A recent Illinois appellate court decision illustrates that a policyholder can compel its insurance carrier to provide it with a defense even when it is clear from extrinsic facts that the insurer will not ultimately have an obligation to indemnify the policyholder against a judgment.
Given the high cost of defending against even baseless claims, compelling the insurer to pay the defense costs even though it will not have to fund a judgment is not an empty victory. As illustrated by the recent appellate decision in Illinois Tool Works, Inc. v. Travelers Casualty and Surety, the policyholder may need to push the insurer to focus on the facts as pled and not the facts as “known” to force its insurance carrier to defend the claim. Policyholders themselves should not focus on the facts as known but on potential liability, assuming the claimant could actually prove the claims — regardless of how factually baseless they may be — in assessing whether it has coverage for defense costs.
The appellate court’s take
In Illinois Tool Works, the policyholder purchased insurance policies that included a defense obligation from the defendant carriers from 1971 through 1987. It is undisputed that Illinois Tool Works was not supplying and distributing products in the welding product market until 1993, when it entered that market by acquiring another company. Illinois Tool Works did not actually engage in the welding product market during the time encompassed by the insurance policies it purchased from the defendant insurers.
Regardless of when Illinois Tool Works entered the welding product market, it found itself named as a defendant in multiple toxic tort personal injury lawsuits filed around the country by people who claimed to have been injured through the use of welding products they allege it sold. The plaintiffs complained in generic terms that they were injured by products sold or distributed by Illinois Tool Works over a period of time that encompassed the years 1971 through 1987. Illinois Tool Works was sued directly for its conduct and indirectly as a successor to the company it acquired. The complaints were vague as to when the exposure occurred but suggested it included the period from 1971 through 1987.
Attempting to avoid their duty to defend Illinois Tool Works, the insurance carriers relied on extrinsic facts nowhere to be found in the complaints against Illinois Tool Works. The insurers denied coverage on the basis that Illinois Tool Works did not in fact distribute the products at issue during the period their policies covered. But an “insurer’s knowledge that extrinsic facts not pled in the complaint will ultimately defeat any coverage obligation does not negate its duty to defend in the first place if the complaint, on its face, presents a claim potentially within the insurance policy’s coverage,” the court stated. Finding the insurers were obligated to fund the policyholder’s defense, the court recognized that “the Insurers agreed to provide a defense for cases based on groundless allegations and, thus, to bear the cost of disproving groundless allegations on [the policyholder’s] behalf.”
The insurers also asserted that to the extent the claims against Illinois Tool Works were a successor to the entity it acquired, there was no coverage. The appellate court found that to the extent the claims were solely as successor to the entity it acquired, there was no coverage.
Addressing inherent conflicts
Among the takeaways from this case, insurers often point to extrinsic matters or seek information about extrinsic matters in order to “evaluate” their defense obligations. Insurance carriers use this “investigation” to search for excuses to avoid their duty to defend even though that duty arises from the claims pled. Sometimes, such as when a policyholder was not even engaged in the conduct alleged during the periods covered by the insurance policies, the carrier’s position may not, at first blush, seem so unreasonable. And many times, policyholders accept the insurance carrier’s determination that there is no coverage based on the extrinsic facts, if the policyholder does not contest the facts the insurer cites.
The insurer’s duty is determined by the claims alleged. After all, a policyholder does not buy insurance just against meritorious claims but also to defend against meritless claims. As illustrated by Illinois Tool Works, the insurance carrier’s coverage obligation includes a defense against claims for conduct alleged to have occurred at a time when the manufacturer had not even begun to manufacture the products at issue. An insurer’s refusal to defend is only justified when “it is clear from the face of the underlying complaint that the allegations fail to state facts which bring the cause within or potentially within coverage,” the appellate court stated. This principle should help to guide how a policyholder defends itself. Vague, poorly pled claims may provide a policyholder with a greater opportunity to find insurance coverage. Thus, while there may be a kneejerk response to seek clarification through a motion to dismiss, the policyholder may be better served by avoiding that reaction.
This case also illustrates the conflict inherent when the complaint presents a claim that is potentially within coverage but where the facts will ultimately show the claim is outside coverage. In such circumstances, the policyholder should insist on receiving a defense by attorneys it hires – at the insurer’s expense – and not accept a defense from counsel appointed by the insurer. Frequently in these circumstances, the insurance carrier will respond to a claim with a lengthy reservation of rights letter tracking the often mind-numbing language of the insurance explaining all of the reasons that coverage is likely to ultimately be excluded — but then providing defense counsel.
Will defense counsel engaged by the carrier be as likely to defend the case in a way to preserve the insurer’s duty to fund the defense? It’s a reasonable question that should cause the policyholder to engage counsel. And in light of the conflict presented between the insurer and policyholder, the insurer will be required to pay for the defense until such time, if ever, as there are no claims potentially within the coverage of the insurance policy.