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1-01-1512                                                                                                                            First Division
                                                                                                                                             June 24, 2002

PRESIDING JUSTICE COHEN delivered the opinion of the court:

Plaintiff State Farm Insurance Company (State Farm), assignee of Eleazar and FernandoBuzos' automobile insurance policy, brought this action seeking declaratory judgment against theBuzos' insurer, American Service Insurance Company (American). In its complaint, State Farm pledthat American had breached its duty to defend the Buzos in an underlying personal injury lawsuitfiled by Linda Josephs, State Farm's insured, and was therefore estopped from denying that theBuzos' insurance policy provided coverage for the accident. State Farm sought reimbursement ofthe $20,000 it paid under its policy to Josephs, along with costs and attorney fees. Both State Farmand American filed cross-motions for summary judgment. After briefing and a hearing, the trialcourt granted State Farm's motion for summary judgment, denied American's cross-motion forsummary judgment and denied State Farm's request for costs and attorney fees.

On appeal, American argues that the trial court erred as a matter of law in granting summaryjudgment to State Farm. American asserts that pursuant to the explicit language of the Buzos'insurance policy, American properly declared the policy "null and void" due to a "materialmisrepresentation" in the insurance application. Because no policy was in existence at the time ofthe accident, American asserts that the trial court erred in determining that Josephs' loss was coveredunder the policy thereby estopping American from denying liability under the policy on the groundof misrepresentation.

State Farm filed a cross-appeal contending that the trial court erred in declining to award attorney fees incurred both by the Buzos in defending the underlying personal injury action and byState Farm in prosecuting its subsequent complaint for declaratory judgment. For the followingreasons, we affirm the trial court's denial of costs and attorney fees. We reverse the trial court's ordergranting summary judgment in favor of State Farm and remand this cause for further proceedings.

BACKGROUND

On June 5, 1995, Eleazar Buzo signed an application for automobile insurance coveragethrough American for a 1983 Chevrolet Caprice four-door sedan. The application listed Eleazaras the principal driver and Leopoldo and Julia Buzo as resident drivers/regular operators. American accepted Eleazar's application and the policy went into effect December 18, 1995.

On March 7, 1996, an attorney representing Josephs contacted American to report anaccident that occurred on March 1, 1996, involving Eleazar's 1983 Chevrolet Caprice. On March11, 1996, Jack Harnett, an agent of American, spoke to Eleazar, who denied being involved in anaccident with Josephs. On October 3, 1997, Josephs filed a personal injury lawsuit againstEleazar and his son, Fernando, in the circuit court of Cook County. In her complaint, Josephsalleged that on the date of the accident Fernando was driving the 1983 Chevrolet Caprice in aJewel/Osco parking lot located at 3700 South Archer in Chicago, Illinois, when he struck andinjured Josephs, a pedestrian. After receiving the summons and complaint from Josephs'attorney, American began investigating the accident.

During American's investigation, Harnett discovered that after the accident Fernando hadbeen ticketed⁽¹⁾ as the driver of the 1983 Chevrolet Caprice and that Eleazar had been arrested forpermitting an unlicenced driver to drive his car. Both Fernando and Eleazar were later foundguilty of the charges. On November 11, 1997, Harnett took a recorded statement from Fernando. In his statement, Fernando admitted that he was only 14 years old on the date of the accident andthat he was, in fact, driving Eleazar's car. Fernando claimed that Eleazar was teaching him howto drive at the time. Based on Fernando's admissions, Harnett concluded that American wouldnot have to defend against or pay any claims asserted by Josephs against the Buzos and notedsuch in his activity log.

On November 17, 1997, American sent a certified letter to Eleazar explaining thatbecause Eleazar had made a material misrepresentation by failing to declare Fernando as aresident driver on his application for insurance coverage, American was rescinding his insurancepolicy. American also sent Eleazar a $213 check refunding the premium amount Eleazar hadpaid and suggested that Eleazar take the necessary steps to protect himself and Fernando. Eleazar later cashed the premium refund check. American also sent a letter to Josephs' attorneyadvising him of the rescission and American's inability to provide coverage for the accident.

