10 Declaratory Judgment Actions - IICLE · PDF fileA. [10.6] Statutory Basis of Declaratory...

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Declaratory Judgment Actions

DAVID H. LEVITT JENNIFER K. GUST Hinshaw & Culbertson LLP Chicago

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ILLINOIS INSURANCE LAW

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I. Introduction A. [10.1] Scope of Chapter B. [10.2] Forms of Insurance Litigation 1. [10.3] Suits on the Policy for Money Damages 2. [10.4] Suits on the Policy as a Supplementary Proceeding 3. [10.5] Suits on the Policy for Declaratory Judgment II. Statutory Basis and Requirements of Declaratory Judgment Actions A. [10.6] Statutory Basis of Declaratory Judgment Actions B. [10.7] Requirements of Declaratory Judgment Statutes 1. [10.8] Declaratory Judgment Actions Are Procedural 2. [10.9] The “Actual Controversy” and “Interested Party” Requirements for

Standing To Bring a Declaratory Judgment Action III. Declaratory Judgment Inappropriate A. [10.10] When Action Would Involve Determination of Ultimate Issue in Underlying

Action B. [10.11] Uninsured-Motorist Claims IV. Pre-Suit Considerations A. [10.12] Whether To File a Declaratory Judgment Action 1. [10.13] Considerations for Insured 2. [10.14] Considerations for Insurer B. [10.15] Recovery of Attorneys’ Fees C. [10.16] Pre-Suit Research D. [10.17] Statute of Limitations — Time for Bringing Suit E. [10.18] Parties F. [10.19] Jurisdiction G. [10.20] Venue V. Pleadings A. [10.21] General Rules of Declaratory Pleadings B. [10.22] Pleading Checklist

DECLARATORY JUDGMENT ACTIONS

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C. Sample Declaratory Judgment Complaints and Answers 1. [10.23] Sample Complaint by Insurer To Declare Lack of Duty To Defend 2. [10.24] Defendants’ Answer to Complaint 3. [10.25] Sample Complaint Seeking Liability Defense and Money Damages 4. [10.26] Defendant’s Answer to Complaint Seeking Liability Defense VI. Discovery Practice in Declaratory Judgment Proceedings A. [10.27] Scope of Discovery B. [10.28] Requests To Admit C. [10.29] Interrogatories D. [10.30] Production of Documents E. [10.31] Depositions VII. Motion Practice in Declaratory Judgment Proceedings A. [10.32] Motions for Summary Judgment B. [10.33] Sample Motion for Summary Judgment VIII. [10.34] Declaratory Judgment Trial Practice A. [10.35] Timing of the Trial — Enjoining Collateral Litigation B. [10.36] Burden of Proof C. [10.37] Right to Jury D. [10.38] The Trial 1. [10.39] Opening Statements 2. [10.40] Preparation of Witnesses 3. [10.41] Direct and Cross-Examination of Witnesses 4. [10.42] Special Interrogatories and Verdict Forms; Sample Special

Interrogatories E. [10.43] Judgment Orders; Sample Declaratory Judgment Order IX. [10.44] Conclusion

§10.1 ILLINOIS INSURANCE LAW


I. INTRODUCTION A. [10.1] Scope of Chapter This chapter concerns declaratory judgment suits on liability insurance policies from initial pleadings through the trial and judgment order. It also concerns developments in insurance law that have made declaratory judgment suits inappropriate or impermissible in some situations. Sample forms of pleadings, discovery devices, trial documents, and judgment orders are included. In order to facilitate a thorough understanding of the role of the declaratory judgment suit in construing liability insurance policies, background information is provided concerning the different forms of insurance litigation, the insurer’s duty to defend pursuant to a policy of insurance and the corresponding right to control the defense, the insurer’s options for preserving a coverage defense, and the effect that conflicts of interest have on the insurer’s duty to defend, right to control the defense, and options for preserving coverage defenses. B. [10.2] Forms of Insurance Litigation An insurance policy may become the focal point of litigation in various ways. Suits involving insurance policies may arise in actions at law for money damages. Frequently, the construction of an insurance policy becomes the central issue in a supplementary proceeding. The primary and most specialized form of legal controversy involving a liability insurance policy is a declaratory judgment lawsuit. 1. [10.3] Suits on the Policy for Money Damages Suits against insurers for expenses incurred in defending allegedly covered claims or suits for reimbursement of money paid by a secondarily liable insurance carrier against a primarily liable insurance carrier are examples of contract actions for money damages. In these cases, the controversies concern policy interpretation and application to events that have already occurred, involving claims that are fully defined. In these suits, the parties request judicial interpretation of policy coverages, conditions, and exclusions in order to recover accrued monetary damages. A lawsuit claiming accrued money damages that arises from an insurance policy is handled just as any other contract action, although there may sometimes be an overlay of claimed bad faith or estoppel. 2. [10.4] Suits on the Policy as a Supplementary Proceeding A liability insurance policy may become a central issue in a supplementary proceeding after judgment. Proceeds of liability policies are a primary asset sought in tort litigation. After a favorable judgment, the injured parties may garnish the defendant’s insurer. Judicial construction of a particular liability policy becomes necessary when a garnishee insurer raises a coverage issue as a defense to the garnishment action. In garnishment, a policy defense should be established by setting forth the defense within the verified answer to a garnishment complaint. When appropriate, the garnisher should file a reply to

