Village of Lombard v. Intergovernmental Risk Management Agency

No. 2--96--1252




IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT

THE VILLAGE OF LOMBARD, ) Appeal from the Circuit
) Court of Du Page County.
Plaintiff and )
Counterdefendant-Appellant, )
v. ) No. 96--MR--205
)
INTERGOVERNMENTAL RISK )
MANAGEMENT AGENCY (IRMA), )
) Honorable
Defendant and ) Robert E. Byrne,
Counterplaintiff-Appellee. ) Judge, Presiding.

PRESIDING JUSTICE GEIGER delivered the opinion of the court:

The plaintiff and counterdefendant, the Village of Lombard
(Lombard), filed a declaratory judgment action against the
defendant and counterplaintiff, Intergovernmental Risk Management
Agency (IRMA), seeking a declaration as to the scope of IRMA's
defense obligations under an insurance coverage agreement entered
into between the parties. IRMA subsequently filed a counterclaim,
seeking a declaration that it was not obligated to defend Lombard
and its employees for certain punitive damages claims not covered
within the indemnity provisions of the agreement. On September 25,
1996, the circuit court of Du Page County entered an order granting
summary judgment on IRMA's behalf as to both the complaint for
declaratory judgment and the counterclaim. We affirm.
IRMA is an intergovernmental association consisting of 68
public entities in northeastern Illinois. IRMA is a public
insurance pool that exists to provide coverage for claims of
injuries to persons or properties made against its members.
Lombard is an Illinois municipal corporation and a member of IRMA.
IRMA also extends insurance coverage to the individual
officials and employees of each member. The scope of this coverage
is defined in policy documents, endorsements, and amendments, which
are issued and incorporated on an annual basis in IRMA's coverage
package. Coverage provided by IRMA includes not only
indemnification for financial losses due to litigation claims but
also the duty to defend against such litigation.
IRMA reviews and makes amendments to its coverage documents on
an annual basis. In 1992, IRMA amended its coverage documents to
include several new exclusions. One such exclusion, entitled the
"No Coverage-No Defense" amendment, provided as follows:
"It is agreed that we will not provide a defense or pay
attorneys fees or defense costs for any loss, claim
proceeding, suit or any other legal or administrative action
or part thereof to which this coverage document does not apply
and/or for which there is no coverage or indemnification
afforded except at the sole discretion of [IRMA]."
Another exclusion, entitled the "Punitive Damages Exclusion"
amendment, provided as follows:
"It is agreed that this coverage does not apply to
punitive or exemplary damages. In addition, we will not pay
defense costs nor shall we be obligated to provide a defense
for claims or legal actions in anyway requesting punitive or
exemplary damages, except at our discretion."
A copy of these proposed amendments was distributed to the entire
IRMA membership on or before February 22, 1993. After reviewing
and considering the proposed amendments, the members of IRMA,
including Lombard, unanimously approved their adoption as part of
the coverage documents.
After these amendments were approved, IRMA adopted an informal
policy whereby, at its sole discretion, it would appoint counsel to
defend a member against both the covered and noncovered claims
contained in the same lawsuit. This appointment of counsel was
contingent upon: (1) a conference between the member, IRMA, and
counsel, during which all potential conflicts were discussed and
waived; (2) an agreement that if any actual conflict of interest
arose during the course of the litigation, it would be immediately
identified and disclosed; and (3) an agreement that the existence
of an actual conflict having an impact on the handling of the
litigation or strategy would require the member to immediately
retain separate counsel at its own expense.
On March 4, 1995, Megan Murray, a former Lombard police
officer, filed an eight-count complaint in the United States
District Court for the Northern District of Illinois naming Lombard
and several of its officers and employees as defendants. The
complaint alleged violations of federal civil rights and employment
laws and sought both compensatory and punitive damages. Lombard
tendered the defense of the entire matter to IRMA.
IRMA's executive director accepted the defense of the covered
compensatory claims but, pursuant to the "No Coverage-No Defense"
amendment, rejected defense of the noncovered punitive claims.
IRMA did offer to voluntarily supply Lombard and its employees with
the services of an IRMA-appointed counsel to defend the noncovered
punitive claims, but only on the condition that they would waive
all potential conflicts of interest.