The cause proceeded to mandatory arbitration. At no time did American defend eitherEleazar or Fernando under a reservation of rights or file a declaratory judgment requesting afinding that Eleazar's insurance policy was void from its inception due to a materialmisrepresentation and thus did not provide coverage for the accident of March 1, 1996. OnAugust 19, 1999, the arbitration panel awarded $20,000 in favor of Josephs. On September 22,1999, Eleazar and Fernando assigned all of their right, title and interest in the insurance policyissued by American to State Farm in consideration for a "Covenant Not to Execute Judgment"against them personally. On October 1, 1999, judgment was entered on the award in the amountof $20,000 plus costs.

On October 28, 1999, State Farm filed a complaint for declaratory judgment againstAmerican requesting that the trial court find that the insurance policy issued by American toEleazar provided coverage for the accident of March 1, 1996. In its complaint, State Farmalleged that American breached its duty to defend the Buzos in Josephs' underlying personalinjury lawsuit. State Farm further alleged that because American had failed to either defend theBuzos under a reservation of rights or to file its own declaratory judgment action, American wasnow estopped from denying coverage under its policy.

On January 3, 2000, American filed its answer to State Farm's complaint denying that theinsurance policy was in force and effect on March 1, 1996. American asserted, as an affirmativedefense, that it had exercised its contractual right under part VI(4) of the policy to declare thepolicy "null and void from its inception" due to a material misrepresentation in Eleazar'sapplication. American further asserted that it had returned a check for his entire $213 premiumpayment to Eleazar, a check which Eleazar accepted and later cashed.

Both parties subsequently filed cross-motions for summary judgment and a hearing washeld on April 10, 2001. After hearing arguments from both parties, the trial court granted StateFarm's motion for summary judgment, denied American's motion for summary judgment anddenied State Farm's request for costs and attorney fees. The court determined that the allegationsin Josephs' complaint in the underlying personal injury action were "within or certainlypotentially within" part B of the insurance policy issued by American to Eleazar and thereforetriggered a duty to defend. The court further found that American had breached its duty todefend by failing either to defend the Buzos under a reservation of rights or to file its owndeclaratory judgment action. Based on this breach, the court determined that American wasestopped from asserting that the insurance policy was void ab initio due to a materialmisrepresentation and was liable to State Farm in the amount of $20,000. The court also deniedState Farm's request for costs and attorney fees without explanation. This appeal and cross-appeal followed.

ANALYSIS

1. Standard of Review

Our review of the circuit court's grant of summary judgment is de novo. Natale v.Gottlieb Memorial Hospital, 314 Ill. App. 3d 885, 888 (2000). Summary judgment is properlygranted where "the pleadings, depositions, admissions, and affidavits on file, when taken togetherin the light most favorable to the nonmovant, show that there is no genuine issue of material factand that the movant is entitled to judgment as a matter of law." Freemont Casualty InsuranceCo. v. Ace-Chicago Great Dane Corp., 317 Ill. App. 3d 67, 73 (2000). The function of areviewing court on appeal from a grant of summary judgment is limited to determining whetherthe trial court correctly concluded that no genuine issue of material fact was raised and, if nonewas raised, whether judgment as a matter of law was correctly entered. Malanowski v.Jabamoni, 293 Ill. App. 3d 720, 724 (1997). In situations where both parties file cross-motionsfor summary judgment, "they agree that no material issue of fact exists and that only a questionof law is involved." Robson v. Electrical Contractors Ass'n Local 134 IBEW Joint PensionTrust, 312 Ill. App. 3d 374, 380 (2000). Thus, " 'the court is invited to decide the issuespresented as a question of law.' " Lexmark International, Inc. v. Transportation Insurance Co.,327 Ill. App. 3d 128, 134 (2001), quoting Container Corp. of America v. Wagner, 293 Ill. App.3d 1089, 1091 (1997). However, "the mere filing of cross-motions for summary judgment doesnot require that the court grant the requested relief to one of the parties where genuine issues offact exist precluding summary judgment in favor of either party." Travelers Insurance Co. ofIllinois v. Eljer Manufacturing, Inc., 307 Ill. App. 3d 872, 878 (1999).

