Cincinnati Insurance Cos. v. West American Insurance Co.

Annotate this Case
Cincinnati Cos. v. American Ins. Co., No. 83282 (9/24/98)
Docket No. 83282--Agenda 13--March 1998.
THE CINCINNATI COMPANIES, Appellee, v. WEST
AMERICAN INSURANCE COMPANY, Appellant.

JUSTICE McMORROW delivered the opinion of the court:
The issue in this case is whether an insurer's duty to defend
its insured arises upon its receipt of actual notice of the suit
against its insured, or whether the duty to defend is triggered
only upon the insured's tender of its defense to the insurer. The
appellate court held that actual notice of the underlying claim
was sufficient to trigger the duty to defend, regardless of
whether the insured tendered its defense to the insurer, provided
the insured did not knowingly forgo the insurer's involvement.
287 Ill. App. 3d 505. We affirm the appellate court.

BACKGROUND
This insurance coverage case has its roots in an underlying
suit brought by Lorren Kessel against several defendants,
including Baird Land Surveyors (Baird) and William Grady,
doing business as B&D Home Repair and Builders (B&D).
Kessel was injured while working at a construction site. Baird
and B&D were contractors at the site. Baird was listed as an
additional insured on a policy which was issued by the plaintiff,
The Cincinnati Companies (Cincinnati), and held by another
contractor at the site. B&D was insured under a policy issued by
the defendant, West American Insurance Company (West
American).
Upon receiving service of process in Kessel's suit, Baird
tendered its defense in the case to its own insurer, which then
tendered the defense to Cincinnati. B&D tendered its defense to
West American. Thus, both Cincinnati and West American had
notice of the suit shortly after service of process upon Baird and
B&D. In the course of discovery in the underlying suit, Kessel
served B&D with interrogatories which, inter alia, asked B&D
whether it was insured for the injuries alleged in Kessel's
complaint, and asked that B&D list the insureds under each
policy which might cover Kessel's injuries. B&D's answer to
the interrogatories stated that B&D was covered by the West
American policy, and listed only itself, B&D, as an insured
under that policy.
On January 27, 1992, the eve of the third trial date set for
the underlying case, counsel for B&D disclosed to Baird that,
contrary to the answer given in response to Kessel's
interrogatories, Baird was in fact listed as an additional insured
on the West American policy issued to B&D. Prior to this
disclosure, Baird did not know that it was listed as an additional
insured on the West American policy. Counsel for Baird,
retained by Cincinnati, then tendered Baird's defense to West
American. West American rejected the tender.
On February 17, 1992, Kessel settled the underlying case
for $60,000. Under the terms of that settlement, Baird and B&D
were each to pay $30,000. Cincinnati paid Baird's share of the
settlement, and West American paid B&D's share. Prior to
reaching the settlement, Cincinnati and West American entered
into a stipulation in which it was agreed that Cincinnati would
preserve its right to pursue a contribution action against West
American for reimbursement of the settlement payment and
attorneys' fees.
On January 25, 1993, Cincinnati filed this declaratory
judgment action against West American. Cincinnati sought a
declaration that West American was a primary insurer for Baird
in the underlying litigation, and that West American was thus
liable for the amount which Cincinnati had paid on behalf of
Baird to settle the underlying case, as well as the attorney fees
and costs incurred by Cincinnati on behalf of Baird in defending
the case. Cincinnati and West American then filed cross-motions
for summary judgment. The trial court granted Cincinnati's
motion for summary judgment. The court found that "[t]he
Answers to Interrogatories provided to Baird made no reference
to the West American/Ohio Casualty policy and foreclosed
Baird's opportunity to make a reasonable judgment as to
tender," and that "[t]he lack of tender must not be attributed to
Baird but to West American through the actions of the B&D
attorney in the Kessel v. Baird case." The trial court found that
West American was liable for an "equitable" share of the
settlement and of attorney fees incurred after the service of the
answers to interrogatories on January 2, 1991. Cincinnati filed
a motion for entry of money judgment for $15,000, representing
one-half of the settlement paid on behalf of Baird, and
$14,384.50, representing one-half of the attorney fees and costs
incurred after January 2, 1991, on behalf of Baird. On April 26,
1996, the circuit court entered judgment against West American
in the amount of $29,384.50.