Lombard refused to waive all potential conflicts and appealed
the executive director's decision to a three-member IRMA appeals
committee. Lombard requested the appeals committee to require IRMA
to pay for separate, independent counsel to defend both Lombard and
its employees in the entire lawsuit. Despite Lombard's request,
the appeals committee unanimously affirmed the executive director's
decision. The appeals committee's ruling was then unanimously
affirmed by the nine-member IRMA executive board. The executive
board's decision, in turn, was affirmed by IRMA's 68-member board
of directors. Except for Lombard, all members voted to affirm the
decision.
On May 22, 1995, Tim Ryan, Jr., and Garrett Wainwright also
filed an eight-count complaint in the United States District Court
for the Northern District of Illinois naming Lombard and several of
its officers and employees as defendants. This complaint, similar
to the Murray complaint, contained both covered compensatory and
noncovered punitive claims. As with the Murray suit, Lombard
tendered the entire matter to IRMA, demanding that IRMA pay for
separate defense counsel to represent Lombard and its employees
against both the covered and noncovered punitive claims. IRMA
refused to defend the noncovered claims, again relying on the "No
Coverage-No Defense" amendment. IRMA and Lombard subsequently
agreed that the dispute concerning the Ryan suit would be treated
by the parties as if it had run the full course of IRMA internal
appeals.
On March 18, 1996, Lombard filed the instant declaratory
judgment action seeking a declaration that (1) a conflict of
interest exists which prevents IRMA-appointed counsel from
defending Lombard and its employees against the covered
compensatory claims in the underlying action; (2) that IRMA is
obligated to defend Lombard and its named employees against both
the covered and noncovered allegations in the Murray and Ryan
suits, using an independent attorney of Lombard's choice; and (3)
that IRMA must reimburse Lombard for all the costs and attorney
fees incurred thus far in the defense of the Murray and Ryan
actions.
In its answer to the complaint, IRMA denied having any duty to
defend the noncovered punitive claims and further denied that there
was any conflict of interest which prevented its appointed counsel
from representing Lombard and its employees as to the covered
compensatory claims. IRMA also filed a counterclaim, seeking a
declaration, inter alia: (1) that the "No Coverage-No Defense"
amendment was valid and binding on all IRMA members; (2) that the
amendment was properly applied to Lombard and its employees in the
underlying lawsuits; (3) that IRMA had no obligation to reimburse
Lombard for any defense costs incurred with respect to the
noncovered claims in the underlying suits; (4) that IRMA had no
obligation to supply separate counsel to Lombard or any other
defendant in the underlying suits with respect to the noncovered
claims; (5) that IRMA had fully discharged its policy obligations
to Lombard and its employee defendants in the underlying suits; and
(6) that Lombard was estopped from contesting the validity of the
amendment.
The parties filed cross-motions for summary judgment and
submitted a joint stipulation of agreed facts. On September 25,
1996, following a hearing on the motions, the trial court granted
IRMA's motion for summary judgment and denied Lombard's. The trial
court explained its decision as follows:
"The thing that impresses me the most about this is all the
cases that [Lombard] cite[s] are about insurance policies.
And all of the law is insurance law and all of the law [] says
that insurance policies must always be strictly construed
against the person who wrote them.
But in this situation, Lombard sits on both sides of the
case. Lombard is the insurance company, Lombard is one of the
68 people who decided as a matter of policy that this was how
they were going to work.
***
Lombard imposed this contract upon themselves. Lombard
is part of the management team.
***
So Lombard is not only a covered party, they are part of
the management team. For that reason I think that that takes
this situation out of all the rest of [the cases] that
[Lombard] *** cited. *** I distinguish this situation from
all of the *** strict insurance cases and find for the
defendant."
In so holding, the trial court rejected Lombard's argument that a
conflict of interest required IRMA to pay for attorneys selected by
Lombard to defend the whole action. Lombard filed a timely notice
of appeal.
Summary judgment is proper if "the pleadings, depositions, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law." 735
ILCS 5/2--1005(c) (West 1994). An order granting summary judgment
should be reversed if the judgment was incorrect as a matter of
law. In re Estate of Herwig, 237 Ill. App. 3d 737, 741 (1992).
The disposition of a summary judgment motion is not discretionary,
and the standard of review is de novo. Quinton v. Kuffer, 221 Ill.
App. 3d 466, 471 (1991). The parties agree that no genuine issue
of fact remains.