DECLARATORY JUDGMENT ACTIONS §10.5


the answers setting forth the reasons the defense should fail. For instance, when the defense to a garnishment action is a policy condition, such as “late notice,” the garnisher may reply by pleading estoppel since it was not raised when first known to the insurer. After initial pleadings are filed, the case proceeds similarly to a contract action for damages. 3. [10.5] Suits on the Policy for Declaratory Judgment Most litigation involving liability insurance policies concerns a declaration of the rights and obligations of the various entities under the insuring agreement. The most common use of the remedy occurs when a suit alleging bodily injury, property damage, personal injury, and/or advertising injury is pending against the insured and the insurer wants to determine whether a certain coverage defense is valid. In the declaratory judgment action, both the duty of the insurer to defend and the duty to indemnify can be considered, although the opportunity to decide the duty to indemnify may be more limited. In addition to agreeing to defend the insured pursuant to a reservation of rights, an insurer can also preserve its policy or coverage defenses by filing a declaratory judgment action. Sims v. Illinois National Casualty Company of Springfield, Illinois, 43 Ill.App.2d 184, 193 N.E.2d 123 (3d Dist. 1963). The declaratory judgment action, however, must be filed promptly to avoid estoppel. For example, in Allstate Insurance Co. v. Elliott, 89 Ill.App.3d 140, 411 N.E.2d 1072, 44 Ill.Dec. 706 (3d Dist. 1980), the court noted that filing a declaratory judgment action within four months of entering a defense was sufficient notice to the insured of the insurer’s coverage position, and a declaratory judgment was a substitute for a reservation-of-rights letter. The filing of a declaratory judgment action has been held to preserve coverage defenses even when the insurer, unlike the insurer in Elliott, refused to defend the insured at all. State Farm Fire & Casualty Co. v. Martin, 186 Ill.2d 367, 710 N.E.2d 1228, 238 Ill.Dec. 126 (1999); Ayers v. Bituminous Insurance Co., 100 Ill.App.3d 33, 424 N.E.2d 1316, 54 Ill.Dec. 413 (3d Dist. 1981). Whether the insurer or the insured brings the declaratory judgment action has no bearing on the preservation of policy defenses. It is the filing of the declaratory judgment action that is of legal import, not the identity of the party initiating the proceeding. Thus, even in cases in which the insurer merely defends the declaratory judgment action brought by the insured rather than filing its own declaratory judgment action, Illinois courts have held that there is no estoppel. L.A. Connection v. Penn-America Insurance Co., 363 Ill.App.3d 259, 843 N.E.2d 427, 300 Ill.Dec. 169 (3d Dist. 2006); Village of Melrose Park v. Nautilus Insurance Co., 214 Ill.App.3d 864, 574 N.E.2d 198, 158 Ill.Dec. 404 (1st Dist. 1991); J.A. Jones Construction Co. v. Hartford Fire Insurance Co., 269 Ill.App.3d 148, 645 N.E.2d 980, 206 Ill.Dec. 728 (1st Dist. 1995). In situations in which a tort claimant files a declaratory judgment action, that claimant need not allege that the insured tortfeasor or the insurer has filed a declaratory judgment action in order to plead a viable claim for declaratory judgment. Record-A-Hit, Inc. v. National Fire Insurance Co. of Hartford, 377 Ill.App.3d 642, 880 N.E.2d 205, 316 Ill.Dec. 727 (1st Dist. 2007). A declaratory judgment action need not be completed with a declaration of coverage or noncoverage before the underlying case is completed in order to avoid an estoppel. The rule expressed by Illinois cases requires that the insurer “seek,” “file,” or “bring” a declaratory



judgment action rather than “secure” a declaratory judgment prior to or pending resolution of the underlying lawsuit. Insurance Company of Illinois v. Markogiannakis, 188 Ill.App.3d 643, 544 N.E.2d 1082, 136 Ill. Dec. 307 (1st Dist. 1989). II. STATUTORY BASIS AND REQUIREMENTS OF DECLARATORY

JUDGMENT ACTIONS A. [10.6] Statutory Basis of Declaratory Judgment Actions Declaratory judgment suits are authorized by statute. 735 ILCS 5/2-701 provides:

(a) No action or proceeding is open to objection on the ground that a merely declaratory judgment or order is sought thereby. The court may, in cases of actual controversy, make binding declarations of rights, having the force of final judgments, whether or not any consequential relief is or could be claimed, including the determination, at the instance of anyone interested in the controversy, of the construction of any statute, municipal ordinance, or other governmental regulation, or of any deed, will, contract or other written instrument, and a declaration of the rights of the parties interested. The foregoing enumeration does not exclude other cases of actual controversy. The court shall refuse to enter a declaratory judgment or order, if it appears that the judgment or order, would not terminate the controversy or some part thereof, giving rise to the proceeding. . . . (b) Declarations of rights, as herein provided for, may be obtained by means of a pleading seeking that relief alone, or as incident to or part of a complaint, counterclaim or other pleading seeking other relief as well, and if a declaration of rights is the only relief asked, the case may be set for early hearing as in the case of a motion. (c) If further relief based upon a declaration of right becomes necessary or proper after the declaration has been made, application may be made by petition to any court having jurisdiction for an order directed to any party or parties whose rights have been determined by the declaration to show cause why the further relief should not be granted forthwith, upon reasonable notice prescribed by the court in its order. (d) If a proceeding under this Section involves the determination of issues of fact triable by a jury, they shall be tried and determined in the same manner as issues of fact are tried and determined in other civil actions in the court in which the proceeding is pending. (e) Unless the parties agree by stipulation as to the allowance thereof, costs in proceedings authorized by this Section shall be allowed in accordance with rules. In the absence of rules the practice in other civil actions shall be followed if applicable, and if not applicable, the costs may be taxed as to the court seems just.



In federal practice, the authority for declaratory judgment is found in 28 U.S.C. §§2201 and 2202, which provide:

§2201. Creation of remedy (a) In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986 [or] a proceeding under section 505 or 1146 of title 11 . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

* * * §2202. Further relief Further necessary or proper relief based on a declaratory judgment or decree may be granted, after reasonable notice and hearing, against any adverse party whose rights have been determined by such judgment.

