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FOURTH DIVISION
July 29, 2005

Nos. 1-04-0250 & 1-04-2119 (Cons.)
 

JUSTICE QUINN delivered the opinion of the court:

Defendant American Country Insurance Company (American Country) appeals from orders of the circuit court of Cook County granting summary judgment in favor of plaintiff Herman Davila and defendant Thomas Williams, and granting Williams' petition for attorney fees and costs pursuant to section 155 of the Illinois Insurance Code (Code) (215 ILCS 5/155 (West 2002)).

In the underlying action in this case, Davila, a police officer pedestrian, was struck by a taxicab owned by defendant Yellow Cab Company (Yellow Cab) and driven by Williams. Williams was convicted of misdemeanor battery as a result of the occurrence. Plaintiff filed suit against Williams and Yellow Cab Company, alleging negligence. The insurer of both Williams and Yellow Cab, American Country, undertook the defense of the personal injury case.

While the tort action was pending, Williams filed suit seeking a declaration that American Country was obligated to provide him with independent counsel because of a conflict of interest. Davila was granted leave to intervene. American Country filed a counterclaim naming Davila, Williams and Yellow Cab, seeking a declaration that it had no duty to defend Williams. On cross-motions for summary judgment, the trial court granted American Country's motion for summary judgment. After his motion to reconsider was denied, Davila appealed.

On appeal, this court affirmed the trial court's determination that our supreme court's holding in American Family Mutual Insurance Co. v. Savickas, 193 Ill. 2d 378 (2000), precluded Williams and Davila from contesting the fact that Williams' battery conviction established that his conduct in injuring Davila was intentional. American Country Insurance Co. v. Williams, 339 Ill. App. 3d 835, 847 (2003). However, we vacated the trial court's grant of summary judgment and remanded the case to the trial court to determine whether a conflict of interest was present and whether Williams was prejudiced by American Country's failure to pay for independent counsel to represent Williams. American Country Insurance Co., 339 Ill. App. 3d at 847.

On remand, Williams and Davila filed motions for summary judgment arguing that there was a conflict of interest and Williams suffered prejudice as a result of the conflict. The trial court found that American Country had a conflict of interest when it assumed Williams' defense in the underlying case and that Williams was prejudiced as a result of the conflict. Based on these findings, the trial court granted the motions for summary judgment; ordered American Country to provide independent counsel to Williams at American Country's expense; and held that American Country was estopped from asserting any coverage defenses in the underlying action. American Country now appeals the trial court's judgment. Williams filed a petition for attorney fees and costs pursuant to section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2002)). Following a hearing, the trial court granted Williams' petition and entered judgment against American Country in the amount of $150,000 which included $125,000 for attorney fees incurred in both the underlying tort action and the declaratory judgment action and $25,000 as a penalty for vexatious conduct. American Country also appealed that judgment and this court granted American Country's motion to consolidate these appeals.

I. BACKGROUND

On October 31, 1996, Davila, an Illinois State Police officer, was on duty outside the Thompson Center in Chicago. Williams was driving a taxicab east on Lake Street adjacent to the Thompson Center. While another police officer was directing traffic on Lake Street, Davila observed Williams repeatedly blowing his car horn. Davila approached Williams' cab, opened the door and leaned inside the cab. While Davila was leaning inside the cab, Williams began driving, forcing Davila to run alongside the cab for 15 feet. Davila suffered injuries from the incident.

Williams was charged with misdemeanor battery as a result of his actions on October 31, 1996. On October 9, 1997, following a jury trial, Williams was convicted of battery to Davila and sentenced to community service and probation.

On May 12, 1998, Davila filed a civil complaint naming Williams and Yellow Cab as defendants. Both Yellow Cab and Williams were insured by American Country. At the time of the occurrence, American Country and Yellow Cab were both subsidiaries of a company known as Great Dane Holdings. The complaint alleged that Williams was the agent and servant of Yellow Cab and was operating a taxicab owned by Yellow Cab. The complaint alleged that Williams and Yellow Cab were negligent in failing to yield to Davila, in driving recklessly, in failing to keep a proper lookout and in operating a vehicle with defective brakes and steering. Davila amended his complaint on October 16, 1998, to add a count of negligent entrustment against Yellow Cab. American Country undertook the defense in this case, retaining Johnson & Bell to represent Williams and Jesmer & Harris to represent Yellow Cab. Prior to retaining counsel, on October 2, 1997, American Country sent Williams a letter advising him that it was "handling this matter under a complete reservation of rights under the terms and conditions of your policy." The letter informed Williams that an investigation revealed that Williams was cited with criminal battery and that battery and intentional conduct were specifically excluded by Williams' insurance policy. The letter then cited the following provision of Williams' insurance policy:

"B. EXCLUSIONS

1. EXPECTED OR INTENDED INJURY

'Bodily injury' or 'property damage' expected or intended from the standpoint of the 'insured.'"

In his answer to Davila's complaint, the attorney retained by American Country to represent Williams, Robert J. Comfort, denied that Williams was an agent of Yellow Cab. Comfort also asserted an affirmative defense that Davila was guilty of comparative fault.