2. Summary Judgment

American argues that the trial court erred as a matter of law in finding that American wasestopped from denying liability under the policy based on Eleazar's misrepresentation. Americanclaims that its denial of coverage was not based on a "policy defense" but, rather, on itsconclusion that "there was no policy in existence at the time of the loss." American asserts thatthe trial court failed to note this important distinction when granting summary judgment in favorof State Farm. State Farm characterizes American's argument as a "semantic sleight of hand." State Farm argues that because American is relying upon provisions of the insurance policy tosupport its argument, American is asserting a "policy defense" as a matter of law. State Farmasserts that American cannot rely upon provisions of the insurance policy and at the same timeclaim that it is not asserting a "policy defense."

Our supreme court has explained the application of the estoppel doctrine to insurancepolicy coverage disputes:

"The general rule of estoppel provides that an insurer which takes theposition that a complaint potentially alleging coverage is not covered under apolicy that includes a duty to defend may not simply refuse to defend the insured. Rather, the insurer has two options: (1) defend the suit under a reservation ofrights or (2) seek a declaratory judgment that there is no coverage. If the insurerfails to take either of these steps and is later found to have wrongfully deniedcoverage, the insurer is estopped from raising policy defenses to coverage.(Emphasis added.) [Citations.]

The estoppel doctrine has deep roots in Illinois jurisprudence. It arose outof the recognition that an insurer's duty to defend under a liability insurance policyis so fundamental an obligation that a breach of that duty constitutes a repudiationof the contract. [Citation.] Although the doctrine has roots in the principle ofequitable estoppel, a review of the case law reveals that it has since developedinto a distinct doctrine that stands on its own. [Citations.]

* * * Application of the estoppel doctrine is not appropriate if the insurerhad no duty to defend, or if the insurer's duty to defend was not properlytriggered. These circumstances include where the insurer was given noopportunity to defend; where there was no insurance policy in existence; andwhere, when the policy and the complaint are compared, there clearly was nocoverage or potential for coverage. (Emphasis added.) [Citations.]" EmployersInsurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127, 150-51 (1999).

Despite State Farm's unsupported assertions to the contrary, American's argument that theinsurance policy was not in existence at the time of the accident is not a "policy defense" simplybecause American relies on provisions of the insurance policy in order to support its argument. American's rescission defense does not involve a question of policy coverage. Rather, theaffirmative defense of rescission raises the issue of whether an insurance policy was in existence. See Pepper Construction Co. v. Transcontinental Insurance Co., 285 Ill. App. 3d 573, 577(1996); Allied American Insurance Co. v. Ayala, 247 Ill. App. 3d 538, 549-50 (1993) (bothnoting a distinction between a policy defense and a claim that a policy is void).

Employers Insurance states that the doctrine of estoppel is inapplicable in cases wherethere was no insurance policy in existence at the time of the loss. 186 Ill. 2d at 151. Thus, thetrial court erred as a matter of law in invoking the estoppel doctrine prior to determining whetherEleazar's insurance policy was in existence at the time of the accident. Under the law, becausethe trial court determined that American breached its duty to defend under part B of the insurancepolicy prior to determining whether the insurance policy indeed even existed, the trial court'sconclusion that American breached its duty to defend was premature. Consequently, this cause isremanded to allow the parties to litigate the issue of rescission in the trial court.

It must be further heeded summary judgment was also improper on an entirely separatebasis. American claims that the undisputed facts demonstrate that as a matter of law there wasno policy in existence on the date of the accident because it properly declared the policy "null andvoid" pursuant to the explicit language of part VI(4) of the policy. Therefore, American claimsthat it had no duty to defend the Buzos in the underlying personal injury claim. Part VI(4) of thepolicy states, in pertinent part:

"Fraud and Misrepresentation. The statements contained in the application aredeemed to be representations relied upon by the Company. In the event that anyrepresentation contained in the application is false, misleading or materiallyaffects the acceptance or rating of this risk by the Company, by either directmisrepresentation, omission, concealment of facts or incorrect statements, thispolicy shall be null and void and of no benefit whatsoever from its inception."