B. [10.7] Requirements of Declaratory Judgment Statutes In addition to providing a basis for declaratory judgment actions, the relevant statutes also help define the nature of the relief available and the requirements that must be met to obtain such relief. 1. [10.8] Declaratory Judgment Actions Are Procedural The federal and state declaratory judgment statutes are procedural in the sense that they simply provide an additional procedural means to obtain a judicial determination of a substantive right rather than create any new substantive cause of action. Aetna Life Insurance Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 81 L.Ed. 617, 57 S.Ct. 461, reh’g denied, 57 S.Ct. 667 (1937); Office of Lake County State’s Attorney v. Illinois Human Rights Commission, 200 Ill.App.3d 151, 558 N.E.2d 668, 146 Ill.Dec. 705 (2d Dist. 1990); McDonald v. County Board of Kendall County, 146 Ill.App.3d 1051, 497 N.E.2d 509, 100 Ill.Dec. 531 (2d Dist. 1986), appeal denied, 505 N.E.2d 354 (1987); Mack v. Plaza Dewitt Limited Partnership, 137 Ill.App.3d 343, 484 N.E.2d 900, 92 Ill.Dec. 169 (1st Dist. 1985). The classification of the declaratory judgment statutes as “procedural” means that the law recognizes forms of litigation other than declaratory judgment as appropriate means for determining the issues in the suit. For example, a lawsuit filed after a judgment has been rendered in an underlying damage suit would provide a determination of the issues involving the insurance policy. Only a declaratory judgment lawsuit, however, will permit the parties to obtain determination of the effect of a liability policy while the underlying action at law is pending.



With some exceptions, declaratory judgments have been specifically approved for the construction and interpretation of liability insurance policies. Sims v. Illinois National Casualty Company of Springfield, Illinois, 43 Ill.App.2d 184, 193 N.E.2d 123 (3d Dist. 1963); Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24 (1976). 2. [10.9] The “Actual Controversy” and “Interested Party” Requirements for

Standing To Bring a Declaratory Judgment Action In Underground Contractors Ass’n v. City of Chicago, 66 Ill.2d 371, 362 N.E.2d 298, 300 – 301, 5 Ill.Dec. 827 (1977), the Illinois Supreme Court outlined the requirements for standing to bring a declaratory judgment action:

Essentially, there are two main, general requirements for standing to bring an action for declaratory relief. First, there must be an “actual controversy.” . . . “Actual” in this context does not mean that a wrong must have been committed and injury inflicted. Rather, it requires a showing that the underlying facts and issues of the case are not moot or premature, so as to require the court to pass judgment on mere abstract propositions of law, render an advisory opinion, or give legal advice as to future events. . . . The case must, therefore, present a concrete dispute admitting of an immediate and definitive determination of the parties’ rights, the resolution of which will aid in the termination of the controversy or some part thereof. . . . The second, and somewhat related requirement, is that the party seeking the declaration must be “interested in the controversy.” . . . The word, “interested” does not mean merely having a curiosity about or concern for the outcome of the controversy. Rather, the party seeking relief must possess a personal claim, status, or right which is capable of being affected. . . . The dispute must, therefore, touch the legal relations of the parties who stand in a position adverse to one another. [Citations omitted.]

In the insurance context, courts have usually recognized that while an actual controversy exists as to an insurer’s duty to defend, since that is an immediate duty, the question of whether an insurer has a duty to indemnify is ripe for consideration only if the insured has already incurred liability in the underlying claim against it. Continental Casualty Co. v. Howard Hoffman & Associates, 2011 IL App (1st) 100957, 955 N.E.2d 151, 352 Ill.Dec. 975; Great West Casualty Co. v. Cote, 365 Ill.App.3d 100, 847 N.E.2d 858, 301 Ill.Dec. 848 (1st Dist. 2006); Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 607 N.E.2d 1204, 1221, 180 Ill.Dec. 691 (1992). Several attempts to obtain rulings on the duty to indemnify brought before a judgment entered against the insured have been rejected. In Batteast v. Argonaut Insurance Co., 118 Ill.App.3d 4, 454 N.E.2d 706, 73 Ill.Dec. 609 (1st Dist. 1983), the court rejected an attempt by the underlying personal injury plaintiff to obtain a ruling on the policy limits available to the personal injury defendant/insured should a judgment be entered against it. The underlying plaintiff contended that settlement negotiations, as well as trial and discovery strategy, would be determined based on the amount of assets available to collect in the event of a judgment. The



court rejected this attempt to obtain a ruling on the duty to indemnify, ruling that there was no actual controversy until the underlying plaintiff had first obtained a judgment against the defendant/insured. See also Stokes v. Pekin Insurance Co., 298 Ill.App.3d 278, 698 N.E.2d 252, 232 Ill.Dec. 414 (5th Dist. 1998). Similarly, in Weber v. St. Paul Fire & Marine Insurance Co., 251 Ill.App.3d 371, 622 N.E.2d 66, 190 Ill.Dec. 656 (3d Dist. 1993), a nursing home sought to obtain a declaration that its insurance policy covered treble damages potentially recoverable under the Nursing Home Care Act, 210 ILCS 45/1-101, et seq. The insurer had reserved rights as to the treble damages, asserting that they were uncovered punitive damages. The appellate court ruled that until a treble damages award had been entered against the insured, there was no actual controversy and dismissed the declaratory judgment action. But see Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677, 680 (7th Cir. 1992), in which the court recognized the rule as a non-absolute “principle of discretion,” which the court could, in its discretion, decide not to follow. Illinois courts have held that the same philosophy holds true in the reinsurance context. In Certain Underwriters at Lloyd’s, London v. Boeing Co., 385 Ill.App.3d 23, 895 N.E.2d 940, 324 Ill.Dec. 225 (1st Dist. 2008), the First District held that a declaratory judgment action brought by a reinsurer was not ripe for adjudication until the underlying international arbitration proceedings were concluded. In cases in which the insured withdraws its tender or places the insurer on “standby,” no actual controversy exists to support a declaratory judgment action. Selective Insurance Company of South Carolina v. Phusion Projects, Inc., No. 11 C 3378, 2001 WL 5588086 (N.D.Ill. Nov. 15, 2011); Legion Insurance Co. v. Empire Fire & Marine Insurance Co., 354 Ill.App.3d 699, 822 N.E.2d 1, 290 Ill.Dec. 719 (1st Dist. 2004). Declaratory judgment should not be granted if to do so would entail piecemeal litigation of the matters in controversy unless the court can, by such judgment, dispose of the controversy between the parties. It is not the intent of the declaratory judgment statute to confer jurisdiction on the courts to be legal advisors. See, e.g., Farmers Insurance Group v. Harris, 4 Ill.App.3d 372, 279 N.E.2d 789 (3d Dist. 1972). In the underinsured-motorist (UIM) context, the court has upheld a two-year time limit for bringing an action against the insurer under the UIM provision. The court noted, however, that the imposition of such a time limit by the insurer might create an exception to the “actual controversy” requirement. Typically, a UIM claim does not exist until, by the policy’s own terms, the policy limits of the underinsured-motorist tortfeasor have been exhausted. In Flatt v. Country Mutual Insurance Co., 289 Ill.App.3d 1097, 682 N.E.2d 1228, 225 Ill.Dec. 151 (4th Dist. 1997), the court noted that companies that seek to enforce the two-year contractual limitations on such claims must expect to be sued within that two-year period whether or not the UIM claim has properly ripened by that time.