In an affidavit, Williams averred that the defense provided by American Country was inadequate and represented a conflict of interest. Williams averred that on July 21, 1999, he complained about the inadequacy to American Country and requested appointment of alternative counsel. Williams averred that Johnson & Bell failed to conduct discovery to assist in his defense. Williams averred that American denied his request for alternative counsel.

On October 1, 1999, Williams filed the instant declaratory action against American Country. In count I of the complaint, Williams alleged that American Country failed to warn him of an actual or potential conflict of interest in defending the underlying action. Williams further alleged that there was a conflict of interest in that proof of intentional conduct on the part of Williams would shift responsibility from American Country to Williams. In count II, Williams alleged that American Country breached its duty to defend through numerous acts and omissions and by failing to provide him with access to the East Bank Health Club, in order to locate a potential witness.

On November 1, 1999, American Country filed a motion to dismiss Williams' declaratory judgment complaint. American Country alleged that the intentional acts exclusion of the insurance policy could not give rise to a conflict of interest where the underlying case sounded in negligence. American Country further alleged that it owed no duty to give Williams access to the East Bank Health Club. The trial court denied American Country's motion to dismiss with respect to count I and granted the motion with respect to count II.

On December 13, 1999, Davila was granted leave to intervene in Williams' declaratory action. The parties then filed cross-motions for summary judgment. Williams alleged that his battery conviction created a coverage defense, therefore presenting a conflict of interest. In an affidavit, Williams stated that neither American Country nor Comfort informed him of a conflict of interest in Comfort representing him in the underlying tort action and Williams did not consent to such representation.

American Country's motion maintained that Illinois law has recognized that a conflict of interest arises out of the intentional acts exclusion of an insurance policy only where the underlying complaint alleges both negligence and battery and where punitive damages are sought. Following argument on the motions, the trial court entered an order stating that, in light of our supreme court's recent decision in American Family Mutual Insurance Co. v. Savickas, 193 Ill. 2d 378 (2000), it could not address the cross-motions until a duty to defend had been determined. The trial court invited briefs in support of or in opposition to the applicability of Savickas to the present case.

On October 26, 2000, American Country filed a counterclaim alleging that Williams' battery conviction established that his conduct was intentional and that he was excluded from coverage under the intentional acts exclusion of his policy. Williams responded that American Country was estopped from denying coverage by reason of prejudice to Williams caused by American directly defending the underlying suit.

On January 23, 2001, Comfort withdrew his representation of Williams in the tort action and Williams retained Michael Radzilowsky to represent him. On January 25, 2001, American Country sent a letter to Radzilowsky offering to retain him on behalf of Williams in the underlying tort case. The letter also stated that American Country's offer to retain Radzilowsky as independent counsel was conditioned on the following: Williams agreeing to drop his chancery action with prejudice; Radzilowsky submitting to American Country a curriculum vitae disclosing all of his jury trials that went to verdict involving claims for bodily injury; Radzilowsky providing American Country periodic progress reports including opinions and recommendations; and Radzilowsky discussing the retention of expert witnesses before incurring such expenses. In an affidavit, Radzilowsky stated that he did not agree to American Country's offer because "American Country insisted on retaining a level of control over the representation which I felt would likely conflict with Mr. Williams' interests and objectives, and which were a substantial variance from the traditional role of independent counsel."

American Country then filed a second motion for summary judgment based on its counterclaim. American Country also filed a motion to dismiss the declaratory action claiming that it was moot where American Country had agreed, by the letter dated January 25, 2001, to relinquish control of the underlying suit under certain conditions.

On June 29, 2001, the trial court granted American Country's motion for summary judgment as to the counterclaim and its motion to dismiss. The court relied upon the holding in Savickas. In Savickas, our supreme court held that a murder conviction collaterally estopped an insured from later contesting the applicability of the intentional acts exclusion of his policy. As all the elements for collateral estoppel had been met, the trial court held that Williams was estopped from denying his conduct was intentional because of his criminal conviction. Applying the holding in Savickas to the facts of this case, the trial court held that American Country had no duty to defend or indemnify Williams.

On July 21, 2001, Davila filed a motion to reconsider. Williams did not file a motion to reconsider. The trial court denied Davila's motion and he filed an appeal (No. 1-01-3642) which was assigned to this division.

Also, on June 21, 2000, Yellow Cab filed a motion for summary judgment in the underlying suit contending that Williams was not Yellow Cab's agent at the time of the occurrence. The trial court granted Yellow Cab's motion and Davila appealed to this court. In an opinion, a different division of this court reversed the ruling of the trial court and remanded the case. Davila v. Yellow Cab Co., 333 Ill. App. 3d 592 (2002) (Davila I). InDavila I, this court held that the dispositive issue was not whether Williams acted intentionally but whether his intentional, negligent or criminal acts were performed within the scope of employment. Davila I, 333 Ill. App. 3d at 600. Therefore, because material questions of fact existed as to whether Williams was an employee or agent of Yellow Cab, the summary judgment ruling on the issue of agency was erroneous.

