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Vol. 5, Iss. 9
September 7, 2016

A Monster: Insurer Sasquashed: #1 Coverage Case Of 2016


The Illinois Appellate Court’s decision in Harwell v. Firemen’s Fund Insurance Co., No. 1-15-2036 (Ill. Ct. App. June 30, 2016) is the most significant coverage case of the year to date. And even though the big blotter calendar on my desk says it’s only September -- yes, that’s what I still use – I am confident that nothing in the next four months is going to surpass Harwell.

Yes, I know, I’ve really built this one up. This is hyperbolic even by Coverage Opinions standards. But read on. I’m not overselling the potential significance of this decision from the Land of Lincoln.

The facts of Harwell are simple. I’ll let the court tell them: “In 2006, Kipling [Development Corporation] was building a home in Will County, Illinois. As general contractor, Kipling hired subcontractors to handle specific aspects of the job, including Speed-Drywall and United Floor Covering. When service technician Brian Harwell entered the site to replace a furnace filter, the stairs leading from the first floor to the basement collapsed beneath Harwell, sending him falling into the basement. Harwell sustained injuries and filed suit against Kipling as the general contractor of the building site. He alleged that Kipling was negligent in failing to properly supervise and direct construction and failing to furnish Harwell with a safe workspace and a safe stairway. Harwell also sued Speed-Drywall and United Floor Covering, alleging they had modified or failed to secure the stairwell.”

OK, here’s where it turns from a routine construction site bodily injury case to anything but routine. Kipling was defended in the case by counsel retained by its insurer – Fireman’s Fund. Counsel for Kipling answered an interrogatory from plaintiff Harwell stating that Kipling had a $1 million liability policy with Fireman’s Fund.

However, the Fireman’s Fund policy contained an endorsement providing that, if Kipling did not obtain a certificate of insurance and hold harmless agreement from its subcontractors, then the limit would be reduced to $50,000 (including defense costs) for bodily injury arising out of the acts of a subcontractor. [We’ve all seen endorsements like this – part of the effort by insurers, over the past decade, to limit its exposure for construction site claims.]

After Kipling’s counsel answered the interrogatory, stating that Kipling had a $1 million liability policy with Fireman’s Fund, the insurer sent Kipling a series of letters, stating that the subcontractor endorsement had not been satisfied, and, therefore, the limit of liability under the policy was reduced to $50,000.

The case went to trial against Kipling only. Harwell won. The jury awarded him $255,000 in damages. Kipling went out of business and had no assets to satisfy the judgment. Harwell filed a coverage action against Fireman’s Fund. The insurer maintained that, because the subcontractor endorsement had not been satisfied, the limit of liability under its policy was only $50,000 – and this was exhausted by payment of Kipling’s defense costs. The trial court granted summary judgment for Fireman’s Fund.

The Illinois Court of Appeals reversed – and was none too pleased with what it saw. The appellate court observed that Fireman’s Fund had informed its insured – Kipling – that its policy limit was $50,000. However, Kipling’s lawyers – paid for by Fireman’s Fund, the court was quick to note – informed Harwell that the policy had a $1 million limit of liability. The court saw this as a violation of an Illinois discovery rule, requiring that “[a] party has a duty to seasonably supplement or amend any prior answer or response whenever new or additional information subsequently becomes known to that party.”

The court described the problem this way: “The impact of this violation is obvious: had Harwell known in 2008 that Fireman’s Fund was limiting its liability to only $50,000, he could have sought settlement with Kipling or changed his trial strategy. It does Fireman’s Fund no good to argue that it owed its duty to disclose only to Kipling, its insured; Harwell was the opposing party in the original lawsuit, Fireman’s Fund was controlling Kipling’s defense, and Fireman’s Fund therefore had a duty to be forthcoming under supreme court rules.”

But wait, the court wasn’t done: “Instead of disclosing this information, Fireman's Fund went forward with trial, handling Kipling's defense. At oral argument, Fireman’s Fund’s counsel admitted that no matter what the outcome at trial, Fireman’s Fund would not have paid out on the policy (because of the endorsement limiting liability to $50,000 due to subcontractor involvement in Harwell’s injury). In other words, by not supplementing the interrogatory, Kipling and Fireman’s Fund’s counsel fashioned a ‘heads I win, tails I win’ outcome. But, like so many best-laid plans, this one backfired. In his petition for rehearing, Fireman’s Fund’s counsel alleges that following this Court’s ruling would have forced them to withdraw from representing both Kipling and Fireman’s Fund, and in doing so implicitly acknowledges the conflict of interest inherent in our analysis.”

And, finally, the pronouncement: “Fireman’s Fund’s agenda seems clear: deny coverage to Kipling, control the flow of information to Harwell, fight Harwell tooth and nail through the original case, and after losing the trial—reveal the endorsement. This smacks of sandbagging, which we do not condone. Instead, we find that equity demands that Fireman’s Fund be estopped from asserting the endorsement against Harwell. This adheres to a fundamental maxim of the common law, which applies when dealing with improper discovery disclosures—a party should not be permitted to take advantage of a wrong, which he or she has committed.”

The flaw in the decision is obvious – it seems highly unlikely that Fireman’s Fund and its hired defense counsel for Kipling were in cahoots, as the opinion suggests. The opinion reads like the insurer and defense counsel were acting out a John Grisham novel. I just don’t believe that this was the work of an insurer and its counsel conspiring to create a “heads I win, tails I win” outcome. Instead, this was likely the result of defense counsel doing his or her job -- worrying about the defense of Kipling, and leaving coverage issues, like the applicability and impact of the subcontractor endorsement, to Fireman’s Fund.

But, nonetheless, a look into the crystal ball reveals the problems that this decision can cause. Under this court’s rationale, defense counsel answering interrogatories, regarding the amount of his or her client’s insurance, may be obligated to do more than simply provide the limits of liability. Counsel may also be obligated to disclose reasons why the limits of liability may not, in fact, be what is stated on the policy’s Dec Page. And that’s not always because of something as clear cut – at least in this case, apparently – as the applicability of a subcontractor endorsement.

Rather, in most cases, coverage defenses are spelled out in a reservation of rights letter, which, by definition, leaves open the possibility of a denial, in whole or in part, and possibly for several reasons, until after the litigation has been concluded. There is a lot of “it depends” in a reservation of rights letter. But that wasn’t the case in Harwell, where the applicability of a subcontractor endorsement applied without regard to how the underlying litigation played out. In other words, Harwell was an easier case than most.

Based on Harwell, what is defense counsel’s answer when asked in discovery about its client’s limits of liability? They are X, but… Is sending the plaintiff the defendant’s insurer’s reservation of right letter – which shows the reasons why coverage may not be owed, or not owed in full -- enough to prevent a court from concluding that the insurer did not “sandbag” the plaintiff if it disclaims, or limits, coverage post-verdict? And keep in mind that the reservation of rights letter may have been sent at the inception of the case and, therefore, not be as accurate now based on developments throughout the litigation.

In any event, in general, the Harwell decision seems to introduce coverage issues into the context of underlying litigation. If this decision is seen is followed -- and the Appellate Court of Illinois is not a Montana small claims court -- it could send defense counsel down roads that they surely would not like to travel.

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