Insurer Merely Retaining an Attorney is not Sufficient to Satisfy a Duty to Defend
In Delatorre v. Safeway Ins. Co., Delatorre, was a passenger in a car driven by Ruben when they were involved in an accident. Delatorre was injured, as well as the driver of the other car, Thomas Zentefis, and his passenger, William Zenko. At the time of the accident, Ruben was insured under a personal automobile insurance policy issued by Safeway Insurance.
In December 1991, Delatorre made a demand for the policy limits, which Safeway refused; however, after learning of the negligence suits brought against Ruben, Safeway agreed to defend Ruben under a reservation of rights. In November 1992, it informed Ruben via letter that it retained an attorney to undertake his defense in the negligence suit brought by Delatorrre. The letter stated that because Delatorre could potentially recover a judgment in excess of the policy limits, it could be prudent for Ruben to consider retaining additional counsel at his own expense. The attorney filed an appearance and answer on behalf of Ruben on December 15, 1992, but there is no evidence that he took any further action to defend Ruben after that date. Safeway admitted that it paid no fees to the attorney in connection with his defense of Ruben, nor did the attorney submit statements for work he performed on Ruben’s behalf. Delatorre moved for sanctions, and the court eventually entered an order of default against Ruben on October 4, 1994. The order specified that the basis for the default was Ruben’s “failure to comply with outstanding discovery.” Delatorre’s attorney sent the order directly to Safeway. According to an affidavit by Safeway’s claims manager, the order was sent to the attorney on receipt, but this was the only written communication Safeway had with the attorney since it retained him. A prove-up hearing on the default judgment was held in November 1995, and Delatorre was awarded $250,000 in damages. Ruben filed a complaint in which he alleged a breach of an insurance contract, because insurer breached its duty to defend and he sought punitive damages against the insurer. As a result of Safeway’s failure to provide an adequate defense, he became subject to a default judgment against him in the amount of $250,000.
At the same time this litigation was proceeding, Safeway pursued a declaratory judgment action against Delatorre, Ruben, Zentefis and Zenko. Specifically, Safeway sought a declaration that it was not liable for damages alleged against Ruben in the negligence actions, due to the fact that Ruben had misrepresented his marital status on his application for insurance, which rendered his policy void.
The court reviewed whether an insurer that has retained counsel to defend its insured may, in certain limited circumstances, still be found to have breached its duty to defend and whether the insured for the judgment entered against its insured. The policy carried a bodily injury liability limit of $20,000 per person and $40,000 per accident. Further, the policy obligated Safeway to defend any suit brought against the insured for bodily injury or property damage covered by the policy, with the understanding that Safeway had no obligation to the insured once the policy limits were exhausted by payment. Here, Safeway informed its insured that it would undertake his defense in the personal injury suits against him, subject to a reservation of rights. In addition, Safeway retained an attorney who entered an appearance on behalf of the insured.
Safeway argued that it did more than merely retain an attorney. When it had learned that the insured had been subject to an order of default, it sent the order to the attorney. The court looked at fact that there was lack of evidence that Safeway made any effort to obtain from the attorney why a default was entered or whether he sought to have it vacated. Safeway’s passive, one-way communication with the attorney retained to defend its insured lead the court to conclude that Safeway breached its duty to defend.
The court then reviewed whether Safeway was liable for against its insured for the amount in excess of the policy limits. Mere failure to defend does not, in the absence of bad faith, render the insurer liable for that amount of the judgment in excess of the policy limits. Damages for a breach of the duty to defend are measured by the consequences proximately caused by the breach. The entry of the final judgment by default in the underlying personal injury action included that portion in excess of policy limits and it directly flew from the breach of contract. The proximate cause of the default judgment, entered about 13 months following the default order, was Safeway’s breach. This situation could have been averted altogether had Safeway seen to it that its insured was actually defended as contractually required.
Therefore, the court found that insurer breached its duty to defend, and insurer was liable for entire amount of default judgment in excess of policy limits.
Delatorre v. Safeway Ins. Co., 2013 WL 1683596 (Ill.App. 1st Dis. 2013).