III. DECLARATORY JUDGMENT INAPPROPRIATE A. [10.10] When Action Would Involve Determination of Ultimate Issue in Underlying

Action Even when an actual controversy and an interested party with standing to bring an action exist, courts sometimes have ruled that a declaratory judgment action will not be permitted in insurance dispute contexts. Illinois courts have declared the remedy inappropriate when a declaratory judgment would involve a determination of the ultimate issue in the underlying action. Thornton v. Paul, 74 Ill.2d 132, 384 N.E.2d 335, 23 Ill.Dec. 541 (1978), overruled in part on other grounds by American Family Mutual Insurance Co. v. Savickas, 193 Ill.2d 378, 739 N.E.2d 445, 250 Ill.Dec. 682 (2000); Illinois Founders Insurance Co. v. Guidish, 248 Ill.App.3d 116, 618 N.E.2d 436, 187 Ill.Dec. 845 (1st Dist. 1993); Fremont Compensation Insurance Co. v. Ace-Chicago Great Dane Corp., 304 Ill.App.3d 734, 710 N.E.2d 132, 237 Ill.Dec. 709 (1st Dist. 1999); Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24 (1976). The rationale behind this rule was detailed in Thornton, supra:

In a declaratory judgment action the ultimate question of the insured’s liability to the injured party is not the issue before the court. However, if a court were to determine in a declaratory judgment action that the insured’s conduct did not come within the coverage of the policy because it constituted a battery, this declaration would be binding on the insured in the personal injury action between the injured party and the insured, and would in all probability be determinative of the issue of liability in that suit. . . .

* * * In such a proceeding, an issue crucial to the insured’s liability in the personal injury action and also one on which punitive damages could ultimately be assessed would be determined in a purely ancillary proceeding with the plaintiff and defendant in the personal injury action both aligned on the same side as defendants in the declaratory judgment action. Also, the order and burden of proof would be oriented to and dictated by the declaratory judgment action and not by the primary litigation, the personal injury suit. 384 N.E.2d at 345 – 346.

In holding that a declaratory judgment action is inappropriate, the court in Thornton did not repudiate the holding of Sims v. Illinois National Casualty Company of Springfield, Illinois, 43 Ill.App.2d 184, 193 N.E.2d 123 (3d Dist. 1963), which expressly authorized the insurer to seek a declaratory judgment. Rather, the court created an exception that applies when the ultimate facts at issue in the underlying case overlap with those present in the declaratory judgment action. In those situations, Illinois courts tend to stay the declaratory judgment action until the underlying lawsuit is resolved. But see Landmark American Insurance Co. v. NIP Group, Inc., 2011 IL App (1st) 101155 (stay or motion to dismiss is not appropriate when duty to defend can be determined outside merits of underlying claim).



Several cases have recognized, however, that a declaratory judgment action is not premature when the underlying complaint does not allege a potentially covered claim. For example, in Badger Mutual Insurance Co. v. Murry, 54 Ill.App.3d 459, 370 N.E.2d 295, 12 Ill.Dec. 672 (3d Dist. 1977), a declaratory judgment was held to be not premature even though the intentional acts exclusion was at issue. The underlying complaint alleged only intentional battery, and since there was no conflict of interest, the court determined that it was not necessary to determine in the declaratory judgment action whether in fact the battery had occurred, but rather only whether the allegations of the complaint fell within the terms of the policy. Similarly, in Illinois Farmers Insurance Co. v. Preston, 153 Ill.App.3d 644, 505 N.E.2d 1343, 106 Ill.Dec. 552 (2d Dist. 1987), the underlying complaint contained only allegations of intentional conduct, and, following Badger, the court held that a declaratory judgment action was not premature. In so holding, the court rejected the insured’s contention that an amended complaint alleging negligence might be filed, noting that an amended complaint doing so would constitute a new cause of action and the doctrine of res judicata would not apply to bar any claim for coverage in that event. See also Illinois State Medical Insurance Services, Inc. v. Cichon, 258 Ill.App.3d 803, 629 N.E.2d 822, 196 Ill.Dec. 277 (3d Dist. 1994); United States Fidelity & Guaranty Insurance Co. v. Jiffy Cab Co., 265 Ill.App.3d 533, 637 N.E.2d 1167, 202 Ill.Dec. 431 (1st Dist. 1994). On the other hand, some other cases have distinguished Thornton, supra, and Peppers, supra, to find that declaratory judgment actions were appropriate even though the complaint alleged both negligent and intentional conduct. The most significant case in this regard is Allstate Insurance Co. v. Carioto, 194 Ill.App.3d 767, 551 N.E.2d 382, 141 Ill.Dec. 389 (1st Dist. 1990). The insured, in the course of a robbery, brandished a knife and then stabbed the victim 17 times. He pled guilty to the criminal charge and then in his deposition admitted that he “intended to attempt murder.” 551 N.E.2d at 385. While noting that the guilty plea was only prima facie evidence and that a declaratory judgment action would normally be considered premature, the court held that there was not a bona fide controversy because conclusive evidence existed that the conduct was intentional. In West American Insurance Co. v. Vago, 197 Ill.App.3d 131, 553 N.E.2d 1181, 143 Ill.Dec. 195 (2d Dist. 1990), the court also rejected the mere fact that the underlying complaint contained an allegation of negligence as the grounds for preventing the declaratory judgment action. A country club patron grabbed a waitress from behind, locked his arms around her waist, and thrust his pelvis against her buttock several times. She sued for battery and emotional distress. Despite allegations of negligence, the court held that such a course of conduct is clearly intentional and not merely negligent or accidental. Furthermore, if the insured engaged in such conduct, he would have been consciously aware that he was practically certain to cause emotional injuries to the waitress. In this context, the court held that the injuries were certainly “expected” and fell within the policy exclusions, and that the insurer was entitled to a declaratory judgment on this issue before resolution of the underlying case. In Imperial Casualty & Indemnity Co. v. Chicago Housing Authority, 759 F.Supp. 446 (N.D.Ill. 1991), a claim was made for breach of contract. The insured’s motion to dismiss the declaratory judgment action, which asserted that the injuries were expected or intended by the insured, was denied. There was no issue in the underlying case, which asserted the breach of lease