West American appealed the trial court's ruling on the
motions for summary judgment and its entry of the monetary
judgment. West American argued that an insurer has no
obligation to defend an insured until the insured tenders its
defense to the insurer, that is, asks the insurer for assistance in
defending the underlying suit; that Baird never tendered its
defense in the underlying action; and that the trial court erred in
attributing this lack of tender to the attorney for B&D. The
appellate court affirmed the judgment of the court, holding that
"an insurer's duty to defend claims potentially falling within the
terms of a policy is triggered when the insurer has actual notice
of the lawsuit, regardless of whether there has been an actual
tender of defense by the insured." 287 Ill. App. 3d at 511, citing
Federated Mutual Insurance Co. v. State Farm Mutual
Automobile Insurance Co., 282 Ill. App. 3d 716, 726 (1996).
The appellate court recognized, but declined to follow, the
contrary decision in Institute of London Underwriters v.
Hartford Fire Insurance Co., 234 Ill. App. 3d 70 (1992), in
which the court held that an insurer's duty to defend a
sophisticated insured arose only upon tender of the defense to
the insurer. The appellate court in the case at bar determined
that West American had received actual notice of the underlying
suit against both Baird and B&D shortly after service of process
in that case. Moreover, the court found no evidence that Baird
had consciously selected one insurer over another to provide its
defense. The court found that B&D's attorney, acting as the
agent for both B&D and West American, had responded
inadequately to Kessel's discovery requests by failing to note
that Baird was an insured under the West American policy, and
that Baird's failure to tender was thus attributable to West
American. Finally, the appellate court rejected West American's
argument that it should not be liable for attorneys' fees and
costs incurred by Cincinnati prior to Baird's tender to West
American in January 1992. The appellate court held that,
because the delay in tender was due to the incomplete discovery
responses of B&D's attorney, who was an agent of West
American, West American's obligation to share in these
expenses took effect at the time of those responses. We granted
West American's petition for leave to appeal to this court. 166
Ill. 2d R. 315.

ANALYSIS
"In insurance law, contribution is `an equitable principle
arising among coinsurers which permits one who has paid the
entire loss to receive reimbursement from the other insurer liable
for the loss." Aetna Casualty & Surety Co. v. James J. Benes &
Associates, Inc., 229 Ill. App. 3d 413, 417 (1992), quoting Hall
v. Country Casualty Insurance Co., 204 Ill. App. 3d 765, 772
(1990). In the case at bar, Cincinnati alone paid the costs of
Baird's defense, and the amount of Baird's settlement
indebtedness, in the underlying case. Cincinnati then brought
this action for equitable contribution against West American,
seeking to recover half of these costs. The issue presented in
this appeal is whether West American was also liable for
Baird's costs because Baird was an insured covered by the
policy issued by West American. More specifically, the question
is whether West American's duty to defend Baird was triggered
when it had actual notice of the suit against Baird, even though
Baird did not tender its defense to West American.[fn1]
Because this is an appeal from an order granting summary
judgment, we review the case de novo. Outboard Marine Corp.
v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102 (1992).
Generally, the question of whether an insurer has a duty to
defend an insured depends on the allegations of the complaint
and the scope of the policy. "In order to determine whether [an]
insurer's duty to defend [an insured] has arisen, the court must
compare the allegations of the underlying complaint to the
policy language. [Citations.] *** If the court determines that
these allegations fall within or potentially within the policy's
coverage, the insurer has a duty to defend [an] insured against
the underlying complaint. [Citations.]" (Emphasis in original.)
Outboard Marine Corp., 154 Ill. 2d at 125.
