense, Ruben became subject to a default judgment against him in the amount of $250,000.

The Court rejected the implications of the rule announced in Brocato v. Prairie State Farms Insurance Ass'n, 166 Ill. App. 3d 986 (1988),that an insurer satisfactorily discharges its duty to defend solely by retaining an attorney for its insured are troubling. The Brocato holding, however, would allow an insurer to escape its legal obligation to provide good faith representation and instead freely abandon its insured to an attorney who either is unwilling or unable to undertake the defense, or who, as in this case, inexplicably deserts the client. In our view, an insurer's promise to defend entitles the insured to expect that its insurer will retain an attorney who will in fact take action to defend the insured in the face of a default order. The insurer's duty, after all, is to defend, not merely to provide representation, and is an ongoing duty throughout the litigation.

The Court was persuaded by the conclusion of the Court of Appeals for the Seventh Circuit in Thoresen v. Roth, 351 F.2d 573 (7th Cir. 1965), where the court was confronted with facts comparable to the facts here. In Thoresen, the insured tendered the defense of a malpractice action brought against it to its insurer, who agreed to conduct a defense as to certain counts of the malpractice complaint. Thoresen, 351 F.2d at 575. The insurer informed its insured that it had turned the matter over to an attorney; however, that attorney did not participate – or even file an appearance – in the litigation. Id. at 575-76. The Seventh Circuit found "incomprehensible" the insurer's argument that "mere retention of [an attorney] was a compliance with its obligation to defend the insured," and agreed with the district court that the insurer had breached its duty to defend. Id. Likewise we are confounded by this argument and conclude that retaining an attorney, standing alone, does not discharge an insurer's duty to defend.

As the Illinois Supreme Court recognized in Conway, damages for breach of the duty to defend " 'are not inexorably imprisoned within policy limits.' " Conway, 92 Ill. 2d at 397-98 (quoting Reis, 69 Ill. App. 3d at 790). We read the Conway opinion to suggest two ways in which an insured may recover an excess judgment based on its insurer's breach of duty to defend: (1) tort based, as a punitive measure, where the insurer has acted in bad faith, or (2) contract based, as a compensatory measure, where the insured's damages are proximately caused by the insurer's breach of duty.

The case that best guides the issue of damages is Green v. J.C. Penney Auto Insurance Co., 806 F.2d 759 (7th Cir. 1986).  There, the court analyzed Conway and Reis, concluding that irrespective of bad faith, an insurer may be liable for damages beyond the policy limits if its breach of duty caused the excess judgment. Id. at 762 (relying on Reis, holding insured may recover total amount of the judgment, including amount exceeding policy limits if the insured can establish that insurer "abandoned [the insured's] defense"). See also post-Conway cases Fidelity & Casualty Co. of New York v. Mobay, 252 Ill. App. 3d 992, 997 (1992) ("When an insurer wrongfully refuses to defend [its insured], it is liable to the insured for breach of contract. The measure of damages for such a contractual breach is generally the amount of the judgment against the insured."), Gruse v. Belline, 138 Ill. App. 3d 689, 697-98 (1985) ("In Illinois, an accepted measure of damages for breach of an insurance contract to defend is the amount of the judgment rendered against the insured .")