provisions by the Chicago Housing Authority (CHA), regarding whether the injuries were expected or intended by the CHA. Although there might be some factual overlap between the two suits, it was unlikely the state lawsuit would decide the coverage issue raised in the declaratory judgment action. Thus, the declaratory judgment action was deemed proper. On the other hand, in Bituminous Casualty Corp. v. Fulkerson, 212 Ill.App.3d 556, 571 N.E.2d 256, 156 Ill.Dec. 669 (5th Dist. 1991), the court found that the declaratory judgment action was premature when the central issue in the declaratory judgment action was how much responsibility the insured had for the events culminating in the plaintiff’s claim. Because the issue of what kind of conduct took place at the jobsite was central to both the underlying case and the declaratory judgment action, the declaratory judgment action was dismissed as premature. B. [10.11] Uninsured-Motorist Claims Reversing the appellate court, the Illinois Supreme Court in State Farm Fire & Casualty Co. v. Yapejian, 152 Ill.2d 533, 605 N.E.2d 539, 178 Ill.Dec. 745 (1992), put to rest the question of whether declaratory judgment actions are appropriate as to uninsured-motorist claims. It rejected the claim that when the predecessor of 215 ILCS 5/143a(1) was amended in 1978 to provide that “any dispute with respect to such coverage shall be submitted for arbitration,” the legislature intended that coverage disputes also be submitted to arbitration. Rather, following earlier law such as Flood v. Country Mutual Insurance Co., 41 Ill.2d 91, 242 N.E.2d 149 (1968), the court held that declaratory judgment actions as to uninsured-motorist coverage issues were still appropriately brought. See §10.9 above for a discussion of Flatt v. Country Mutual Insurance Co., 289 Ill.App.3d 1097, 682 N.E.2d 1228, 225 Ill.Dec. 151 (4th Dist. 1997). IV. PRE-SUIT CONSIDERATIONS A. [10.12] Whether To File a Declaratory Judgment Action In addition to deciding whether a declaratory judgment action would be permitted, both the insurer and the insured considering a declaratory judgment action must carefully weigh the risks and benefits inherent in such a proceeding based on the facts of the particular case. 1. [10.13] Considerations for Insured It is rarely useful for the insured to file a declaratory judgment action against the insurance company. In a case in which the insured believes that the company has breached its duty to defend, the only advantage of prevailing in a declaratory judgment action is that the insured will not initially have to pay the defense costs and await later reimbursement from the insurer. On the other hand, there are several advantages to the insured in waiting until later to sue the insurer for damages. First, an insurer who fails to defend a potentially covered claim will be estopped from later disputing coverage. By filing a declaratory judgment action, the insured may preserve rights of the insurer that would otherwise lapse by the insured’s failure to defend under a reservation of rights or file a declaratory judgment action itself.



Second, the insured will be able to select its own defense counsel and retain control of the defense, thereby enabling the insured to attempt to structure the case so that any judgment that is entered against it is entered for reasons that will give rise to coverage. An insured who succeeds in a declaratory judgment action will lose that right. 2. [10.14] Considerations for Insurer Clearly, the most important consideration for an insurer in a coverage dispute is to preserve its right to assert its defenses. Absent a conflict-of-interest situation, providing a defense pursuant to a reservation of rights or pursuing a declaratory judgment are the insurer’s only two means for preserving its defenses if it is later established that a duty to defend existed. Accordingly, unless the potential judgment against the insured is very small or the absence of a duty to defend is obvious, an insurer who does not want to defend under a reservation of rights should pursue a declaratory judgment action when it believes that it does not have a duty to defend. On the other hand, an insurer that chooses to file a declaratory judgment action in lieu of defending under a reservation of rights loses control of the defense of the underlying action. While not estopped from asserting its coverage position, it runs the risk of being bound by the results of the underlying action, including verdicts against or settlements by the insured, should it not ultimately prevail in the declaratory judgment action. B. [10.15] Recovery of Attorneys’ Fees An additional consideration for an insured in deciding whether to file a declaratory judgment action is whether it will be able to recover attorneys’ fees associated with prosecuting the action. While there is as yet no Illinois Supreme Court decision dispositive of this issue, several Illinois appellate court cases have held that the insured may not recover attorneys’ fees absent a finding of vexatious delay, even if it is successful in the declaratory judgment action. American Alliance Insurance Co. v. 1212 Restaurant Group, L.L.C., 342 Ill.App.3d 500, 794 N.E.2d 892, 276 Ill.Dec. 642 (1st Dist. 2003); Westchester Fire Insurance Co. v. G. Heileman Brewing Co., 321 Ill.App.3d 622, 747 N.E.2d 955, 254 Ill.Dec. 543 (1st Dist. 2001); Society of Mount Carmel v. National Ben Franklin Insurance Company of Illinois, 268 Ill.App.3d 655, 643 N.E.2d 1280, 205 Ill.Dec. 673 (1st Dist. 1994); International Insurance Co. v. City of Chicago Heights, 268 Ill.App.3d 289, 643 N.E.2d 1305, 205 Ill.Dec. 698 (1st Dist. 1994); Tuell v. State Farm Fire & Casualty Co., 132 Ill.App.3d 449, 477 N.E.2d 70, 87 Ill.Dec. 469 (2d Dist. 1985); Preferred Risk Mutual Insurance Co. v. United States Fidelity & Guaranty Co., 77 Ill.App.3d 266, 395 N.E.2d 1180, 32 Ill.Dec. 799 (1st Dist. 1979); Brown Bag Co. v. Bituminous Casualty Corp., 117 Ill.App.2d 287, 254 N.E.2d 577 (1st Dist. 1969). There is, however, an anomaly to this rule. The Fifth District Appellate Court in Trovillion v. United States Fidelity & Guaranty Co., 130 Ill.App.3d 694, 474 N.E.2d 953, 86 Ill.Dec. 39 (5th Dist. 1985), held that the insured was entitled to its attorneys’ fees in both the underlying action and the prosecution and appeal of a declaratory judgment action against its insurer, at least when the insurer had breached its duty to defend. The Seventh Circuit also ruled in this way, relying only on Trovillion, in National Cycle, Inc. v. Savoy Reinsurance Co., 938 F.2d 61 (7th Cir. 1991). See also Green v. J.C. Penney Auto Insurance Co., 806 F.2d 759 (7th Cir. 1986). But see Taco