However, certain courts applying Illinois law, including the
United States Court of Appeals for the Seventh Circuit and
certain districts of the Illinois appellate court, have held that an
additional requirement must be met before an insurer's duty to
defend is triggered. These courts hold that the duty to defend
arises only after the insured tenders its defense to the insurer.
Hartford Accident & Indemnity Co. v. Gulf Insurance Co., 776 F.2d 1380, 1383 (7th Cir. 1985) (Hartford I); Institute of
London, 234 Ill. App. 3d at 80. According to these courts,
"[w]hat is required [to trigger the duty to defend] is knowledge
that the suit is potentially within the policy's coverage coupled
with knowledge that the insurer's assistance is desired."
Hartford I, 776 F.2d at 1383.
The courts which require an insured to tender its defense
before the duty to defend is triggered recognize an exception to
the tender rule if the insured is "unsophisticated." Under this
exception, an insurer's duty to defend an unsophisticated insured
is triggered solely by the insurer having "actual notice" of the
suit against its insured. See Long v. Great Central Insurance
Co., 190 Ill. App. 3d 159, 169-70 (1989). See also Aetna
Casualty & Surety Co. v. Chicago Insurance Co., 994 F.2d 1254, 1260 (7th Cir. 1993); Hartford I, 776 F.2d at 1383;
Institute of London, 234 Ill. App. 3d at 76-77. "Actual notice"
is defined as "notice sufficient to permit the insurer to locate the
suit and defend it." Long, 190 Ill. App. 3d at 168. This
exception to the tender requirement is the result of concern that
application of the tender rule to an unsophisticated insured
would be unfair in light of the fact that the insurer has superior
knowledge about the scope of its policies, and that the insured
may not be aware of the tender requirement. See, e.g., Hartford
Accident & Indemnity Co. v. Gulf Insurance Co., 837 F.2d 767,
774 (7th Cir. 1988) (Hartford II).
The courts which require tender also hold that any insured--
irrespective of the sophistication of the insured--covered by
more than one policy can knowingly designate one of the
insurers to defend. Institute of London, 234 Ill. App. 3d at 78-
80; Aetna, 994 F.2d at 1260. Where the insured makes such a
designation, the duty to defend falls solely on the selected
insurer. That insurer may not in turn seek equitable contribution
from the other insurers who were not designated by the insured.
Institute of London, 234 Ill. App. 3d at 79. This rule is intended
to protect the insured's right to knowingly forgo an insurer's
involvement. Institute of London, 234 Ill. App. 3d at 79.
In the case at bar, consistent with its prior announcements
on the issue of whether tender is required to trigger the duty to
defend, the appellate court, Second District, rejected the
requirement of tender. The court held that an insurer's duty to
defend is triggered solely by its having "actual notice" of a
claim against its insured. 287 Ill. App. 3d at 511-12, citing
Federated Mutual, 282 Ill. App. 3d at 726. It defined "actual
notice" as " `notice sufficient to permit the insurer to locate and
defend the lawsuit.' " 287 Ill. App. 3d at 512, quoting Federated
Mutual, 282 Ill. App. 3d at 726. The court further held that the
rule allowing notice to trigger the duty to defend applies without
regard to the level of the insured's sophistication. Finally, the
appellate court held that the insurer's duty to defend was not
triggered where an insured has knowingly forgone an insurer's
involvement, or where " `there is *** prejudice to the insurer.' "
287 Ill. App. 3d at 511, quoting Federated Mutual, 282 Ill. App.
3d at 726.
West American argues that the appellate court erred in
ruling that tender is not required to trigger an insurer's duty to
defend when the insured is "sophisticated." It offers several
arguments in support of this position. First, West American
argues that, by holding actual notice is sufficient to trigger the
duty to defend, the appellate court "stripped policyholders of an
initial measure of autonomy--by curtly dismissing the notion that
an insured might not want a particular insurer to defend a
particular claim, even if the policy in question allows the
insured to claim a defense." West American further argues that
a rule allowing actual notice to trigger the duty to defend is
based on the "unfortunate presumption that an insurer should
presume that an insured desires its involvement unless the
insured declares otherwise," and that, while this presumption
"might frequently be true[,] there are easily imaginable
circumstances in which it is untrue--and in which the insurer's
intermeddling might be unwelcome or even detrimental." In
sum, West American argues that an insured should have the
right to forgo coverage under a policy if the insured so desires,
and that allowing actual notice of an underlying suit against an
insured to trigger an insurer's duty to defend might deprive the
insured of that right.
