Insurance Coverage and Litigation Lawyers in Wheaton, IL

The Insurance Policy and Its Duties of Indemnification and Defense: Rights and Responsibilities

Insurance – the bringing together of people and resources to share the cost of protecting against risk – is essential in everyday life. In exchange for the payment of premiums, the policy issuer (the insurer) promises to provide, to the policy holder (the insured) a defense in the event of a claim, and further agrees to pay a judgment, if entered against the insured, up to and including certain policy limits. The twin duties of the duty to defend and the duty to indemnify form the basis of the insurance contract. Certain events are clearly covered by insuring agreements, while other circumstances (for example, claims seeking recovery for an insured's intentional acts of wrong doing) are clearly outside of a policy's standard parameters. There are also circumstances where the question of coverage is far from clear, as there are circumstances where the availability of coverage might, literally, depend on the claimant's point of view and choice of words.

The case of Maryland Casualty Company v. Peppers, 64 Ill. 2d 187, 355 N.E. 2d 24 (1976), the seminal case in this area, addressed what occurs when these twin duties are at odds. In Peppers, Robert Peppers shot James Mims as Mims fled after attempting to break into Peppers' property. Mims filed suit against Peppers alleging facts that fell both inside (negligence) and outside (intentional assault) the coverage of Peppers' insurance. The question presented to the Court was whether or not Peppers' insurance carrier had a duty to indemnify and/or to defend Peppers from the claims Mims was advancing against him.

In ruling, the Supreme Court noted that the pleadings (which, in most instances, form the basis for making a determination concerning the duty to defend) created a conflict between the insurer and the insured. Because a carrier generally has the right and the duty to defend, it generally selects and pays counsel for the insured. That attorney, in circumstances such as the ones found in the Peppers case, would best serve the interests of the insurer if he conducted the defense in such a way that Peppers was found guilty of intentional misconduct, because then the carrier would not have to pay any judgment against Peppers. By way of contrast, the attorney would best serve the interests of Peppers if he conducted the defense so as to obtain a finding that the insured did not act intentionally, which would trigger the insurer's obligation to pay any judgment entered against him.

How Did the Court Resolve This Issue?

The Supreme Court identified three options which are available to an insurer and an insured when this circumstance confronts them:

• An insurer may waive a policy coverage defense; or
• The insured, after having the conflict fully disclosed to him, may accept the attorney selected by the insurer for the defense of the case brought against him; or
• The insured may select his own counsel, which attorney would control the nature and conduct of the insured's defense, but who would be paid by the insurer.

These principles come into play in circumstances that might not obviously involve insurance. Schmidt & Barbrow, PC has been involved in a number of cases where a "Peppers conflict" has been identified, with the following results:

Case One:

A person who held a joint interest in real property with a relative is approached by the relative to modify his interest in the property, due to fears that medical debts he has incurred would result in judgments being entered against him, and that such judgment holders would attempt to seize his interest in the property. The person honored the relative's request, but the relative later sued the person for the return of his interest in the property, and for money damages. Schmidt & Barbrow, PC made a formal demand to be appointed Peppers counsel for the person at the expense of the insurer. The insurer agreed to the Peppers tender, and, for the five year life of the case, Schmidt & Barbrow, PC defended the insured's interests, at the insurer's expense.

Case Two:

A person is involved in a bar fight, which resulted in serious injury to another. This injured party pressed criminal charges against the person, and brought a civil suit against him. After being retained, Schmidt & Barbrow, PC uncovered the fact that the person had potential insurance coverage under his parents' Homeowner's Policy, because he lived with them. Schmidt & Barbrow, PC made a Peppers' tender to the carrier, and at the person's request, defended the person's interests in the civil case. Schmidt & Barbrow, PC's fees, and the expenses associated with defending the claim for four years (through trial) were borne in full by the insurance carrier.

Case Three:

The owner of an office building refused to return a security deposit to a former tenant. The former tenant sued the owner on multiple theories, including conversion and fraud. Because of the allegations of the tenant's complaint, Schmidt & Barbrow, PC tendered the defense of the case to the owner's Commercial General Liability insurance carrier, demanding that the firm be appointed Peppers counsel. The case, which ultimately settled, was defended at the cost and expense of the insurer.

For more information about how we can help you with your insurance coverage and litigation matters, contact our law firm today at 630-690-0100. We have over 60 years of combined experience assisting clients with litigation issues. Schmidt & Barbrow, PC assists clients in Northern Illinois throughout DuPage County, Cook County, Kane County, Will County, Kendall County, and McHenry County.