Bell Corp. v. Continental Casualty Co., 388 F.3d 1069 (7th Cir. 2004) (holding that attorney’s fees related to declaratory judgment action are not recoverable absent finding that insurer raised frivolous defense). Counsel filing declaratory judgment actions should be aware of these anomalies and should note that the court in National Cycle expressly chose not to certify the question to the Illinois Supreme Court. In Bonnie Owen Realty, Inc. v. Cincinnati Insurance Co., 283 Ill.App.3d 812, 670 N.E.2d 1182, 219 Ill.Dec. 294 (5th Dist. 1996), the Fifth District Appellate Court rejected its prior ruling in Trovillion and held that attorneys’ fees could not be recovered by the prevailing insured in a declaratory judgment action. This change means that all Illinois districts that have considered the question have ruled that such attorneys’ fees are not recoverable. Since the Seventh Circuit in National Cycle, supra, and Green, supra, followed the Trovillion ruling that such attorneys’ fees are recoverable in federal cases, the rulings in these cases appear to be of questionable viability given the rejection of Trovillion and the lack of any other Illinois authority supporting recovery of such attorneys’ fees absent evidence of vexatious conduct by the insurer. C. [10.16] Pre-Suit Research Legal research of the substantive issues to be raised in the complaint for declaratory judgment is essential to an orderly and expeditious determination. Issues concerning liability insurance have been the subject of numerous appellate court opinions. Frequently, decisions can be found that are wholly determinative of most aspects of the case. When legal precedent exists, substantial advantage goes to the party who frames the pleadings and discovery inquiries in precisely the language passed on or used by a reviewing court. D. [10.17] Statute of Limitations — Time for Bringing Suit There is no specific statute of limitations for the commencement of a declaratory judgment suit. The cause of action, created by statute, is an alternative procedural remedy for the judicial determination of a substantive right. Even though there is no applicable statute of limitations, a declaratory judgment action may fail by reason of laches or estoppel. These common-law limitations have been recognized in suits involving other than insurance litigation. Harper v. City Mutual Insurance Co., 67 Ill.App.3d 694, 385 N.E.2d 75, 24 Ill.Dec. 308 (1st Dist. 1978); Stern v. Material Service Corp., 44 Ill.App.2d 198, 194 N.E.2d 511 (1st Dist. 1963); James v. Frantz, 21 Ill.2d 377, 172 N.E.2d 795 (1961). First-party claims, such as an uninsured-motorist claim under an automobile policy or property damage under a homeowner’s policy, represent an overlap between declaratory judgment actions and contract actions. In the absence of a specific and clear policy provision, a ten-year statute of limitations has been held to apply to such first-party actions. Employers Insurance of Wausau v. Ehlco Liquidating Trust, 309 Ill.App.3d 730, 723 N.E.2d 687, 243 Ill.Dec. 384 (1st Dist. 1999); Murphy v. United States Fidelity & Guaranty Co., 120 Ill.App.3d 282, 458 N.E.2d 54, 75 Ill.Dec. 886 (5th Dist. 1983); Shelton v. Country Mutual Insurance Co., 161 Ill.App.3d 652, 515 N.E.2d 235, 113 Ill.Dec. 426 (1st Dist. 1987). This ten-year period is the general contract statute of limitations.



