Duty to Defend and Indemnify
In Metzger v. Country Mut. Ins. Co., Metzger was injured in a motor vehicle accident with Brian McKee. At the time, Brian was vice-president of McKee Custom Masonry, a subchapter S corporation whose sole shareholders were Brian and his wife. Metzger sought a declaration that the liability policy provided coverage for the truck that driver’s vehicle collided with. The insurance policy was in effect at the time of the accident, and covered the truck as a non-owned vehicle operated in the business.
The court reviewed whether the insurer had a duty to indemnify and a duty to defend. The court explains that the duty to indemnify can arise only after damages are fixed in their amount. The duty to defend may arise as soon as damages are sought in some amount. A declaratory judgment action brought to determine an insurer’s duty to defend is ripe upon the filing of a complaint against the insured. A declaratory judgment action brought to determine an insurer’s duty to indemnify an insured is not ripe for adjudication until an insured becomes legally obligated to pay the damages in the underlying action.
Metzger filed a complaint against McKee, so business’s liability Country Mutual Insurance’s duty to defend against a lawsuit brought against McKee by a third-party was ripe for adjudication. To determine whether an insurer had a duty to defend, the court compares the allegations in the underlying complaint to the relevant provisions of the insurance policy and liberally construes both in the insured’s favor. If the underlying complaint’s allegations fall within or potentially within the policy’s coverage, the insurer is obligated to defend its insured. The duty to indemnify arises only if the insured’s activity and the resulting damage actually fall within the policy’s coverage. The duty to defend is broader than the duty to indemnify. If an insurer owes no duty to defend, it owes no duty to indemnify. However, if there is potential coverage, the insurer must assume the defense of the underlying lawsuit, unless the insurer is secondary or excess, in which case the insurer’s duty to defend will not arise until the limits in the primary policy are reached. However, if there is no potential coverage, the insurer, whether primary or secondary, does not have to defend the underlying lawsuit.
The court also found that the borrowed truck being driven by shareholder of the corporation at the time of accident was not a “non-owned” vehicle under corporation’s business liability policy. Thus, exclusion of coverage for bodily injury or property damage applied, and there was no potential coverage under liability policy, even if the truck was owned by shareholder individually and used for business purposes. The policy in this case defined “non-owned” vehicle as “any ‘auto’ you do not own, lease, hire or borrow which is used in connection with your business.” The court held that since the corporation was a legal entity that existed independently of its sole shareholders, it was analytically and legally possible for the driver, in his personal capacity as owner of the truck, to convey possession and use of it to the corporation. Since it is possible to lend out the vehicle, it would not be covered as a non-owned vehicle under the policy. The court held, as a matter of law, that there is no potential coverage under the business policy for the vehicle. Since there is no possibility that defendant will have a duty to defend the underlying lawsuit, no duty will arise to indemnify regarding that suit.
Metzger v. Country Mut. Ins. Co., 2013 IL App (2d) 120133, 986 N.E.2d 756 Ill.App. 2 Dist., 2013.
