Insurance Company not Prevented From Later Denying Payment for Claim it Initially Defended

An insurance company defended a construction firm against a claim by a condo association for defective design and construction of a building, as it thought the claim arose during the company’s policy period. The insurance company was not estopped from later denying payment for the claim when it was discovered that the claim had in fact arisen 10 years before the policy went into effect.

In 2002, the Blue Moon Lofts Condominium Association filed a complaint against The Structural Shop, Ltd in Illinois state court seeking damages arising out of TSS’s allegedly defective design and construction of a building. Blue Moon served notice of action to TSS’s registered agent, Thomas Donohoe on November 2002. TSS never responded to the notice or appeared in the state court action to defend itself, leading in May 2003 to the state court declaring the company in default. In 2009, the state court entered a default judgment and set the damages amount at $1,356,435 plus costs.

Many years later, Essex Insurance Company sold TSS a policy for claims first made against TSS from May 2012 to May 2013. Essex knew nothing about the prior litigation. For a time, both TSS and Essex believed that Blue Moon had failed to properly serve TSS in 2002, and thus had first brought notice of the claim to TSS in 2012 when it attempted to collect the default judgment. Laboring under this mistaken belief, TSS petitioned the state court to vacate the default judgment. The court granted the motion and vacated the judgment. TSS then informed Essex of the developments and Blue Moon’s claim. Essex, unaware that Blue Moon had properly served TSS in 2002, considered the claim to have arisen during the policy period and thus acted on its duty to defend TSS.

In February 2013, Blue Moon provided TSS with an invoice indicating that it had paid Tri-County Investigations $60 in 2002 to serve TSS. Believing this invoice to be a flimsy basis on which to conclude that service had occurred, TSS’s counsel advised TSS to reject Blue Moon’s offer to settle the dispute for $25,000. In June 2014, however, everything changed, as Blue Moon sent TSS a copy of the special process server’s affidavit and records indicating that Donohoe had in fact been TSS’s registered agent in 2002. Blue Moon then filed a motion to reinstate the default judgment, which was granted. TSS eventually settled with Blue Moon for $550,000, also assigning its rights to indemnification by Essex to Blue Moon. Essex later brought a declaratory judgment action in federal court seeking a judgment that it had no obligation to indemnify Blue Moon for the cost of the default judgment. The district court ultimately entered judgment for Essex, and Blue Moon appealed.

The appellate panel began by noting that Blue Moon argued that Essex should be estopped from claiming that Blue Moon’s claim fell outside of the policy period, as it had aided in TSS’s defense of the claim. The panel stated that, for equitable estoppel to apply under Illinois law, Blue Moon was required to show that Essex misled TSS into thinking it would pay for the default judgment, that TSS reasonably relied on Essex’s misleading act or statement, and that prejudice resulted to TSS. The panel stated that the district court was correct in concluding that Essex did not prejudice TSS. The panel noted that TSS never lost control of its defense of the claim, and by the time it took a more active role in the defense and appeal process, it had reserved its rights to deny coverage after learning that service occurred in 2002. The panel found, thus, that Blue Moon could not prove its claim for equitable estoppel. The panel, therefore, affirmed the decision of the district court.

You can view the full decision of the Court here.

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