We find this argument unpersuasive. It is true that an
insured may choose to forgo an insurer's assistance for various
reasons, such as the insured's fear that premiums would be
increased, or the policy cancelled, in the future. See Institute of
London, 234 Ill. App. 3d at 78-79. Moreover, an insured's
ability to forgo that assistance should be protected. However, we
do not believe that the appellate court's holding that actual
notice is sufficient to trigger a duty to defend would operate to
"strip" policyholders of the ability to forgo an insurer's
assistance. On the contrary, an insured may knowingly forgo the
insurer's assistance by instructing the insurer not to involve
itself in the litigation. The insurer would then be relieved of its
obligation to the insured with regard to that claim. Furthermore,
and contrary to West American's suggestion, the insurer is not
required to actually defend every claim against its insured of
which it has actual notice. The duty to defend may be
discharged simply by contacting the insured to ascertain whether
the insurer's assistance is desired. If the insured indicates that
it does not want the insurer's assistance, or is unresponsive or
uncooperative, the insurer is relieved of its duty to defend.
Towne Realty, Inc. v. Zurich Insurance Co., 548 N.W.2d 64, 67
& n.2 (Wis. 1996). If, after being contacted, the insured
indicates that it desires the insurer's assistance, then the
insurer's duty to defend continues.
West American next argues that, under the appellate court's
decision, every claim against an insured of which an insurer has
notice will require the insurer either to involve itself in the
underlying litigation or to seek a declaratory judgment that it
does not owe a duty to defend. West American explains that,
"uncertain of whether its insured's silence is an implicit tender
or an indication that the insured does not regard the claim as a
covered one, the insurer is at peril of forfeiting its ability to
challenge its obligations under the policy. Its prudent response
is either to insinuate itself into litigation its policy might not
cover, or to commence its own litigation to determine its
coverage obligations." This argument is similar to that relied
upon by a number of "tender rule" courts, which have found that
allowing mere notice to trigger the duty to defend would require
the insurer to "intermeddle officiously" in the underlying
litigation. See Hartford I, 776 F.2d at 1383, citing Oda v.
Highway Insurance Co., 44 Ill. App. 2d 235, 253 (1963). See
also Institute of London, 234 Ill. App. 3d at 75, quoting
Hartford I, 776 F.2d at 1383.
We find this argument also to be misplaced. Where the
insurer has actual notice of a claim against its insured, it would
not be required to interpret the insured's silence as a desire for
assistance. Rather, the insurer can simply ask the insured if the
insurer's involvement is desired, thus eliminating any
uncertainty on the question. Contrary to West American's
argument, the insurer is not required to insinuate itself into the
litigation at this stage. The insurer does not become liable
simply by inquiring of the insured whether it desires the insurer
to defend. The insurer is only potentially liable at this stage.
Moreover, this potential liability is not a result of the insurer's
contacting the insured, but of the insurance contract for which
the insurer received consideration.
West American next argues that a rule allowing actual
notice to trigger the duty to defend a sophisticated insured
would create "difficult problems of proof concerning the
insurer's knowledge of the underlying suit," and that a tender of
the defense should be required. We are not persuaded by this
argument for two reasons. First, courts have long allowed actual
notice to trigger the duty to defend unsophisticated insureds.
See, e.g., Federated Mutual, 282 Ill. App. 3d at 726-27; Long,
190 Ill. App. 3d at 169-70. West American points to no case in
which a court has struggled with the question of when an
insurer had actual notice. Second, West American's suggested
alternative to this rule--an alternative which would provide
different treatment for sophisticated and unsophisticated
insureds--might also create difficult problems of proof by
requiring courts to determine the level of an insured's
"sophistication." Continental Casualty Co. v. United Pacific
Insurance Co., 637 So. 2d 270, 274-75 (Fla. Dist. Ct. App.
