Insurance Co. v. Federal Kemper Insurance Co.

                                   SECOND DIVISION
                                   August 5, 1997







No. 1-96-3694

INSURANCE COMPANY OF ILLINOIS,          )    Appeal from the
                                        )    Circuit Court of
               Plaintiff-Appellee,      )    Cook County.
                                        )
     v.                                 )
                                        )    
FEDERAL KEMPER INSURANCE COMPANY,       )
TERRY PANZKE, Special Adm'r of the      )
Estate of David Aguirre, Deceased,      )    Honorable
and MATHEW DUGGAN,                      )    Thomas Durkin,
               Defendants-Appellants.   )    Judge Presiding.

     PRESIDING JUSTICE McNULTY delivered the opinion of the court:

     Defendant, Federal Kemper Insurance Company (Federal Kemper),
appeals from the trial court order granting plaintiff Insurance
Company of Illinois' (ICI) motion for summary judgment in its
declaratory judgment action.  In granting ICI's motion for summary
judgment, the trial court found that plaintiff was not required to
pay uninsured motorist benefits to the estate of David Aguirre and
that Federal Kemper was required to indemnify Matthew Duggan for up
to $300,000 of the $500,000 default judgment entered against him. 
Federal Kemper appeals, claiming that the trial court erred in
estopping it from asserting policy defenses to coverage of Matthew
Duggan.  We affirm. 
     On March 1991, 17-year-old Matthew Duggan was living with his
mother, Noreen Duggan, in her Wheeling, Illinois, home.  When Noreen
awoke on the morning of March 10, 1991, her car was no longer in the
driveway.  Suspecting that her son had taken her keys and stolen her
car, Noreen called the police.  Matthew, along with two of his
friends, David Aguirre and Stacey Mueller, were located and led the
Indiana State Police on a high speed chase.  In an effort to avoid
a police roadblock, Matthew drove Noreen s vehicle into the median,
causing the vehicle to strike an earthen embankment and enter a
creek bed.  David Aguirre died as a result of this car accident.  
     On March 22, 1991, Terry Panzke, as special administrator of
the estate of David Aguirre, filed suit against Matthew for the 
wrongful death of David Aguirre (Panzke suit).  Federal Kemper had
issued to Matthew's mother, Noreen, an automobile liability policy
that was effective on March 11, 1991, the date of the automobile
accident.  Matthew never tendered the Panzke suit to Federal Kemper. 
Nonetheless, on August 29, 1991, Federal Kemper sent Matthew a
letter stating that it had received a report of the automobile
accident and was denying Matthew defense and indemnity since the
policy excludes coverage for anyone using a vehicle without the
owner's permission.  Federal Kemper also suggested in the letter
that Matthew retain counsel to investigate this accident and defend
him in the event that any suits or actions are brought against him. 
     On March 2, 1993, the Panzke complaint was amended, adding
Noreen as a defendant.  The complaint alleged that Noreen, by
express or implied permission, negligently allowed Matthew to
operate her car on March 11, 1991, when she knew or should have
known that he was not a competent driver.  Noreen tendered the
complaint to Federal Kemper on March 10, 1993, and Federal Kemper
assumed Noreen's defense.  
     On July 19, 1994, the circuit court granted Noreen s motion for
summary judgment as to the count brought against her in the Panzke
complaint.  The court found as a matter of law that Noreen did not
negligently entrust her vehicle to Matthew, since she never gave him
permission, either express or implied, to use the vehicle.
     Neither Matthew nor anyone on his behalf entered an appearance
in the Panzke matter.  On June 9, 1995, after hearing testimony from
Terry Panzke on damages, the circuit court entered a default
judgement against Matthew in the amount of $500,000.
     Terry Panzke then sought under/uninsured motorist benefits from
her insurance carrier, plaintiff ICI.  ICI filed a declaratory
judgment action seeking a declaration that David Aguirre was not
covered under his mother s insurance policy with ICI.  ICI also
sought a declaration that Federal Kemper owed a defense and
indemnity to Matthew under Noreen s policy with Federal Kemper.  ICI
alleged that, because Federal Kemper owed a defense and indemnity to
Matthew and denied such a defense, it is now estopped from asserting
policy defenses to coverage.  ICI requested to have Federal Kemper
indemnify Matthew for $300,000 of the $500,000 judgment entered
against him.
     ICI and Federal Kemper brought cross-motions for summary
judgment.  The circuit court granted ICI s motion for summary
judgment and denied Federal Kemper s motion for summary judgment.     
The trial court found that ICI owes no obligation to Terry Panzke as
administratrix of the estate of David Aguirre for the injuries
arising from the March 11, 1991, accident and that Federal Kemper
must indemnify Matthew up to its policy limit of $300,000 for the
$500,000 judgment entered against Matthew in the Panzke suit and
shall pay the $300,000 to Terry Panzke.  
     Federal Kemper first claims on appeal that the trial court
improperly determined that Federal Kemper was estopped from
asserting its policy defenses.  It is well settled that, if a
complaint alleges facts potentially within policy coverage, the
insurer is obligated to defend even if the allegations are
