Under Illinois law, an insurer has two options when it is unsure as to whether an underlying claim triggers a defense obligation under a liability policy: it can provide a defense under a reservation of rights or it can seek a declaratory judgment as to its coverage obligations prior to trial.  Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127 (1999).  The recent decision by the United States District Court for the Northern District of Illinois in Cincinnati Ins. Co. v. Silvestri Paving Co., 2011 U.S. Dist. LEXIS 114273 (N.D. Ill. Oct. 4, 2011) addressed the appropriateness of a declaratory judgment action under such circumstances.

Cincinnati Insurance Company’s insured, Silvestri, was named as a defendant or third-party defendant in three consolidated lawsuits alleging dumping of waste in violation of the Illinois Environmental Protection Act.  After initially disclaiming coverage, Cincinnati agreed to defend Silvestri in these matters under a reservation of rights.  Cincinnati then brought suit against Silvestri in federal court pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that it had no duty to defend or indemnify Silvestri on the basis of several coverage defenses, including the application of its policies’ pollution exclusion, the lack of an occurrence, and Silvestri’s failure to comply with the policies’ notice provisions.

Silvestri subsequently moved to dismiss pursuant to the Wilton/Brillhart abstention doctrine, which provides a district court with the discretion to stay or dismiss a declaratory judgment action when a parallel case is pending in state court that involves the same parties and identical legal issues.  Where, however, the declaratory judgment presents an issue distinct from the state court proceeding, abstention is inappropriate.  Silvestri argued that abstention was proper since the issues presented for adjudication in Cincinnati’s declaratory judgment action would also be resolved in the underlying suits and because Cincinnati’s duty to indemnify necessarily required a finding of fact in the underlying suits.  Silvestri further argued that Cincinnati was engaging in improper forum shopping since the judges in the underlying consolidated cases had ruled on certain issues relating to the duty to defend and indemnify involving other defendants and their respective insurers.

The court rejected each of Silvestri’s arguments.  Most pertinently, the court held that the underlying state court cases could not be considered parallel actions for the purpose of the Wilton/Brillhart doctrine because Cincinnati was not a defendant in those suits and because the coverage issues would not be addressed in those suits.  While the underlying suits would be determinative of Silvestri’s liability under the Illinois statute, those suits would not address Silvestri’s right to coverage for its liability.  As the court explained, “[w]hether Silvestri dumped ‘waste’ in violation of the IEPA [and] is liable for damages to the State of Illinois, is … independent from the issue of whether the allegations in the underlying case are covered by Silvestri's insurance policies with Cincinnati.” The court further held that it was irrelevant that the underlying courts addressed insurance coverage issues as to parties other than Silvestri and Cincinnati under entirely different insurance policies.  Such would have no effect on the insurance coverage dispute between Silvestri and Cincinnati and, at the very least, did not merit abstention under the Wilton/Brillhart doctrine.