Lombard argues that the trial court erred in determining that
IRMA was not obligated to provide an independent counsel of
Lombard's choice to represent its interests in the entire
litigation. Lombard contends that, despite the language contained
in the "No Coverage-No Defense" amendment, public policy requires
that IRMA's duty to defend be extended to both the covered and
noncovered claims. Lombard also argues that, in order to avoid a
potential conflict between the interests of IRMA and Lombard, IRMA
should be required to hire independent counsel to represent
Lombard.
The general rule in Illinois requires an insurer to defend a
claim against an insured when any theory of the complaint gives
rise to the possibility that the insurer would be liable for its
costs. Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, 193-94
(1976). Because the insurer's duty to defend is broader than its
duty to indemnify, in some instances an insurer may have to defend
against claims that are not covered by the policy. Conway v.
Country Casualty Insurance Co., 92 Ill. 2d 388, 394 (1982). Our
supreme court has held that this duty to defend extends to cases
where the complaint alleges several causes of action, one of which
is within the coverage of a policy while the others may not be.
Peppers, 64 Ill. 2d at 194.
As IRMA correctly notes, however, the parties to an insurance
agreement, as the parties to any other contract, have the power to
contractually define the limits of the defense and indemnity
protection afforded to the insured party. Community Unit School
District No. 5, Counties of Whiteside & Lee v. Country Mutual
Insurance Co., 95 Ill. App. 3d 272, 278 (1981). The insurer's duty
to defend its insured arises from, and is limited by, the expressed
undertaking to defend as stated in the contract of insurance.
Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2d 23,
48 (1987). Therefore, an insurer is vested with the power to limit
its duty to defend simply by including a provision in its coverage
document that limits its defense obligations to claims falling
within the coverage of the policy. Community Unit School District
No. 5, 95 Ill. App. 3d at 278.
In the case at bar, IRMA's defense obligations are explicitly
stated in the "No Coverage-No Defense" and "Punitive Damages
Exclusion" amendments to the coverage agreement. The plain
language of these amendments provides that IRMA has no obligation
to either defend or indemnify claims that seek punitive damages.
Indeed, Lombard concedes in its appellate brief that the coverage
amendments, as written, do not impose a duty on IRMA to defend or
indemnify claims seeking punitive damages.
Despite this contractual language, Lombard nonetheless asserts
several reasons why IRMA should be required to provide, at its own
expense, independent counsel to represent both Lombard and its
employees as to both the covered and noncovered claims. Lombard
first argues that the "No Coverage-No Defense" amendment violates
public policy because it vitiates the long-established principle
that requires an insurer to "defend an action against an insured
when the complaint in that action sets forth allegations which
bring the claim potentially within the coverage of the insurance
policy." Nandorf, Inc. v. CNA Insurance Cos., 134 Ill. App. 3d
134, 136 (1985). Lombard argues that such public policy prohibits
the insurer from dividing its duty to defend in a way that would
allow it to defend and control only one portion of a lawsuit, while
leaving the insured on its own to defend the noncovered portions.
Lombard contends that handling litigation in such a manner
would result in numerous ethical ambiguities, as the insured would
be represented by multiple counsel pursuing different aspects of
the litigation. In the instant case, for example, Lombard would be
represented by IRMA-appointed counsel as to the compensatory claims
and independently retained counsel as to the punitive claims.
Lombard argues that IRMA-appointed counsel's sole concern will be
to limit Lombard's exposure to compensatory damages. As IRMA has
no obligation to indemnify a punitive damages award, Lombard
envisions a scenario where IRMA-appointed counsel may encourage the
jury to award punitive damages rather than compensatory damages.
Lombard contends that such a circumstance would be contrary to both
public policy and Rule 1.7(b) of the Rules of Professional Conduct
(134 Ill. 2d R. 1.7(b)).
In support of its argument, Lombard relies on Illinois
Municipal League Risk Management Ass'n v. Seibert, 223 Ill. App. 3d
864, 873-77 (1992), and Nandorf, Inc. v. CNA Insurance Cos., 134
Ill. App. 3d 134, 139-40 (1985). Seibert involved a defense
dispute between a municipal employee and the intergovernmental risk
management association which provided him insurance coverage.
Seibert, 223 Ill. App. 3d at 866. The municipal employee was named
as a defendant in two civil rights suits seeking $10 million in
compensatory damages and $5 million in punitive damages. Seibert,
223 Ill. App. 3d at 866-67. Although the coverage agreement did
not indemnify for claims for punitive damages, the insurer
expressly acknowledged that it was under a duty to defend the
entire lawsuit and did so pursuant to a reservation of rights.
