Illinois First Appellate Circuit Holds Duty to Defend Exists Where Underlying Claim Potentially Falls Within CGL Coverage

The First Appellate Circuit in Illinois recently reversed a trial court’s decision that State Farm did not owe a duty to defend.

The underlying case involved a 13-year-old boy who was fatally struck by a driver whose employer was insured by both Nationwide and State Farm. Both insurers contributed to a settlement that was reached in the underlying case though only Nationwide contributed on behalf of the insured. Nationwide filed a declaratory action against State Farm alleging that the Nationwide had a duty to defend in the underlying suit under a commercial general liability policy and that Nationwide was entitled to indemnification. The circuit court concluded that State Farm had no duty to defend the insured in the underlying suit because coverage was precluded by an automotive exclusion in the commercial general liability (CGL) policy and, consequently, Nationwide was not entitled to indemnification for the settlement.

Nationwide argued on appeal that State Farm was estopped from raising policy defenses to coverage because it failed to either defend the underlying suit under a reservation of rights or to timely seek declaratory judgment on the question. The appellate court agreed with Nationwide that the underlying complaint alleged facts outside of the automotive exclusion that fell within or potentially within the CGL policy, thus triggering State Farm’s duty to defend. The court found that because State Farm breached its duty to defend, it was estopped from raising policy defenses and Nationwide was entitled to indemnification. The court affirmed all other aspects of the circuit court’s judgment.