1994) ("[o]bviously, what constitutes `sophistication' *** is
fertile ground for litigation").
For these reasons, we reject West American's arguments in
support of the tender requirement. We believe that the better
rule is one which allows actual notice of a claim to trigger the
insurer's duty to defend, irrespective of the level of the
insured's sophistication, except where the insured has knowingly
forgone the insurer's assistance. This rule is the result of a
number of considerations. First, the insurer is usually in a better
position than even a sophisticated insured to know the scope of
the insurance contract and its duties under it. See Towne Realty,
548 N.W.2d at 67. In light of this frequent disparity in
information and knowledge of insurance law, we are reluctant
to interpret an insured's silence as a statement of intent to forgo
the insurer's assistance, particularly where, as West American
concedes, the insured more often than not does in fact desire the
insurer's involvement. As the Federated Mutual court stated:
"Such a rule [requiring tender] requires an insured to jump
through meaningless hoops towards an absurd end: telling
the insurer something it already knows. Such a rule injects
a degree of gamesmanship into the insurer-insured
relationship without providing any valid corresponding
benefit. In fact, the only benefit of such a rule is to create
a possibility--where none would otherwise exist--for an
insurer to escape an obligation it otherwise owes its
insured." Federated Mutual, 282 Ill. App. 3d at 725.
This argument is supported by the fact that the duty placed on
an insurer, one which may be satisfied by a simple letter to the
insured requesting clarification, is hardly "onerous." Towne
Realty, 548 N.W.2d at 67.
A second reason for allowing actual notice to trigger the
duty to defend is to assure or protect the benefits of the
insurance contract. The insurer, having received consideration
for inclusion of the insured on its policy, should not be allowed
to evade its responsibilities under the policy as a result of the
insured's ignorance, particularly where the insurer has actual
notice of a claim against its insured. See Federated Mutual, 282
Ill. App. 3d at 726-27.
Finally, we note that the state has an interest in having an
insured being adequately represented in the underlying litigation.
Aetna, 994 F.2d at 1260; Hartford I, 776 F.2d at 1382;
Federated Mutual, 282 Ill. App. 3d at 726. A rule which
requires only actual notice to trigger the duty to defend will
protect that interest. See Federated Mutual, 282 Ill. App. 3d at
726.
For these reasons, we hold that where the insured has not
knowingly decided against an insurer's involvement, the
insurer's duty to defend is triggered by actual notice of the
underlying suit, regardless of the level of the insured's
sophistication. We also agree with the appellate court's
determination that "actual notice" should be defined as " `notice
sufficient to permit the insurer to locate and defend the
lawsuit.' " 287 Ill. App. 3d at 512, quoting Federated Mutual,
282 Ill. App. 3d at 726. We note that, in order to have actual
notice sufficient to locate and defend a suit, the insurer must
know both that a cause of action has been filed and that the
complaint falls within or potentially within the scope of the
coverage of one of its policies.
It is clear from the record and from the findings of the trial
court that West American had notice of the claim against its
additional insured, Baird, no later than January 2, 1991.
Moreover, Baird clearly would have tendered its defense to
West American if Baird had known that it was listed as an
additional insured on a policy issued by West American.
Therefore, we affirm the appellate court's holding that West
American is obligated to reimburse Cincinnati for one-half of
Baird's settlement indebtedness, and also for one-half of Baird's
attorney fees incurred after January 2, 1991.

CONCLUSION
For the reasons discussed above, the judgment of the
appellate court is affirmed.

Appellate court judgment affirmed.


[fn1] We note that neither Cincinnati nor West American
argues governance of the terms of the policy with respect to
when the duty to defend arises. Consequently, policy defenses
have not been a factor our decision.