Seibert, 223 Ill. App. 3d at 867. The insurer did, however, notify
the employee that he might wish to retain independent counsel to
properly advise him as to his rights. Seibert, 223 Ill. App. 3d at
867. The employee did retain independent counsel, who negotiated
with the insurer in an to attempt to settle the litigation with the
plaintiff. Seibert, 223 Ill. App. 3d at 868.
The insurer then filed a declaratory judgment action seeking
a determination that there was no conflict between its interests
and the interests of the employee in the underlying litigation and
that it was solely authorized to appoint counsel to represent the
employee in the litigation. Seibert, 223 Ill. App. 3d at 868. The
Seibert court denied the requested relief, commenting that, when an
insurance company retains an attorney to defend its insured, the
attorney must work toward furthering the interests of both the
insured and the insurance company. 223 Ill. App. 3d at 871. The
court explained that the interests of insured and insurer are not
always in harmony and that an insurmountable conflict may arise
when it appears that the insurer cannot vigorously defend a claim
lodged against its insured. Seibert, 223 Ill. App. 3d at 872. The
Seibert court concluded that such a conflict arises where a lawsuit
seeks both compensatory and punitive damages, commenting:
"Under the present facts, [the insured] bears a
significant risk in the litigation because its outcome might
result in a large punitive damage award which *** would be
borne by him. He faces grave economic consequences. Because
the [insurer] has agreed to defend under a reservation of
rights and the policy precludes coverage for punitive damages,
the [insurer] does not face economic consequences for the
potential $5 million punitive damages claim.
The Illinois Supreme Court has required the insurer to
relinquish control of its insured's defense when the [insured]
could be prejudiced by the insurer's attorney presenting the
case in the best light for the insurer. [Citations.] A
similar concern arises in the instant case. Although the
claims are not mutually exclusive, the [insurer] could benefit
by a finding that [the insured's] conduct justifies a punitive
damages award. The [insurer] may be required to pay only
minimal compensatory damages, while [the insured] may be
personally liable for a large punitive damages award. If [the
insured]'s conduct is ruled malicious, the [insurer] would not
be liable for even the compensatory damages because injuries
caused by such acts are excluded from indemnification."
Seibert, 223 Ill. App. 3d at 875.
The court therefore held that there was a conflict of interest
between the employee and the insurer and ordered that the insurer
pay for the employee's personally selected counsel to assume
control of the litigation. Seibert, 223 Ill. App. 3d at 878.
In Nandorf, Inc. v. CNA Insurance Cos., 134 Ill. App. 3d 134,
135 (1985), the insured, a shop owner, was named as a defendant in
a false imprisonment suit. The plaintiff sought $5,000 in
compensatory damages and $100,000 in punitive damages. Nandorf,
134 Ill. App. 3d at 135. Acknowledging that it had an obligation
to defend the action, the insurer proceeded to defend the
litigation under a reservation of rights. Nandorf, 134 Ill. App.
3d at 135. Despite the insured's subsequent requests, the insurer
refused to surrender control of the defense. Nandorf, 134 Ill.
App. 3d at 135. For reasons similar to those discussed in Seibert,
the Nandorf court ruled the insurer should have relinquished
control of the defense and reimbursed the costs of independent
counsel to represent the insured. 134 Ill. App. 3d at 140.
Although we certainly recognize the holdings in Seibert and
Nandorf, those cases differ from the instant controversy in one
important respect. In those cases, the coverage agreements at
issue did not contain a provision that expressly limited the
insurer's duty to defend to only those claims covered by the
policy. Without such a contractual restriction, the Seibert and
Nandorf courts properly applied the applicable law and held that
the insurer was obligated to defend both the covered and the
noncovered claims. Moreover, the insurers in both Seibert and
Nandorf conceded that they were under an obligation to defend the
insured against all the claims contained in the suit. The sole
question at issue in those cases, therefore, was whether the
insurer could appoint its own counsel to represent the insured, or
whether it had to pay for counsel selected by the insured.
Seibert, 223 Ill. App. 3d at 878; Nandorf, 134 Ill. App. 3d at 140.