In the present matter, this court affirmed the trial court's determination that our supreme court's holding in Savickas precluded Williams and Davila from contesting the fact that Williams' battery conviction established that his conduct in injuring Davila was intentional. American Country Insurance Co. v. Williams, 339 Ill. App. 3d 835, 847 (2003). However, we vacated the trial court's grant of summary judgment and remanded the case to the trial court to determine whether a conflict of interest was present and whether Williams was prejudiced by American Country's failure to pay for independent counsel to represent Williams. American Country Insurance Co., 339 Ill. App. 3d at 847.

On remand, attorneys from Madsen, Farkas & Powen, LLC, filed appearances for Williams and on July 15, 2003, filed a request for an evidentiary hearing to be held on the issues of conflict and prejudice as directed by this court. American Country filed a motion to amend its counterclaim to add additional theories for relief, which the trial court granted on September 23, 2002.

On September 25, 2003, American Country filed its amended complaint alleging that: Williams' insurance policy provides no coverage for the incident based on the intentional acts exclusion in the policy; the insurance policy provides no coverage for the incident because the judgment of conviction against Williams is a conclusive determination that the claimed bodily injury of Davila was not caused by accident; and the insurance policy provides no coverage for the incident because the alleged injury sustained by Davila, as a result of the battery by Williams, did not arise out of the ownership, use or maintenance of the covered vehicle.

On October 24, 2003, Williams and Davila filed motions for summary judgment arguing that there was a conflict of interest and Williams suffered prejudice as a result of the conflict. Williams argued that American Country had a clear conflict of interest in its representation of Williams. Williams noted that at the time of trial, American Country and Yellow Cab were both owned by Great Dane Holdings. Williams argued that when American Country appointed Comfort to represent him, Comfort's actions and inactions revealed that he was protecting the interests of American Country and Yellow Cab rather than Williams. Williams argued that it was in American Country's interest to establish that Williams was not an agent of Yellow Cab in order to shift liability and that Williams was prejudiced when Comfort denied that Williams was an agent of Yellow Cab and that there was any applicable insurance. Davila argued that Williams suffered prejudice because American Country controlled his defense where it had a conflict of interest in representing Williams. Davila also argued that American Country waived coverage defenses because it undertook the defense of Williams.

American Country responded to the motions for summary judgment, arguing that Williams was barred from asserting a conflict of interest as his complaint was dismissed by the trial court on June 29, 2001, and Williams had not appealed that dismissal. American Country also argued that there was no conflict of interest in its representation of Williams and that Williams suffered no prejudice.

On December 29, 2003, the trial court found that American Country had a conflict of interest when it assumed Williams' defense in the underlying case and that Williams was prejudiced as a result of the conflict. Based on these findings, the trial court granted the motions for summary judgment; ordered American Country to provide independent counsel to Williams at American Country's expense; and held that American Country was estopped from asserting any coverage defenses in the underlying action. The trial court did not explain its rationale. American Country now appeals the trial court's judgment.

Williams made a request to American Country that it retain Madsen, Farkas & Powen, LLC, to defend Williams in the underlying tort case. American Country entered a retention agreement with Madsen, Farkas & Powen, LLC, in which American Country was obligated to pay all invoices within 14 days and Madsen, Farkas & Powen, LLC, agreed to reduce its hourly attorney fee to $150. Madsen, Farkas & Powen, LLC, also provided a rough estimated budget of $40,000.

The underlying tort case settled on the first full day of trial. Williams subsequently filed a petition for attorney fees and costs pursuant to section 155 of the Illinois Insurance Code (Code) (215 ILCS 5/155 (West 2002)). Williams' petition sought the following attorney fees: $63,014.08 for fees and costs incurred by Madsen, Farkas & Powen, LLC, in defending the underlying tort action; $44,781.09 for fees and costs incurred by Madsen, Farkas & Powen, LLC, in prosecuting the chancery matter on Williams' behalf; $16,366.05 for fees and costs incurred by Radzilowsky in the underlying tort action; $26,524.07 for fees and costs incurred by Radzilowsky in prosecuting the chancery matter on Williams' behalf; $60,000 in statutory penalties; $2,000 in additional costs and fees anticipated through the conclusion of the declaratory judgment action; $6,080.35 in prejudgment interest on Radzilowsky's invoices; and $1,897.10 in prejudgment interest on the invoices of Madsen, Farkas & Powen, LLC, for a total of $220,662.74.

Williams argued that American Country's actions were vexatious and unreasonable where it defended Williams under a reservation of rights instead of filing a declaratory judgment action where American Country had a conflict of interest in representing Williams and where Williams was prejudiced by the conflict. American Country filed a response arguing that an award of attorney fees was inappropriate where there was a bona fide dispute concerning coverage. American Country asserted that it fulfilled its duties by defending Williams under a reservation of rights as required by the controlling law at the time. American Country also argued that Williams' request for $60,000 in penalties was an ex post facto application of Public Act 93-485, (Pub. Act 93-485,