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State Farm v. Martin (Ill. S.Ct.)

Docket No. 85659-Agenda7-January 1999.

STATE FARM FIRE &CASUALTY COMPANY, Appellant, v.

GREGORY LEE MARTIN, SR.,et al., Appellees.

Opinion filed April 15,1999.

JUSTICE HEIPLE delivered the opinion of thecourt:

Plaintiff-appellant, State Farm Fire and Casualty Company(State Farm), filed a declaratory judgment action in the circuit court ofMadison County seeking a determination of whether it owed its insured, Gregory Lee Martin, Sr.(Martin), a defense andindemnification in two underlying wrongful death suits. The trial court found that State Farm had aduty to defend and indemnifyMartin, and State Farm appealed. The appellate court affirmed the decision of the trial court (296 Ill.App. 3d 466), and wegranted leave to appeal.

BACKGROUND

This case originated with an arrangement between Martinand Delaney Gordon, Sr., to destroy a building owned by Martin.Gordon was one of Martin's tenants, and in exchange for his participation, Martin offered him areduced rental rate. On October24, 1992, at approximately 2 a.m., Gordon ignited the fire by leaving an unattended candle in ahamper in the basement. Anaccelerant was also used. During the ensuing blaze, firefighters Timmie Lewis and Gary Porter werekilled. Thereafter, Martinwas indicted by a federal grand jury for "maliciously damaging and destroying by means of fire,[Martin's] building ***, and as adirect and proximate result of this conduct, death resulted to Gary Porter and Tim Lewis, bothfiremen in Alton, Illinois; all inviolation of Title 18, United States Code, Section 844(i)."

In June and July of 1993, respectively, Scott Lewis,special administrator of the estate of Timmie Lewis, and Ethelyn J. Gorham,executrix of the estate of Gary Porter, each filed wrongful death suits against Martin in the circuitcourt of Madison County.Martin tendered defense of both complaints to State Farm under his rental dwelling insurance policy.Because of Martin's arson,however, State Farm denied coverage under the policy and refused to defend Martin. State Farm thenfiled a complaint seeking adeclaration that it owed no duty to defend or indemnify Martin. The complaint named Martin, Lewis,and Gorham as defendants.In the complaint, State Farm alleged that the underlying actions did not constitute a covered"occurrence" as defined in the policyand that Martin's action triggered two coverage exclusions. Defendant Gorham sought a stay of thedeclaratory judgmentproceedings pending resolution of the federal criminal cases then pending against Martin and Gordon(defendant Lewis had notyet answered State Farm's declaratory judgment petition and thus did not file a motion to stay). OverState Farm's objection, thetrial court granted the stay on February 23, 1994. The court's order provided that any party couldmove to lift the stay after thecriminal cases had been resolved.

In September 1994, Martin was found guilty on thecriminal charge, and in December 1994, Martin was sentenced to 50 years'imprisonment. Although the record contains no order lifting the trial court's stay in the declaratoryjudgment action, State Farmfiled a motion for summary judgment in that action on April 18, 1995. In an order dated August 30,1995, the trial court foundthat coverage existed and denied State Farm's motion. On October 4, 1995, the trial court grantedsummary judgment in favor ofdefendants and against State Farm.

In the meantime, on August 8, 1995, the trial court in thewrongful death case entered a default judgment against Martin onGorham's complaint in the amount of $10 million. On September 5, 1995, the trial court entered adefault judgment againstMartin on Lewis' complaint in the amount of $9 million.

State Farm appealed the decision of the trial court in thedeclaratory judgment action. The appellate court opined that State Farmwas estopped from denying coverage because the company had failed to secure a declaratoryjudgment before default judgmentswere entered in the wrongful death suits. 296 Ill. App. 3d at 470. Nevertheless, the appellate courtdeclined to decide the case onan estoppel theory, but rather went on to hold that State Farm's policy substantively did require thecompany to indemnify Martinfor his liability arising from the deaths of the two firemen. Accordingly, the appellate court affirmedthe judgment of the circuitcourt.

Now before this court, State Farm maintains that thecircuit and appellate courts erred in finding that State Farm had a duty todefend and indemnify Martin. State Farm argues that Martin's actions in hiring his tenant to set fireto the building are outside thescope of coverage under its rental dwelling policy. In addition, State Farm contends that theallegations of the wrongful deathcomplaints trigger two coverage exclusions contained in the policy. Accordingly, State Farm arguesthat it had neither a duty todefend nor a duty to indemnify Martin. As an initial matter, however, the parties disagree overwhether State Farm is entitled todeny coverage at all. Defendants Gorham and Lewis argue that State Farm should be estopped fromdenying coverage becausethe company breached its duty to defend Martin.