In the instant case, IRMA was under no contractual obligation
to defend Lombard and its employees for the noncovered punitive
claims. Rather, the parties expressly agreed in the "No Coverage-
No Defense" and "Punitive Damages Exclusion" amendments that there
would be no defense or indemnity for claims seeking punitive
damages. As noted above, an insurer may properly seek to
contractually limit the scope of its duty to defend in the coverage
agreements. See Zurich Insurance Co. v. Raymark Industries, Inc.,
118 Ill. 2d 23, 48 (1987).
Furthermore, we agree with the trial court that the
relationship between Lombard and IRMA cannot be viewed as a typical
insurer/insured relationship. Lombard is one of 68 member
municipalities that comprise and govern IRMA and was partially
responsible for establishing and approving the terms of IRMA's
coverage obligations. In 1993, prior to the adoption of the "No
Coverage-No Defense" and "Punitive Damages Exclusion" amendments,
Lombard was provided with the text of these amendments and given
the opportunity to vote on whether they should be incorporated into
the coverage agreement. As noted above, Lombard voted in favor of
incorporating these amendments. Lombard is therefore partially
responsible for creating the contractual language of which it now
complains.
As Lombard contractually agreed to the amendments limiting the
scope of IRMA's defense and indemnity obligations, we find that the
amendments are valid and enforceable. The plain language of these
amendments limits IRMA's defense obligations to only those claims
that fall within the scope of coverage. We therefore hold that,
while IRMA must appoint counsel to represent Lombard on the covered
compensatory claims, it owes no duty to provide counsel to defend
the noncovered punitive claims.
In so ruling, we acknowledge that it might be preferable to
have a single attorney control the entirety of the litigation.
However, it is certainly not unprecedented to have multiple counsel
representing a single party in the same lawsuit. Additionally,
there is no Illinois authority which forbids multiple
representation. Although the presence of multiple counsel may add
to the complexity of the litigation, such complexity should be
eased by heightened cooperation and coordination among counsel.
Nor do we find there to be any conflict of interest which
prevents IRMA-appointed counsel from defending Lombard and its
employees as to the covered compensatory claims. The authorities
relied on by Lombard to establish the existence of a conflict of
interest all involve litigation where the insurer has undertaken to
defend both covered and noncovered claims. See Seibert, 223 Ill.
App. 3d at 875; Nandorf, 134 Ill. App. 3d at 140. In these cases,
an irreconcilable conflict arose because the insurer-appointed
counsel was placed in a situation where it could not adequately
advance the insurer's interests in respect to the covered claims
and, at the same time, advance the insured's interests with respect
to the noncovered claims. Seibert, 223 Ill. App. 3d at 875;
Nandorf, 134 Ill. App. 3d at 140.
In the instant case, IRMA-appointed counsel will not be
presented with such a conflict because it will not have to defend
the noncovered claims. IRMA-appointed counsel will therefore be in
the position to defend both Lombard's and IRMA's interests as to
the compensatory damages claims, while Lombard and its employees
may retain independent counsel to defend their interests as to the
punitive damages claims. In such a manner, the full interests of
Lombard and its employees will be protected.
Furthermore, there is no reason to believe that IRMA-appointed
counsel will defend the covered compensatory claims in a manner
that would be harmful to Lombard's position with respect to the
noncovered claims. An insurer is bound not to put its own interest
ahead of the protection it has promised to its insured. Briseno v.
Chicago Union Station Co., 197 Ill. App. 3d 902, 906 (1990).
Additionally, Lombard will have the opportunity to retain
independent counsel to defend the noncovered claims and prevent any
potential diminishment of its position. As IRMA correctly notes,
there is no provision in the coverage agreement that gives IRMA-
appointed counsel the right to maintain exclusive control over the
litigation. Rather Lombard's defense will be the collaborative and
coordinated effort of multiple attorneys who will all be under an
ethical obligation to persuasively advance its interests. We are
aware of no Illinois authority holding that such a defense
arrangement creates an insurmountable conflict of interest.
Finally, it is important to note that the compensatory and
punitive damages sought in the underlying suit arise out of the
same factual occurrence. As the claims arise out of precisely the
same conduct, it is unlikely that the jury would view the covered
and noncovered claims as mutually exclusive outcomes. See
generally, Tews Funeral Home, Inc. v. Ohio Casualty Insurance Co.,
832 F.2d 1037, 1046 (7th Cir. 1987). It therefore should not be
difficult for multiple counsel to advance a consistent defense on
behalf of Lombard and its employees as to both the compensatory and
punitive damages claims. We therefore hold that the division of
the duty to defend between the covered and noncovered claims
neither creates a conflict of interest nor is violative of public
policy.
For the foregoing reasons, the judgment of the circuit court
of Du Page County is affirmed.
Affirmed.
INGLIS and McLAREN, JJ., concur.