State Farm responds that American lacked the power to unilaterally void the insurancepolicy pursuant to sections 143.15 (215 ILCS 5/143.15 (West 2000)) and 143.19 (215 ILCS5/143.19 (West 2000)) of the Illinois Insurance Code (Insurance Code). However, both section143.15 and section 143.19 pertain to the cancellation of automobile insurance policies and areinapplicable in cases where, as here, an insurance company purports to declare an insurancepolicy void ab initio. American Country Insurance Co. v. Mahoney, 203 Ill. App. 3d 453, 462(1990).

Interestingly, State Farm acknowledges the inherent difference between cancelling apolicy and declaring a policy void from its inception, but asserts that section 143.15 of theInsurance Code would be rendered meaningless if an insurer could sidestep the effective date ofcancellation provision set forth therein simply by claiming to "void" a policy rather than "cancel"it. We note, however, that our legislature has already closed this obvious loophole by addingsection 154 to the Insurance Code:

"No misrepresentation or false warranty made by the insured or in hisbehalf in the negotiation for a policy of insurance, or breach of a condition of suchpolicy shall defeat or avoid the policy or prevent its attaching unless suchmisrepresentation, false warranty or condition shall have been stated in the policyor endorsement or rider attached thereto, or in the written application therefor. Nosuch misrepresentation or false warranty shall defeat or avoid the policy unless itshall have been made with actual intent to deceive or materially affects either theacceptance of the risk or the hazard assumed by the company." 215 ILCS 5/154(West 2000).

This statutory language supercedes part VI(4) of Eleazar's insurance policy, whichpurports to grant American the power to avoid the insurance policy for reasons other than thoseoutlined in section 154. Pursuant to section 154, American could have properly avoidedEleazar's automobile insurance policy only if Eleazar, in fact, made a misrepresentation or falsewarranty in the written application and: (1) Eleazar made the misrepresentation or false warrantywith the actual intent to deceive American; or (2) the misrepresentation materially affectedAmerican's acceptance of the risk or the hazard assumed.

It is undisputed that Eleazar failed to disclose Fernando as a "resident driver" or "regularoperator" of the insured automobile on the insurance application. However, myriad other factualquestions preclude a finding of summary judgment on this issue in favor of either party. Forexample, it is unclear from the record whether Eleazar's failure to disclose Fernando on theapplication for insurance constitutes a "misrepresentation" or "false warranty." It is also unclearwhether Eleazar's failure to disclose Fernando on the application was either made with the actualintent to deceive American or if it materially affected American's acceptance of the risk or thehazard assumed. Furthermore, it is unclear whether the fact that Eleazar cashed the $213premium refund check issued by American demonstrated his intent to rescind the insurancepolicy.

Finding genuine issues of material fact remain, this cause is remanded to the trial courtfor a determination of whether American properly avoided the policy as defined under section154 of the Insurance Code.

3. Attorney Fees

Finally, State Farm contends that the trial court erred in declining to award the costs andattorney fees incurred both by the Buzos in defending the underlying personal injury action andby State Farm in prosecuting its subsequent complaint for declaratory judgment in the trial court. State Farm's entire argument relies on the fact that the trial court found that American hadbreached its duty to defend the Buzos in the underlying personal injury claim. Because weremand for a determination of whether Eleazar's policy was in effect at the time of the accident,the issue of costs and attorney fees arising out of an alleged breach of the duty to defend is notyet ripe for our consideration. We therefore find that the trial court did not abuse its discretion indenying State Farm's request for costs and attorney fees.

CONCLUSION

The trial court erred as a matter of law in holding that American was estopped fromdenying liability under the policy on the ground of misrepresentation. This error in law resultedin the trial court's failure to consider issues that were properly raised, issues that required thecourt to rule. Accordingly, we reverse the trial court's order granting summary judgment in favorof State Farm, affirm the trial court's order denying State Farm's request for costs and attorneyfees and remand this cause for proceedings consistent with this opinion.

Affirmed in part and reversed in part; cause remanded with directions.

McNULTY and TULLY, JJ., concur.

1. The specific charges against Fernando cannot be determined from the record.