ANALYSIS

As this court has repeatedly held,"[w]hen a complaintagainst the insured alleges facts within or potentially within the scope ofthe policy coverage, the insurer taking the position that the complaint is not covered by the policymust defend the suit under areservation of rights or seek a declaratory judgment that there is no coverage." Clemmons v.Travelers Insurance Co., 88 Ill. 2d469, 475 (1981); Waste Management, Inc. v. International Surplus Lines Insurance Co.,144 Ill. 2d 178, 207-08 (1991); Murphyv. Urso, 88 Ill. 2d 444, 451 (1981); see also Sims v. Illinois National CasualtyCo., 43 Ill. App. 2d 184, 199 (1963). If theinsurer fails to take either of these actions, it will be estopped from later raising policy defenses tocoverage. Clemmons, 88 Ill. 2dat 475; Waste Management, 144 Ill. 2d at 207-08; Murphy, 88 Ill. 2d at451; see also Sims, 43 Ill. App. 2d at 199. In the instantcase, the parties do not dispute that State Farm did, in fact, seek a declaratory judgment as to itsduties to Martin under itsinsurance policy. Nevertheless, defendants Gorham and Lewis argue that the rule cited above shouldbe construed so as torequire an insurance company to actually secure a declaratory judgment or defend undera reservation of rights. In support oftheir position, defendants cite Country Mutual Insurance Co. v. Murray, 97 Ill. App.2d 61 (1968), in which the appellate courtheld:

"[I]n a situation where the personal injury action reaches judgment before thedeclaratory judgment action achieves fruitionand finality *** [the insurance company] must;

(1) Secure a declaratoryjudgment of its rights and obligations while defending its potential insured on a reservation ofrights, or

(2) Defend its potential insured on areservation of rights and adjudicate its coverage in a supplemental suit." (Emphasis inoriginal.) Country Mutual, 97 Ill. App. 2d at 73.

Defendants alsocite several appellate court cases in which courts have quoted the "secure a declaratory judgment"languagewithout further analysis. See, e.g., Consolidated R. Corp. v. Liberty MutualInsurance Co., 92 Ill. App. 3d 1066, 1073 (1981);Associated Indemnity Co. v. Insurance Co. of North America, 68 Ill. App. 3d 807, 821(1979).

In reply, State Farm argues that it properly preserved itsright to deny coverage by seeking a declaratory judgment as to itsresponsibilities under the insurance policy. State Farm points out that this court has never adoptedthe language or the ruleproposed by defendants. Moreover, a clear majority of Illinois courts which have expressly consideredthe argument now madeby defendants have rejected it. Industrial Coatings Group, Inc. v. American MotoristsInsurance Co., 276 Ill. App. 3d 799(1995); Gibraltar Casualty Co. v. Sargent & Lundy, 214 Ill. App. 3d 768 (1990);Insurance Co. v. Markogiannakis, 188 Ill.App. 3d 643 (1989); Ayres v. Bituminous Insurance Co., 100 Ill. App. 3d 33 (1981).State Farm also argues that the ruleadvanced by defendants would effectively require insurance companies to defend their purportedinsureds in all cases, even wherethe underlying complaints are clearly outside the scope of the policy. According to State Farm, sucha holding would represent anunprecedented and unwarranted expansion of an insurer's duty to defend. We agree.

This court has consistently identified two options for aninsurer taking the position that a complaint potentially alleging coverageis actually not covered under its insurance policy: the insurer may either "defend the suit under areservation of rights or seek adeclaratory judgment that there is no coverage." Clemmons, 88 Ill. 2d at 475;Waste Management, 144 Ill. 2d at 207-08;Murphy, 88 Ill. 2d at 451; see also Sims, 43 Ill. App. 2d at 199. Theseare separate and distinct options. To argue, as defendantsdo, that an insurer choosing the latter option is estopped from denying coverage unless heactually secures a declaratoryjudgment before judgment is entered on the underlying tort complaint is to render the declaratoryjudgment option illusory. Sucha rule would force insurers into a race in which they must obtain declaratory relief before theunderlying tort suits proceed tojudgment.

Moreover, defendants' rule would give both the potentialinsured and the tort plaintiff an incentive to resolve the tort suit beforethe declaratory judgment action. An insurer in such a position would be at an extreme disadvantage.First, while the insurerwould not be in a position to affect the course of the tort suit, both the potential insured and the tortplaintiff, as proper andnecessary parties to the declaratory judgment action (Williams v. Madison County MutualAutomobile Insurance Co., 40 Ill. 2d404, 407 (1968)), could exercise considerable influence over the progress of the declaratory judgmentaction. While we attributeno improper motive to defendants in the instant case, we note that defendant Gorham sought andobtained a lengthy stay of StateFarm's declaratory judgment action-a delay which State Farm opposed. Second, under defendants'rule, a potential insured witha dubious claim to insurance coverage could effectively force his insurance company to provide himwith a defense by the simpleexpedient of refusing to answer the complaint in the underlying tort suit. Under such circumstances,an insurer would have norealistic choice but to immediately defend its potential insured or risk entry of a default judgementfor which it wouldsubsequently be estopped from denying coverage.

For all of these reasons, we reaffirm that when a complaintagainst the insured alleges facts potentially within the scope of thepolicy coverage, an insurer taking the position that the complaint is not covered by its policy mustdefend the suit under areservation of rights or seek a declaratory judgment. An insurer will not be estoppedfrom denying coverage merely because theunderlying case proceeds to judgment before the declaratory judgment action is resolved.Accordingly, we hold that State Farmdid not breach its duty to defend Martin, and is therefore not estopped from raising policy defensesto coverage.