groundless, false or fraudulent.  Maryland Casualty Co. v. Peppers,
64 Ill. 2d 187, 355 N.E.2d 24 (1976).  If a complaint raises the
possibility of coverage, and an insurer believes that a defense to
the policy exists, the insurer has two options available.  The
insurer can either (1) seek a declaratory judgment as to its
obligations and rights under the policy prior to trial or settlement
of the underlying action, or (2) defend under a reservation of its
rights and adjudicate its coverage in a supplemental suit.  Fidelity
& Casualty Co. v. Envirodyne Engineers, Inc., 122 Ill. App. 3d 301,
461 N.E.2d 471 (1983).  Generally, if the insurer fails to exercise
either of these two options and refuses to defend an insured who
ultimately incurs an adverse judgment, the insurer is estopped from
raising policy exclusions or noncoverage as a defense in any
subsequent action brought to recover policy proceeds.  Central
Mutual Insurance Co. v. Kammerling, 212 Ill. App. 3d 744, 571 N.E.2d 806 (1991).    
     Federal Kemper admits that because the Panzke complaint alleged
that Matthew had permission to use his mother s car at the time of
the accident, the allegations in the complaint potentially fall with
coverage of its policy with Noreen.  However, Federal Kemper claims
that because it was faced with a conflict of interest in defending
both Noreen and Matthew, it was excused from its duty to defend
Matthew.  The Illinois Supreme Court has determined that, where
there is a conflict of interest, the insurer is not obligated or
even permitted to participate in the defense.  Thornton v. Paul, 74 Ill. 2d 132, 384 N.E.2d 335 (1978).  The insurer's obligation to
provide a defense when a conflict of interest exists is satisfied by
reimbursing the insured for the cost of independent counsel. 
O'Bannon v. Northern Petrochemical Co., 113 Ill. App. 3d 734, 447 N.E.2d 985 (1983).  The court in Insurance Co. v. Protective
Insurance Co., 227 Ill. App. 3d 360, 369, 592 N.E.2d 117 (1992),
stated that there was "no reason to allow an insurer, whose
obligation to provide a defense is clear, to avoid the application
of estoppel simply because it later claims a conflict of interest
existed, especially when this basis for denying the insured a
defense was not told to the insured and the insurer made no offer to
advance funds to pay for alternative representation in an effort to
meet its obligation to provide a defense."  
     We therefore find that, even if a conflict of interest existed,
Federal Kemper still had certain obligations to Matthew, which it
failed to fulfill.  On August 29, 1991, Federal Kemper sent Matthew
a letter denying Matthew a defense.  However, Federal Kemper made no
mention in the letter about a conflict of interest.  While Federal
Kemper suggested that Matthew obtain an attorney, Federal Kemper did
not inform Matthew that it would pay for that attorney.  
     Federal Kemper claims that, because Matthew did nothing to
secure a defense and failed to incur any defense costs, Federal
Kemper was relieved of any duty to reimburse him and should not be
estopped from asserting its policy defenses.  See Murphy v. Urso, 88 Ill. 2d 444, 430 N.E.2d 1079 (1981).  We are not persuaded by this
argument, since Matthew was only 17 years old when he was told by
Federal Kemper that he was being denied a defense but was not told
that he would be reimbursed for the cost of obtaining independent
counsel.  It was Federal Kemper that failed to fulfill its
obligation to secure a defense for Matthew.    
     Federal Kemper also claims that, although it was aware of the
amended Panzke suit filed against both Matthew and Noreen in 1993,
it was relieved of its duty to defend, because Matthew failed to
either tender the Panzke suit to Federal Kemper or request Federal
Kemper to defend him.  This argument is unpersuasive since an
insurance company that receives actual notice of a suit from any
source sufficient to permit the insurer to locate and defend its
insured, particularly an unsophisticated insured, must defend the
suit.  Long v. Great Central Insurance Co., 190 Ill. App. 3d 159,
546 N.E.2d 739 (1989);  Olivieri v. Coronet Insurance Co., 173 Ill.
App. 3d 867, 528 N.E.2d 986 (1987);  Del Grosso v. Casualty
Insurance Co., 170 Ill. App. 3d 1098, 524 N.E.2d 1042 (1988).  Given
Matthew's age and lack of experience, he was unquestionably an
unsophisticated insured and only actual notice was required to
trigger Federal Kemper's duty to defend him in the Panzke suit.   
     Moreover, we find it reasonable to conclude that Federal Kemper
had actual notice of the suit of the original Panzke complaint
brought against Matthew as early as August 1991.  If fact, it would
be absurd to conclude that Federal Kemper sent Matthew the 1991
letter denying coverage without having any knowledge of the suit.
     While Federal Kemper claims in its reply brief that a genuine
issue of material fact exists as to whether Federal Kemper actually
sent the letter denying Matthew a defense, this issue is waived
since it was not raised in Federal Kemper's opening brief.  134 Ill.
2d Rs. 341(e),(g).  Furthermore, Federal Kemper admitted in its
affirmative defenses to ICI's declaratory judgment action that it
sent Matthew a letter by certified mail on August 31, 1991, denying
coverage under the policy.    
     Accordingly, for the reasons set forth above, we affirm the
judgment entered by the trial court in favor of ICI.
     Affirmed.  
     RAKOWSKI and TULLY, JJ., concur.