The insured here was Chicago Abstract Title Agency LLC, which was in the title and escrow services business. In 2008, Chicago Abstract was sued in state court by a title insurance company and two financial firms. Chicago Abstract tendered these lawsuits to its “errors and omissions” liability insurer, plaintiff Title Industry Assurance Company, R.R.G., known in this case as TIAC. TIAC then faced a choice. It could (a) defend Chicago Abstract without reservation; or (b) defend while reserving its rights; or (c) seek a declaratory judgment concerning the scope of coverage. TIAC could also (d) decline to defend, but only if the allegations in the complaints against Chicago Abstract clearly fell outside the scope of the insurance policy, and then only at its peril. Under Illinois law, when a liability insurer unjustifiably refuses to defend a suit against its insured, the insurer will be estopped from later asserting policy defenses to coverage.
The district court granted judgment to the Claimants. We affirm. We disagree with portions of the district court opinion, particularly its ruling that TIAC was required to plead legal theories in its federal complaint. That ruling is squarely at odds with settled federal pleading practice. See Johnson v. City of Shelby, 574 U.S. —, 135 S. Ct. 346 (2014) (summarily reversing dismissal of action for failure to identify legal theory in complaint). Nevertheless, we agree that the undisputed facts show that TIAC breached its duty to defend Chicago Abstract in the underlying litigation. TIAC is therefore estopped from asserting at this very late stage any policy defenses to coverage that might have been available if TIAC had made a different choice when the complaints were first tendered.
When TIAC breached its duty by denying a defense in 2009, it left its Insured high and dry. TIAC complains that Chicago Abstract did not “contest or object to TIAC’s coverage declination.” At oral argument, TIAC took the point one step further, suggesting that because Chicago Abstract did not challenge its denial decision, TIAC was unaware “that there was any suggestion that there might be coverage under the policy.” Nonsense. Chicago Abstract placed TIAC on notice of its claim for coverage when it tendered the underlying complaints. TIAC cites no authority for the proposition that an insured must lodge an exception to a denial decision or follow up, begging for reconsideration. On the contrary, Illinois courts even excuse insureds from complying with otherwise non-negotiable policy duties after receiving denial letters. E.g., Owners Ins. Co. v. Seamless Gutter Corp., 960 N.E.2d 1260, 1271 (Ill. App. 2011) (“[A]n insurer should not be allowed to assert a blanket denial of coverage and then assert the insured’s failure to provide proof of loss, since the law does not require the insured to perform what appeared to be a useless act.”); Jones v. Universal Casualty Co., 630 N.E.2d 94, 101 (Ill. App. 1994) (same).
When an insurer learns of a claim against its insured, the ball is in the insurer’s court. It may defend under a reservation of rights, or it may seek judicial input as to its obligations under the policy. But if it refuses to defend, it cannot then blame the insured for failing to win it over, particularly where—as here—the insured faces significant exposure and must make prompt and difficult decisions regarding litigation or settlement.
Though TIAC did appear in the Coastal Funding action and file for declaratory relief in federal court five years later, those long-overdue actions cannot excuse its breach of duty back in 2009. By the time TIAC saw fit to intervene, 1st Funding had settled its claims against Chicago Abstract, which had also defaulted on multiple counts in the Coastal Funding case. “Where an insurer waits to bring its declaratory judgment action until after the underlying action has been resolved by a judgment or a settlement, the insurer’s declaratory judgment action is untimely as a matter of law.” Ehlco Liquidating Trust, 708 N.E.2d at 1138; cf. Korte Construction Co. v. American States Ins., 750 N.E.2d 764, 770 (Ill. App. 2001) (“[T]he insurer must take some action to adjudicate the issue of coverage or undertake to defend the insured under a reservation of rights, and it must take that action within a reasonable time of a demand by the insured.”) (emphasis added).
“The world is a dangerous and litigious place. People and businesses buy liability insurance in large part for peace of mind—the knowledge that if one is sued, the insurer will provide a legal defense … .” CE Design Ltd. v. King Supply Co., 791 F.3d 722, 727 (7th Cir. 2015) (Hamilton, J., concurring). When an insurer breaches its duty to defend, “it’s not just any breach of contract. An insurer’s breach abandons its insured and deprives it of the peace of mind it has bought.” Id.; see also Pompa v. American Family Mutual Ins. Co., 520 F.3d 1139, 1146 (10th Cir. 2008) (“‘By purchasing insurance, the insured reasonably expects that he will not be required to furnish the cost of defending actions that facially fall within the terms of his policy.’ The insured will be deprived of the peace of mind that insurance promises if the insurer can refuse to defend the case, await developments, and then decide to reimburse the insured for defense costs only once it is clear that there was coverage.”) (citations omitted); Cates Construction, Inc. v. Talbot Partners, 980 P.2d 407, 416 (Cal. 1999) (“In general, insurance policies are not purchased for profit or advantage; rather, they are obtained for peace of mind and security in the event of an accident or other catastrophe.”).