Home Insurance Co. v. Hooper

SIXTH DIVISION
January 23, 1998

No. 1-95-3056

THE HOME INSURANCE COMPANY OF ILLINOIS, ) Appeal from the
) Circuit Court of
Plaintiff-Appellee, ) Cook County
)
v. )
)
CARL HOOPER, DEBORAH HOOPER, AND MARC P. )
GRETZ, TRUSTEE FOR LESTER )
ENGINEERING COMPANY, DEBTOR IN )
POSSESSION, ) Honorable
) Albert Green,
Defendants-Appellants. ) Judge Presiding.

JUSTICE QUINN delivered the opinion of the court:

Plaintiff, the Home Insurance Company of Illinois (Home),
filed a declaratory judgment action to determine whether a self-
insured retention provision of an insurance policy issued to Lester
Engineering Corporation (Lester) was a condition precedent re-
quiring Lester to make actual payment of the first $250,000 in
damages before Home was liable for the policy limits of the subject
liability policy. The defendants, Carl Hooper and Deborah Hooper
(Hoopers) and Lester moved for summary judgment, alleging, inter
allia, that the self-insured retention provision of the insurance
policy was invalid as a violation of section 388 of the Illinois
Insurance Code (215 ILCS 5/388 (West 1994)) and that the language
of the policy provided drop down coverage paying Lester's self-
insured retention if Lester became bankrupt or otherwise insolvent.
The trial court granted Home's motion for summary judgment. The
defendants appeal.
For the following reasons we reverse in part, affirm in part,
and remand with instructions.
The pertinent facts adduced from the record are as follows.
Carl Hooper (Hooper) sustained personal injuries on January 27,
1989, while performing work on a dye casting and injection molding
machine which was manufactured by Lester Engineering Corporation
(Lester). Plaintiff, Home Insurance Company of Illinois (Home),
previously issued an insurance policy to Lester for the policy
period of February 14, 1988, to February 14, 1989. The policy
provided comprehensive liability and product liability coverage up
to $1 million per occurrence and was in full force and effect at
the time Hooper suffered his injury. The policy was also subject
to a self-insured retention of $250,000 per occurrence and $750,000
in aggregate. Application of Lester's self-insured retention is
set forth in endorsement No. 4, which provides in pertinent part as
follows:
"SELF-INSURED RETENTIONS - OCCURRENCE POLICY -
REDUCTION IN INDEMNITY ONLY

In consideration of the premium paid, it is hereby
understood and agreed that Section I of the policy is amended
by deleting existing paragraph B, and adding new paragraph B
as follows:

B. (1) With regard to such insurance as is afforded by
this policy, it shall be a condition precedent to the
company's liability under this policy that the Named Insured
make actual payment, by way of settlement or judgment of
damages, of the amount(s) stated in the declarations and in
any endorsements thereto as the Named Insured's Self-Insured
Retention(s). The Named Insured's obligations to make actual
payment for the Self-Insured Retention(s) shall not be
satisfied in whole or in part by the payment by the Named
Insured of:

(a) any hospital, medical or funeral charges incurred in
the adjustment, investigation or defense of any
claim,

(b) any sums paid or payable as salaries, wages
compensation, fees, charges, interest or expenses
for doctors, nurses, attorneys, investigators and
any other persons, as a result of the adjustment,
investigation or defense of any claim, and

(c) any other expenses incurred in the adjustment,
investigation or defense of any claim.

The Named Insured's obligation to make actual payment for
the Self-Insured Retention(s) shall only be satisfied by
payment by the Named Insured of actual damages for bodily
injury or property damage to which this insurance applies.
The company shall only be liable for ultimate net loss over
and above the amount(s) stated in the declarations as the
Named Insured's Self-Insured Retention(s), subject to the
limits of liability stated in the declarations and subject to
the terms, exceptions, limitations and conditions of the
policy."