We therefore turn the question of actual coverage underState Farm's business liability policy. State Farm defends its denial ofcoverage on four grounds: (1) that the underlying complaints did not allege a covered "occurrence"within the meaning of thepolicy because the fire was not an accident; (2) that Martin's actions triggered an exclusion for bodilyinjury that is expected orintended by the insured; (3) that Martin's actions triggered an exclusion for bodily injury that is theresult of willful and maliciousacts of an insured; and (4) that insurance for the civil consequences of arson is void as against thepublic policy of Illinois.Because we find that State Farm properly denied coverage based upon the "willful and malicious"exclusion, we do not reach theremaining arguments.

State Farm's insurance policy contained the followingcoverage exclusion:

"1. Coverage L-Business Liability and Coverage M-Premises Medical Paymentsdo not apply to:

a. bodily injury, personal injury, orproperty damage:

(1) which is either expected or intendedby an insured; or

(2) to any person or property which isthe result of willful and malicious acts of an insured ***."

State Farm assertsthat Martin's acts in hiring his tenant to commit arson are willful and malicious as a matter of law, andtherefore are excluded from coverage under the policy. State Farm argues that the appellate courterroneously equated the"willful and malicious" exclusion with the "expected or intended" exclusion when it held that Martin'sacts were not "willful andmalicious" within the meaning of the policy unless Martin acted with a "specific intent to causepersonal injury [to the firemen]with conscious knowledge that the deaths were practically certain to occur." (Emphasis omitted.) 296Ill. App. 3d at 472. StateFarm further maintains that Martin's criminal conviction of "maliciously damaging and destroying [hisbuilding] by means of fire"is prima facie evidence of the nature of Martin's conduct where malice was anelement of the offense charged.

In response, defendants argue that because the terms"willful and malicious" are not defined by the policy, the policy is thereforeambiguous and should be construed against the drafter, State Farm. Defendants also cite testimonyfrom Martin's criminal trial tothe effect that Martin and his accomplice had not intended to injure anyone and, in fact, "were goingthrough hell about those twofiremen who got killed." Defendants claim that this testimony establishes that Martin did not intendto do any harm to thedeceased firemen, and therefore Martin's acts were not "willful and malicious" towardsdecedents.

We find defendants' arguments unpersuasive. Defendantsclearly equate the "willful and malicious" exclusion with the "expectedor intended" exclusion. Similarly, the appellate court's discussion of the "willful and malicious"exclusion concluded: "The trialcourt analyzed this issue in the same manner as it did the 'expected and intended' exclusion. We agreewith that analysis." 296 Ill.App. 3d at 473. Not surprisingly, therefore, the appellate court's discussion of the "willful andwanton" exclusion focuses almostexclusively on cases construing exclusions for injuries which are "expected or intended." Theappellate court's approach was,however, incorrect.

When construing an insurance contract,"[a] court muststrive to give each term in the policy meaning unless to do so wouldrender the clause or policy inconsistent or inherently contradictory." Outboard Marine Corp.v. Liberty Mutual Insurance Co.,154 Ill. 2d 90, 123 (1992). In the instant case, the language of State Farm's policy excludes coveragefor injuries which are"expected or intended" or "which [are] the result of willful and malicious acts of aninsured." By use of the conjunction "or," thepolicy unambiguously indicates that each of the two exclusionary clauses must be given its ownmeaning. Accordingly, theapplicability of the "willful and malicious" exclusion cannot be made to depend upon whether Martinsubjectively "expected orintended" to injure the decedent firemen.

State Farm's policy excludes coverage for injuries "which[are] the result of willful and malicious acts of an insured." (Emphasisadded.) Notably, the exclusion is not phrased in terms of willful and malicious injuries.Accordingly, an assessment of thisexclusion's applicability requires a focus upon the acts of the insured-not upon theinjuries of the tort plaintiffs. The only actfrom which Martin's liability could have arisen was his act of hiring his tenant to set fire to thebuilding. As defendants' wrongfuldeath complaints each allege: (1) Martin hired Gordon to start the fire, (2) Martin knew or shouldhave known that firemenwould respond to the fire and could be injured because of the fire; and (3) as a direct and proximateresult of Martin's acts, twofiremen were killed. Although for strategic reasons Gorham and Lewis phrase their complaints interms of negligence, it strainscredulity to suggest that Martin's acts were merely negligent. On the contrary, it is manifestly clearthat defendants allege, andthat Martin committed, an intentional, willful act. We further note that Martin was convicted of"maliciously damaging anddestroying [his building] by means of fire." Martin's criminal conviction is prima facieevidence of the facts on which it wasbased. Thornton v. Paul, 74 Ill. 2d 132, 151 (1978); see also Talarico v.Dunlap, 177 Ill. 2d 185, 193 (1997). Under thecircumstances of this case, we have little difficulty concluding that Martin's actions were willful andmalicious as a matter of law,and therefore fall within the policy's exclusion.