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Docket No. 92056-Agenda 27-January 2002.

DENISE GUILLEN, a Minor, by Suamy Guillen, Her Father andNext Friend, Appellee, v. POTOMAC INSURANCE COMPANY

OF ILLINOIS, Appellant.

Opinion filed January 24, 2003.

CHIEF JUSTICE McMORROW delivered the opinion of thecourt:

Two principal issues are presented in this case: (1) whether aninsurer who mails notice to its insured of a material change in aninsurance policy, as required under section 143.17a(b) of theIllinois Insurance Code (215 ILCS 5/143.17a(b) (West 1992)),must maintain proof of the mailing on a recognized "U.S. PostOffice" (hereinafter, Postal Service) form or form acceptable to thePostal Service or other commercial delivery service; and (2)whether the plaintiff, by virtue of an assignment given by theinsured in this case, obtained a right to indemnification from thedefendant insurance company.

BACKGROUND

In May 1996, the plaintiff, Denise Guillen, a minor, by herfather and next friend, Suamy Guillen (Guillen), filed a complaintagainst her former landlords, Ezequiel and Maria Ortiz, in thecircuit court of Cook County. In her complaint, Guillen allegedthat she was a tenant in an apartment owned by the Ortizes forapproximately the first two years of her life, from October 19,1993, until September 1995. During this time, Guillen alleged, shewas exposed to deteriorating lead-based paint and paint dust,which was present in the apartment. Guillen asserted that, as aresult of this exposure, she suffered severe lead poisoning andpermanent developmental injuries. Guillen further alleged that herinjuries were proximately caused by the Ortizes' negligent failureto inspect for or remove the lead-based paint.

Shortly after receiving Guillen's complaint, the Ortizestendered Guillen's claims to their insurer, defendant PotomacInsurance Company of Illinois (Potomac). Potomac refused thetender and denied any obligation to defend or indemnify theOrtizes. According to Potomac, an endorsement that had recentlybeen added to the Ortizes' commercial liability policy containeda lead exclusion which precluded coverage for Guillen's claims.After refusing the tender and denying coverage, Potomac took nofurther action with respect to Guillen's complaint. Potomac didnot defend under a reservation of rights or file suit seeking adeclaration of the rights of the parties.

In July 1997, Guillen and the Ortizes entered into a settlementagreement. Under the terms of the settlement, the Ortizes agreedto pay Guillen the sum of $600,000 in exchange for a release fromliability for any claims relating to Guillen's lead poisoning.Importantly, however, the Ortizes' obligation to pay the $600,000was subject to the condition that it would "be satisfied solelythrough the assignment" to Guillen of the Ortizes' right topayment from Potomac. The assignment of the Ortizes' right topayment from Potomac was included within the terms of thesettlement agreement. No other payment obligation was imposedupon the Ortizes and no judgment was entered against them.

In March 1998, Guillen, as the assignee of the rights of theOrtizes, filed an amended declaratory judgment complaint againstPotomac in the circuit court of Cook County. In this action, whichis the subject of the instant appeal, Guillen sought a declarationthat Potomac was obligated to pay Guillen the $600,000 settlementamount agreed to by the Ortizes. Potomac filed an answer toGuillen's complaint in which it raised numerous affirmativedefenses. The parties thereafter filed cross-motions for summaryjudgment.

In her motion for summary judgment, Guillen alleged thatPotomac had failed to comply with the statutory noticerequirements that governed the addition of the lead exclusion.Guillen argued that, under section 143.17a(b) of the IllinoisInsurance Code (Code) (215 ILCS 5/143.17a(b) (West 1992)),when an exclusion that materially alters insurance coverage isadded to a renewal insurance policy, the insurer must give thepolicyholder 60 days written notice and must "maintain proof ofmailing or proof of receipt [of notice]" to make the alterationeffective. Guillen contended that Potomac had failed to maintainthe required proof of mailing or proof of receipt and, as a result,could not establish that the Ortizes had been notified of the changein coverage affected by the lead exclusion. Thus, according toGuillen, the lead exclusion never became part of the Ortizes'insurance policy. Because the lead exclusion was not part of theOrtizes' insurance policy, Guillen maintained that Potomac hadbreached its duty to defend and should be estopped from raisingpolicy defenses to coverage for Guillen's claims against theOrtizes. Finally, Guillen alleged that Potomac's wrongful refusalto defend made it responsible for any reasonable settlementamount agreed to by the Ortizes. And, since the Ortizes hadassigned to Guillen their right to recovery from Potomac, Guillenargued that she was entitled to recover the $600,000 settlementamount from Potomac.