However, as noted in Murphy, supra, contractual limitations for lesser periods on first-party claims have been upheld. See also Vansickle v. Country Mutual Insurance Co., 272 Ill.App.3d 841, 651 N.E.2d 706, 209 Ill.Dec. 528 (4th Dist. 1995). These contractual limitations periods are somewhat restricted in their application. 215 ILCS 5/143.1 provides that a contractual limitations period is tolled until the insurer informs the insured of the denial of a claim. In Mitchell v. State Farm Fire & Casualty Co., 343 Ill.App.3d 281, 796 N.E.2d 617, 277 Ill.Dec. 531 (4th Dist. 2003), Sponemann v. Country Mutual Insurance Co., 120 Ill.App.3d 211, 457 N.E.2d 1031, 75 Ill.Dec. 589 (5th Dist. 1983), and Dickman v. Country Mutual Insurance Co., 120 Ill.App.3d 470, 458 N.E.2d 199, 76 Ill.Dec. 60 (3d Dist. 1983), the courts ruled that actions by the insurer that induced the insured not to file suit within the contractual limitations period may estop the insurer from raising that provision as a defense. Additionally, contractual limitations periods have been held not to apply to minors. Severs v. Country Mutual Insurance Co., 89 Ill.2d 515, 434 N.E.2d 290, 61 Ill.Dec. 137 (1982). E. [10.18] Parties All persons interested in the outcome of a declaratory judgment proceeding must be made parties if they are to be bound by the judgment order. Zurich Insurance Co. v. Raymark Industries, Inc., 144 Ill.App.3d 943, 494 N.E.2d 630, 98 Ill.Dec. 508 (1st Dist. 1986). The insured and any additional insureds are necessary parties to the suit when their claims for coverage are in issue, including the driver of the insured vehicle. Northland Insurance Co. v. Hawk, 59 Ill.App.3d 155, 376 N.E.2d 30, 17 Ill.Dec. 137 (1st Dist. 1978); Safeway Insurance Co. v. Harvey, 36 Ill.App.3d 388, 343 N.E.2d 679 (1st Dist. 1976). All persons claiming benefits from the policy also must be joined in Illinois state court declaratory judgment actions. All plaintiffs/claimants in the underlying tort litigation are necessary parties to the declaratory suit involving a defendant’s liability coverage if they are to be bound by the declaratory order. Crum & Forster Specialty Insurance Co. v. Extended Stay America, Inc., 375 Ill.App.3d 654, 873 N.E.2d 964, 314 Ill.Dec. 34 (1st Dist. 2007); Society of Mount Carmel v. National Ben Franklin Insurance Company of Illinois, 268 Ill.App.3d 655, 643 N.E.2d 1280, 205 Ill.Dec. 673 (1st Dist. 1994); Insurance Company of North America v. Cape Industries, Ltd., 138 Ill.App.3d 720, 486 N.E.2d 287, 93 Ill.Dec. 186 (4th Dist. 1985); American Home Assurance Co. v. Northwest Industries, Inc., 50 Ill.App.3d 807, 365 N.E.2d 956, 8 Ill.Dec. 570 (1st Dist. 1977); Sobina v. Busby, 62 Ill.App.2d 1, 210 N.E.2d 769 (1st Dist. 1965); Fourniotis v. Woodward, 63 Ill.App.2d 79, 211 N.E.2d 571 (1st Dist. 1965). The personal injury plaintiff has a substantial right in the liability policy and may assert any matter that would defeat the insurer’s policy position. General Casualty Company of Illinois v. Olsen, 56 Ill.App.3d 986, 372 N.E.2d 846, 14 Ill.Dec. 567 (2d Dist. 1977). When the named insured is not a defendant in the underlying case and has no interest in the coverage litigation, the named insured is not an indispensable party. State Farm Mutual Automobile Insurance Co. v. Haskins, 215 Ill.App.3d 242, 574 N.E.2d 1231, 158 Ill.Dec. 838 (2d Dist. 1991). The court permitted a declaratory judgment action to proceed without the named insured as a party in Safeco Insurance Company of Illinois v. Treinis, 238 Ill.App.3d 541, 606 N.E.2d 379, 179 Ill.Dec. 547 (1st Dist. 1992), even though coverage for the named insured was directly in issue. Although finding that the named insured was a necessary party, the court also



noted that great efforts had been made to serve him, to no avail. The underlying claimant, a defendant in the declaratory judgment action, was unable to suggest that it would be unable to obtain discovery or would suffer any other prejudice in litigating the coverage issue. Weighing the competing factors, including that the named insured would not be bound by any declaration and could relitigate the coverage issue should it resurface, the court nonetheless permitted the declaratory judgment to proceed. A claimant has standing to bring a declaratory judgment action even though the insurer and the insured agree that there is no coverage. Society of Mount Carmel, supra; American Country Insurance Co. v. Williams, 339 Ill.App.3d 835, 791 N.E.2d 1268, 274 Ill.Dec. 857 (1st Dist. 2003); Reagor v. Travelers Insurance Co., 92 Ill.App.3d 99, 415 N.E.2d 512, 47 Ill.Dec. 507 (1st Dist. 1980). However, as noted in Batteast v. Argonaut Insurance Co., 118 Ill.App.3d 4, 454 N.E.2d 706, 73 Ill.Dec. 609 (1st Dist. 1983), a declaratory judgment action by the claimant may be premature if brought before an adjudication of the underlying lawsuit. See also Weber v. St. Paul Fire & Marine Insurance Co., 251 Ill.App.3d 371, 622 N.E.2d 66, 190 Ill.Dec. 656 (3d Dist. 1993), reading Reagor, supra, as a duty-to-defend case and rejecting an argument that it could be read to permit an early declaration regarding the duty to indemnify. Personal injury claimants sometimes move to dismiss themselves from declaratory judgment proceedings involving the alleged tortfeasor’s liability carrier on the theory that the injured plaintiffs have no interest in the declaratory litigation. For instance, this might be the case when the insurer sought to prove prior policy cancellation. The injured plaintiffs might argue that the dispute is between the insurer and the insured. However, if the personal injury claimants are dismissed on their own motion, they are bound by the eventual declaratory ruling and cannot later contest its validity in garnishment proceedings. Williams v. Madison County Mutual Automobile Insurance Co., 40 Ill.2d 404, 240 N.E.2d 602 (1968). F. [10.19] Jurisdiction Jurisdiction is conferred on the court sitting in a declaratory judgment suit just as in other civil litigation. Parties can be brought before the court only by virtue of proper service of summons. When, as frequently is the case, there is ongoing litigation between the insured and the injured parties, an insurance company may wish to intervene for the determination of policy questions. If intervention were permitted, the insurer could avoid the cost and difficulty of re-serving the parties with summons, and the insurer could better schedule the hearing on the declaratory judgment issue so that it would be heard before the trial of the personal injury action. See, e.g., Doe v. Illinois State Medical Inter-Insurance Exchange, 234 Ill.App.3d 129, 599 N.E.2d 983, 174 Ill.Dec. 899 (1st Dist. 1992), in which the court noted that the insured could have potentially requested supplemental interrogatories or an allocated verdict by the personal injury jury, which would have specified the acts for which he was liable, thereby, according to the court, determining the coverage question. However, the Doe court is clearly incorrect since it would be reversible error in the personal injury case to give special interrogatories that did not control the result or affect the general verdict under 735 ILCS 5/2-1108, particularly when the insurer would not be bound by the special interrogatories as a nonparty to the medical malpractice action.