On May 4, 1990, Carl and Deborah Hooper filed a complaint in
the circuit court of Cook County against certain defendants
including Lester, premised on the theories of strict product
liability and negligence. In 1991, shortly after the filing of the
aforementioned lawsuit, Lester filed a petition in the United
States Bankruptcy Court for the Northern District of Ohio pursuant
to chapter 7 of the United States Bankruptcy Code. The Hoopers
filed a responsive motion to lift the resulting automatic stay of
proceedings with respect to Lester in order to permit the Hoopers
to continue their lawsuit against Lester. An agreed order
modifying the stay of proceedings was entered on November 7, 1991,
by the United States Bankruptcy court, vacating the automatic stay
"to the extent of the debtor's insurance coverage."
Home subsequently filed a motion in the United States
Bankruptcy court seeking an order modifying the automatic stay to
permit it to initiate a declaratory judgment action seeking a
declaration that Home had no obligation to indemnify Lester in the
underlying lawsuit unless and until actual payment was made by
Lester of the entire amount of its $250,000 per occurrence self-
insured retention.
On November 18, 1994, Home filed a two-count complaint seeking
a determination that, under the subject policy, notwithstanding the
bankruptcy of Lester, it had no obligation to indemnify Lester or
to pay the Hoopers in connection with any judgment or settlement
entered against it unless and until such time as Lester made actual
payment to the Hoopers of the entire $250,000 self-insured
retention amount. Home also sought a declaration that it had no
drop down obligation to assume Lester's liability to pay the first
$250,000 of damages or judgment, even though it might be liable for
the balance of said claims and damages up to $1 million.
The Hoopers filed a counterclaim seeking a declaration that
Home was required to fully indemnify Lester, irrespective of
Lester's inability to make any of the actual payment of the claimed
retention amount. Alternatively, the Hoopers sought a declaration
that Home was obligated to indemnify Lester for that portion of the
judgment or settlement exceeding $250,000, irrespective of Lester's
inability to pay the claimed retention amount.
The trial court granted summary judgment for Home and against
the Hoopers, rejecting the Hoopers' argument that the self-insured
retention provision of the subject policy violated section 388 of
the Illinois Insurance Code (Code) as well as rejecting the
Hoopers' assertions that Home was required to/had to drop down and
pay Lester's self-insured retention if Lester became bankrupt or
otherwise insolvent. Specifically, the trial court held that
actual payment of the $250,000 self insured retention by Lester was
a condition precedent to coverage under the Home policy. The
Hoopers appeal from this ruling.
On appeal, Home asserts that section 388 provides that a
direct action may be maintained against an insurer only after a
judgment obtained against the insured is returned unsatisfied
because of the insured's insolvency or bankruptcy. The relevant
provision of section 388 provides;
"[T]hat in case a certified copy of a judgment against the
insured is returned unsatisfied ***, then an action may be
maintained by the injured person or his or her personal
representative against such company under the terms of the
policy and subject to all of the conditions thereof for the
amount of the judgment in such action not exceeding the amount
of the policy." 215 ILCS 5/388 (West 1994).

The necessity of obtaining a judgment as a prerequisite to
proceeding against the insurer under section 388 was affirmed by
this court in Mar San v. Insurance Co. of North America, 86 Ill.
App. 3d 64, 407 N.E.2d 969 (1980), which held that the statute:
"presupposes that a judgment will be recovered against
the insured and permits a direct action to be brought against
the insurance company in case execution on the said judgment
has been returned unsatisfied, and eliminates from the
consideration of the court any defense which might have been
urged by the insurance company to the effect that the insured
was either insolvent or bankrupt. It does not give the
injured party the right to bring a primary action against the
insurance company before the liability has been established in
the suit brought by him against the insured." Mar San, 86 Ill.
App. 3d at 66-67.