In its motion for summary judgment, Potomac disputedGuillen's contention that it had not provided proper notice to theOrtizes regarding the addition of the lead exclusion. Potomacargued that it had notified the Ortizes in writing about the leadexclusion 75 days prior to renewal and that it had maintainedsufficient proof of mailing. In support of this contention, Potomacprovided the circuit court with an unsigned copy of a letter whichwas purportedly sent to the Ortizes, and an affidavit from anemployee of Potomac that described Potomac's custom andpractice with respect to mailing notices of material changes ininsurance policies to its insureds.

Potomac additionally argued in its motion for summaryjudgment that, even if it had breached its duty to defend, it was notrequired to pay the $600,000 settlement amount agreed to by theOrtizes. According to Potomac, it was under no obligation to payGuillen because the Ortizes' assignment to Guillen of their rightto recovery against Potomac was invalid. Potomac pointed out thatunder the terms of the Ortizes' insurance policy, Potomac wasrequired to pay "those sums that the insured becomes legallyobligated to pay as damages." Potomac argued that the Ortizeswere never "legally obligated" to pay anything under the terms ofthe settlement agreement with Guillen. In support of thiscontention, Potomac noted that, since the Ortizes' paymentobligation under the settlement agreement was limited solely to anassignment of the Ortizes' right to recover under their insurancepolicy, the Ortizes were never personally obligated to pay anymoney and, indeed, were never placed in any personal financialrisk by the agreement. Potomac argued, therefore, that the Ortizeswere not "legally obligated" to pay damages to Guillen in anypractical sense of the term and, thus, had no right toindemnification from Potomac. Potomac further noted thatGuillen, as the assignee of the Ortizes' rights against Potomac,"stood in the shoes" of the Ortizes. Therefore, Potomac argued,since the Ortizes had no right to recover from Potomac, neither didGuillen.

In a written order dated June 26, 2000, the circuit court foundthat, with respect to the lead exclusion, Potomac had not satisfiedthe notice requirements of section 143.17a(b) of the Code. Thecourt concluded that the unsigned letter and employee affidavitoffered by Potomac failed to show that Potomac had "maintain[ed]a contemporaneous proof of mailing" as required under the statute.The court further reasoned that, because of Potomac's failure tocomply with the notice requirements of the Code, the leadexclusion never became a part of the Ortizes' insurance policy.Consequently, the circuit court found that Potomac had a duty todefend the underlying lawsuit brought by Guillen, that Potomachad breached that duty, and that Potomac was estopped fromraising policy defenses to coverage.

The circuit court further found, however, that Guillen hadfailed to establish the elements of a prima facie claim forindemnification against Potomac. The circuit court concluded that,because the Ortizes' payment obligation under the settlement waslimited to the assignment, the Ortizes had not "incurred anyliability for damages with respect to the Guillen lawsuit" andtherefore had no right to assert a cause of action for indemnityagainst Potomac. The circuit court also noted that Guillen, as theassignee of the Ortizes' rights against Potomac, could have nogreater claim against Potomac than the Ortizes themselves had.Thus, because Potomac owed no duty to indemnify the Ortizes, thecourt concluded that Potomac was not liable to Guillen. Thecircuit court therefore granted Potomac's motion for summaryjudgment.

On appeal, the appellate court reversed the circuit court'sgrant of summary judgment in favor of Potomac. 323 Ill. App. 3d121. Initially, the appellate court addressed whether Potomac hadestablished that it provided the Ortizes with notice of the leadexclusion. In deciding whether Potomac had adhered to the noticerequirements of section 143.17a(b) with respect to the leadexclusion, the appellate court turned to subsection (a) of thestatute, which governs an insurer's notice obligations when itchooses not to renew an insurance policy. Subsection (a) statesthat "proof of mailing" notice of nonrenewal shall be maintainedon "a recognized U.S. Post Office form or a form acceptable to theU.S. Post Office or other commercial mail delivery service." 215ILCS 5/143.17a(a) (West 1992). Subsection (b), which deals withnotice of a material policy change, also states that the insurer mustmaintain "proof of mailing" but does not repeat the definition ofthat term which is set forth in subsection (a). Concluding that thewords "proof of mailing" should be given the same meaningthroughout the statute, the appellate court held that an insurer whoattempts to prove that it mailed notice of a material policy changeunder subsection (b) must show that it maintained proof of mailingon a form acceptable to the Postal Service or other commercialmail delivery service. Since Potomac failed to show proof ofmailing on such a form with respect to the lead exclusion, theappellate court concluded, like the circuit court, that the exclusionnever became part of the Oritzes' insurance policy and thatPotomac had therefore breached its duty to defend. 323 Ill. App.3d at 131.

