United States: Illinois Appellate Court Clarifies Duty To Defend Standards

In a decision issued on January 13, 2015, the Illinois Appellate Court affirmed a trial court's ruling that insurers had a duty to defend an insured against the thousands of lawsuits filed against it claiming injuries from welding products that contained asbestos and other harmful chemicals. This opinion is significant in its discussion of the application of the duty to defend when there is little possibility that the insured would actually be liable for a claim involving injury during the insurers' policy periods but the underlying complaints contain little by way of specific allegations regarding the timing of the injury. The court also rejected the insurers' argument that a pro rata allocation should be used to allocate defense costs to the insured for the time period when the insured elected to self-insure. A copy of the opinion in Illinois Tool Works Inc. v. Travelers Casualty and Surety can be found here.    

The case involved coverage for toxic tort cases alleging that underlying plaintiffs were injured as a result of exposure to asbestos, benzene, manganese, and other harmful materials.The insured, Illinois Tool, manufactured and distributed tools, equipment, finishing systems, and consumables but was not in the welding consumable business until an acquisition in 1993. In the underlying cases, Illinois Tool has been named individually, as a successor in interest to the welding companies it later acquired, or both.  

The policies that had been issued by the various insurers to Illinois Tool included a provision requiring the insurers to defend Illinois Tool in any suit brought against it for bodily injury even if the allegations of the suit were false or groundless. On appeal, the insurers did not dispute whether the injuries alleged in the underlying welding cases would be the type covered by their particular policies. Instead, the insurers argued that they were not liable because the final policy they issued expired in 1987 and Illinois Tool did not enter the welding product market until 1993 and therefore could not possibly be liable for the injuries alleged. 

The Appellate Court rejected the insurers' arguments. The court first reiterated the general rule that the duty to defend hinges on the whether the allegations in the underlying complaint, if true, would potentially bring the claims within coverage and not whether Illinois Tool was likely to be found liable. The court noted that it was required to consider false and groundless allegations in its analysis. In addressing the duty to defend issue on appeal, the court divided the underlying complaints into groups based on whether they contained allegations of: (1) direct liability with exposure dates during a policy period; (2) direct liability with unstated injury or exposure dates; (3) pure successor-in-interest liability claims; and (4) a combination of direct liability and successor-in-interest claims.

The first category of complaints the court addressed was the group in which the underlying plaintiff alleged exposure to an Illinois Tool product during at least some point within a relevant policy's period. The court found the duty to defend applicable in this set of cases because the unequivocal allegations were that Illinois Tool, itself, made or distributed harmful materials during the policy periods that caused the underlying plaintiffs' injuries. The court explained that it was not relevant, for the purposes of determining the duty to defend, that Illinois Tool undoubtedly did not make or distribute these harmful materials. In so holding, the court highlighted the distinction between the duty to defend and the duty to indemnify and observed that the threshold required to trigger a duty to defend was minimal and that it was required to consider false and groundless allegations. As a result, the court determined that the insurers whose policies were triggered had a duty to defend Illinois Tool for these types of complaints.

The second category of complaints the court considered was those complaints where the underlying plaintiff alleged that exposure to an Illinois Tool product resulted in an injury, but did not set forth when the exposure occurred or when the injury manifested. In ruling that a duty to defend existed in these types of cases, the court rested its decision on Illinois case law holding that an insurer may only refuse to defend its insured if the allegations of the underlying complaint preclude any possibility of coverage. Here, the court determined that the ambiguous or unstated time period must be resolved in favor of a duty to defend. Because the bare allegations of the underlying complaints leave open the possibility that the plaintiffs' exposure or injury occurred during the policy periods, the court found a duty to defend. The court also rejected the insurers' argument that a pro rata allocation should be applied and certain defenses costs allocated to Illinois Tool for the period of time when Illinois Tool elected to self-insure. 

The third category of cases involved only claims that Illinois Tool was liable as the successor to companies Illinois Tool acquired after the insurers' policy periods. Illinois Tool did not seek defense, however, for cases only alleging successor liability. The court found that position appropriate since the underlying allegations were only targeted at predecessor companies or activities beginning after the insurers' policies. These allegations "pled the insurer out of any duty to defend." 

The fourth category of cases involved complaints that included allegations against Illinois Tool for direct and successor liability. The court held there was a duty to defend because "there are allegations of direct liability . . . and the bare allegations leave open the possibility that the loss could be covered." The fact that these complaints also contained allegations of successor liability for which there would not be a duty to defend did not change this conclusion because, as the court noted, Illinois law requires an insurer to defend an entire complaint even if some of the allegations are not covered.

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