Here, Home maintains that since the Hoopers had never obtained a
judgment against Lester, they could not bring suit under section
388.
In reply, the Hoopers assert that Home's declaratory judgment
action also was premature. They cite cases holding as a general
proposition that "[t]he question of whether or not an insurer has
a duty to indemnify is only ripe for consideration if the insured
has already incurred liability in the underlying claim against it."
Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 607 N.E.2d 1204 (1992). Attempts to obtain rulings on the duty
to indemnify brought before a judgment is entered against the
insured have been rejected. Batteast v. Argonaut Insurance Co., 118
Ill. App. 3d 4, 454 N.E.2d 706 (1983); Weber v. St. Paul Fire &
Marine Insurance Co., 251 Ill. App. 3d 371, 622 N.E.2d 66 (1993).
This court permitted Home to file a surreply brief only as to
this last issue. Home asserts that the cases cited above are
inapposite to the case at bar in that they involve situations where
the court has determined that the insurer's duty to defend has
arisen. Here, Home has denied that it has a duty to defend due to
the condition precedent not having been satisfied. Further, the
duty to defend is determined by the four corners of the underlying
complaint, but the duty to indemnify is narrower in scope and can
be dependent upon the facts presented during trial. In the above
cases, holding that resolution of the duty to indemnify was
premature, the "duty to indemnify" issue was dependent upon facts
that might or might not have arisen in the underlying lawsuit.
In Illinois State Medical Insurance Services v. Cichon, 258
Ill. App. 3d 803, 629 N.E.2d 822 (1994), the court held that a duty
to indemnify issue may not be premature even before liability is
incurred in the underlying claim. "[T]he question of coverage can
appropriately be decided in a declaratory judgment action where the
issues in the underlying suit are separable from those in the
collateral proceeding.*** [T]he test is whether collateral estoppel
would operate. If the issues are substantially the same so that
collateral estoppel would apply to control the resolution of issues
in the underlying suit, declaratory judgment would be premature.
Such is not the case here." Illinois State, 258 Ill. App. 3d at
807, citing Murphy v. Urso, 88 Ill. 2d 444, 455, 430 N.E.2d 1079,
1084 (1981).
Here, Home argues, and we agree, the indemnification issues
set forth in the declaratory action and motions for summary
judgment involve purely legal questions regarding: (1) whether
payment of the self-insured retention by Lester was a condition
precedent that had to be satisfied prior to triggering coverage
under the Home policy; (2) whether the instant policy was in
violation of section 388 of the Illinois Insurance Code; and (3)
whether the policy's coverage would drop down. These issues are
not in any way reliant upon facts that will be presented in the
underlying action.
On November 7, 1991, the bankruptcy court granted an agreed
order allowing the declaratory action to proceed to determine if
there are insurance proceeds awardable to the insured. That court
vacated the automatic stay "to the extent of the debtor's insurance
coverage." Based on the facts of the case, the applicable case law
and the positions of the parties as expressed in their briefs and
at argument, this court will invoke Supreme Court Rule
366(a)(1)(155 Ill. 2d R. 366(a)(1)), and will treat Home's
complaint for declaratory judgment on the issue of indemnification
as a complaint for declaratory judgment for determination of the
extent of coverage provided by the Home policy.
Declaratory relief is available where a case presents "a
concrete dispute admitting of an immediate and definitive
determination of the parties' rights, the resolution of which will
aid in the termination of the controversy or some part thereof."
Underground Contractors Ass'n v. City of Chicago, 66 Ill. 2d 371,
375, 362 N.E.2d 298 (1977). It is also a long-standing principle
that the courts favor declaratory judgment actions on the issue of
policy coverage prior to adjudication of the underlying claim,
especially when based on a present denial of coverage. Safeco
Insurance Co. v. Brimie, 163 Ill. App. 3d 200, 205, 516 N.E.2d 577
(1987).
We next address the issue of whether the trial court properly
determined that the self-insured retention provision of the subject
policy was a condition precedent and did not constitute a violation
of the Illinois Insurance Code.
Section 388 of the Illinois Insurance Code (215 ILCS 5/388
(West 1994)) requires all liability policies to contain a provision
which guarantees that the insolvency or bankruptcy of the insured
will not release the insurer from payment of damages from injuries
or loss occurring during the term of the policy. Specifically, the
statute states in pertinent part:
"No policy of insurance against liability or
indemnity for loss or damage to any person other
than the insured, for which any insured is liable,
shall be issued or delivered *** unless it con-
tains in substance a provision that the insolvency
or bankruptcy of the insured shall not release the
company from the payment of damages for injuries sus-
tained ***." 215 ILCS 5/388 (West 1994).