However, the appellate court reversed the circuit court'sholding that Guillen had failed to state a prima facie claim forindemnification against Potomac. Potomac argued before theappellate court, as it did in the circuit court, that because of thenature of the settlement agreement between the Ortizes andGuillen, the Ortizes were under no "legal obligation" to pay anydamages to Guillen. Therefore, according to Potomac, the Ortizeshad no right to indemnification from Potomac and had nothing toassign to Guillen. The appellate court rejected these arguments andheld that the Ortizes had a right to indemnification from Potomacand that they had properly assigned this right to Guillen. In soholding, the appellate court emphasized that the issue of theOrtizes' right to indemnification and the validity of theirassignment to Guillen could not be considered "in a vacuum" buthad to be considered in light of the fact that Potomac had breachedits duty to defend. 323 Ill. App. 3d at 135.

Finally, the appellate court observed that courts have raisedconcerns about the possibility of collusion between an insured andan injured plaintiff who agree to settle a claim following aninsurer's breach of the duty to defend. 323 Ill. App. 3d at 132-33,citing United States Gypsum Co. v. Admiral Insurance Co., 268Ill. App. 3d 598, 637 (1994). Thus, the appellate court noted, aninsurer may challenge a settlement made in its absence-eventhough the insurer's absence was caused by its own breach of theduty to defend-on the basis that either the decision to settle or thesettlement amount was unreasonable. 323 Ill. App. 3d at 133.Applying these principles to the case at bar, the appellate courtconcluded that the Ortizes' decision to settle with Guillan wasmade "in reasonable anticipation of liability" and was not subjectto challenge by Potomac. However, the appellate court remandedthe cause to the circuit court for a hearing to determine whetherthe settlement amount agreed to by the Ortizes was reasonable.323 Ill. App. 3d at 137-38.

Potomac subsequently filed a petition for leave to appeal,which we allowed (177 Ill. 2d R. 315).

ANALYSIS

The circuit court's entry of summary judgment is subject to denovo review. Outboard Marine Corp. v. Liberty Mutual InsuranceCo., 154 Ill. 2d 90, 102 (1992). The construction of an insurancepolicy, which is a question of law, is also reviewed de novo.American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 479-80(1997).

At the outset, Guillen acknowledges the general rule whichholds that, in the absence of a breach of the duty to defend, aninsured must obtain the consent of the insurer before settling withan injured plaintiff. See, e.g., Thornton v. Paul, 74 Ill. 2d 132, 144(1978); Alliance Syndicate, Inc. v. Parsec, Inc., 318 Ill. App. 3d590, 600 (2000). Guillen concedes that in this case, if Potomac didnot breach its duty to defend the Ortizes, then the Ortizes' decisionto settle with Guillen has no binding effect upon Potomac.Accordingly, we first consider whether Potomac breached its dutyto defend the Ortizes against Guillens' complaint.

Duty to Defend

In determining whether an insurer owes its insured a duty todefend, a court looks to the allegations contained in the underlyingcomplaint against the insured and compares those allegations tothe relevant coverage provisions of the insurance policy. Crum &Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d384, 393 (1993). If the facts alleged in the underlying complaintfall within or potentially fall within the coverage of the policy, theinsurer's duty to defendant is triggered. Outboard Marine, 154 Ill.2d at 108.

As noted, the complaint at issue in this case was filed againstthe Ortizes by Guillen in May 1996. In that complaint, Guillenalleged that she suffered serious injuries after being exposed tolead-based paint and paint dust in the Ortizes' apartment fromapproximately October 19, 1993, to September 1995. Thecomplaint alleged that Guillens' injuries were caused by theOritzes' negligent failure to inspect for or remove the lead-basedpaint.

The relevant insurance policies in this case are commercialgeneral liability policies that were issued by Potomac to theOrtizes from 1991 through 1994. The Ortizes' initial insurancepolicy was issued by Potomac for the period of October 12, 1991,to October 12, 1992. Two renewal policies were subsequentlyissued for the period of October 12, 1992, to October 12, 1993,and for October 12, 1993, to October 23, 1994.

As it did in the courts below, Potomac maintains in this courtthat it sent a letter to the Oritzes on July 28, 1993, in which itnotified them that a lead liability exclusion would take effect intheir October 12, 1993, renewal policy. The lead exclusion stated,in pertinent part, that

"This insurance does not apply to:

1. 'Bodily injury', 'property damage', 'personalinjury', or 'advertising injury' arising out of, resultingfrom, or in any way caused or contributed to by the actual,alleged or threatened ingestion, inhalation, absorption of,exposure to or presence of lead in any form emanatingfrom any source ***." (Emphasis in original.)

Potomac maintains that the lead exclusion clearly precludedcoverage for claims such as those brought by Guillen. Moreover,according to Potomac, because the exclusion took effect onOctober 12, 1993, and Guillen's complaint alleges that her injuriesbegan October 19, 1993, the underlying complaint did not fallwithin the Ortizes' policy language. Accordingly, Potomaccontends that the Ortizes had no coverage and Potomac had noduty to defend.

Guillen maintains, however, that Potomac failed to complywith the notice requirements of section 143a of the Code withrespect to the lead exclusion. Section 143a of the Code provides,in pertinent part:

"