The plain language of section 388 makes clear the legislative
intent to prevent insurers from using the insured's bankrupt
condition and resulting inability to make actual payment to satisfy
a judgment or any portion thereof as grounds to avoid payment on a
policy.
Home asserts that under the express language of the policy
actual payment of the $250,000 is a condition precedent to its
obligation to pay damages in excess of the self-insured retention
limit. The subject policy issued by Home also contained the
following provision: "[b]ankruptcy or insolvency of the named
insured *** shall not relieve the company of any of its obligations
hereunder." However, the unambiguous language of the self-insured
provision contained in the instant policy would release Home from
the obligation of payment under the policy due to Lester's
bankruptcy. Lester's pending bankruptcy petition will almost
certainly make it impossible for Lester to pay the initial $250,000
of any judgment. The operative effect of the language of the self-
insured provision is directly contrary to the public policy as
declared by the legislative enactment of section 388.
Home's characterization of the self-insured retention clause's
requirement of "actual payment" by Lester of the retention amount
as a condition precedent to its obligation to pay on the policy is
also unavailing due to the same public policy considerations.
Irrespective of the language contained in the subject policy,
section 388 prevents Home from avoiding making payment of that
portion of a judgment in excess of $250,000. Therefore, Home is
obligated to pay any portion of an award to the Hoopers that is in
excess of $250,000 up to $1 million.
In an endorsement of the policy at issue in this case, Home's
liability is described as being limited to pay only those:
"[c]laims which resulted in the amounts cumulatively
equaling or exceeding $250,000, such that the amounts
paid or payable by the company, plus the amounts
paid or potentially payable by the Named Insured,
shall equal $1,000,000."

The express language of the policy clearly defines Home's
liability to pay claims in amounts cumulatively exceeding $250,000,
such that the amounts paid or payable by the company, plus the
amounts paid or potentially payable by the named insured, shall
equal $1 million. Under the aforementioned provision, Home is
obligated to indemnify Lester for that portion of the judgment or
settlement exceeding $250,000, irrespective of Lester's inability
to pay the claimed retention amount.
Lastly, Lester asserts that Home's coverage was required to
drop down and pay Lester's self-insured retention if Lester became
bankrupt or insolvent. In reviewing the language in the policy, it
is clear that there is no drop down provision requiring Home to pay
the first $250,000 under these circumstances. In this case, Home's
obligation is similar to that of an excess insurer's obligation to
provide coverage when an underlying insurer has become insolvent.
While courts have held that an excess insurer has an obligation to
provide coverage when an underlying insurer has become insolvent,
with coverage beginning where the unpaid underlying insurance was
to have left off, the excess insurer is not responsible for
liability below limits contained in the excess policy. Hartford
Accident & Indemnity Co. v. Chicago Housing Authority, 12 F.3d 92,
96 (7th Cir. 1993); Hudson Insurance Co. v. Gelman Sciences, Inc.,
921 F.2d 92, 95 (7th Cir. 1990). Therefore, we hold that Home
retains the obligation to cover any judgment in excess of $250,000
but is not obligated for the first $250,000. The trial court's
granting of Home's motion for summary judgment on the issue of drop
down coverage is affirmed.
For the aforementioned reasons, the decision of the trial
court is reversed in part and affirmed in part, and this cause is
remanded with instructions to proceed consistent with this opinion.
Reversed in part and affirmed in part: cause remanded with
instructions.
GREIMAN, P.J., and THEIS, J., concur.