Accordingly, when an insurer seeks to determine its obligations under a liability policy that involve issues separate from the underlying tort case, the insurer must file a separate declaratory lawsuit to determine those issues. Hurley v. Finley, 6 Ill.App.2d 23, 126 N.E.2d 513 (4th Dist. 1955); Home Insurance Co. v. Lorelei Restaurant Co., 83 Ill.App.3d 1083, 404 N.E.2d 895, 39 Ill.Dec. 304 (1st Dist 1980). But see Johnson v. Cape Industries, Ltd., 91 Ill.App.3d 192, 414 N.E.2d 470, 46 Ill.Dec. 586 (4th Dist. 1980), in which the court permitted intervention under the special circumstances of that case; the insured had instructed the insurer not to enter an appearance for it, resulting in a default order in the underlying case. The nonresident motorist statute, 625 ILCS 5/10-301, will not confer jurisdiction of a defendant on the court for the purposes of seeking declaratory judgment relief. For example, a policy defense frequently asserted in declaratory judgment actions is noncooperation of the insured. This noncooperation may mean that the insured is failing to cooperate with defense attorneys and is making himself or herself unavailable for questioning and interrogation. When the insured resides outside the state, the insurer may desire to serve him or her through the nonresident motorist statute. However, the nonresident motorist statute has been narrowly interpreted to provide service of summons only in certain personal injury cases arising from the use of a vehicle. Hurley, supra. Thus, there may be situations in which it is impossible to obtain jurisdiction over all of the necessary parties to a declaratory judgment action. G. [10.20] Venue Venue requirements in declaratory judgment actions are governed by §§2-101 through 2-108 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-101 through 5/2-108. Generally, every action must be commenced (1) in the county of residence of any defendant who is joined in good faith and with probable cause for the purpose of obtaining a judgment against him or her and not solely for the purpose of fixing venue in that county, or (2) in the county in which the transaction or some part of it occurred out of which the cause of action arose. 735 ILCS 5/2-101. Section 2-103 of the Code of Civil Procedure provides that actions against insurance companies must be brought in the county in which the principal offices are located or in the county in which the transaction or some part of it occurred out of which the cause of action arose. V. PLEADINGS A. [10.21] General Rules of Declaratory Pleadings Declaratory judgment litigation involving a liability insurance policy generally revolves around a narrow dispute regarding construction of the contract and application of that construction to undisputed or partially disputed facts. In order to make full use of the advantages of declaratory judgment actions, the pleadings must completely set forth the issues involved while at the same time narrowly define the limits of the controversy. In a declaratory judgment proceeding seeking to construe a liability insurance policy, properly drawn complaints and answers provide the complete framework for discovery, trial, and judgment order.



The complaint for declaratory judgment should state the insurance controversy existing between the plaintiff and the defendant in clear terms. It should state the positions of the plaintiff and the defendant and request the court to determine the controversy. A properly drawn complaint defines the issue or issues existing between the parties so that the entire controversy turns on limited issues of fact. Particularly when the controversy concerns a policy defense, such as late notice, noncooperation, a prohibited use, or a policy condition such as cancellation, premium lapse, or other available insurance, the factual issues invite precise and clear pleading. Since a declaratory judgment action in an insurance case is based on the written insurance policy, the relevant portions of the policy or, whenever possible, the entire policy should be attached as an exhibit to the complaint. 735 ILCS 5/2-606. It is also helpful, in defining and narrowing the issues, to quote relevant portions of the policy in the body of the complaint. The plaintiff’s complaint, standing alone, should describe the entire controversy. When the answer meets and covers the issues raised by the complaint, no counterclaim is required to declare the rights of all of the parties, regardless of which may prevail. The answer acts as a counterclaim on which affirmative relief can be given. In re Estate of Soderholm, 127 Ill.App.3d 871, 469 N.E.2d 410, 82 Ill.Dec. 876 (1st Dist. 1984); Johnson v. Town of City of Evanston, 39 Ill.App.3d 419, 350 N.E.2d 70 (1st Dist. 1976); Country Life Insurance Co. v. Goffinet, 117 Ill.App.2d 338, 254 N.E.2d 281 (4th Dist. 1969). However, a counterclaim naming additional parties must be filed in order to bind those not named in the original complaint. The pleadings in insurance policy litigation are the chief discovery device of the parties. Properly drawn, the pleadings become, in effect, requests to admit all issues not in controversy and act to narrow the factual dispute. The body of the pleadings serves as a basis for specifically tailored interrogatories, and the prayer for relief in the complaint may become the proposed judgment order. B. [10.22] Pleading Checklist The declaratory judgment complaint should generally contain the following: 1. identification of the parties setting forth the general basis of their insurance relationship; 2. description of the underlying facts that give rise to the controversy between the parties

(when a complaint has been filed against the insured for which the plaintiff seeks liability coverage, the complaint should be attached);

3. quotation of policy provisions that are in controversy; 4. statements of each party’s position that gives rise to the policy controversy; 5. statement of the statutory authority for the pleading; and 6. “wherefore” clauses requesting judicial findings, policy construction, and the desired

determination of the controversy.



C. Sample Declaratory Judgment Complaints and Answers 1. [10.23] Sample Complaint by Insurer To Declare Lack of Duty To Defend FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. Note that Paragraphs 2 and 8 of the sample complaint make reference to the policy and to the specific language at issue. If the answer denies either of these paragraphs, the pleader should consider obtaining a certified copy of the policy. A certified copy of the policy includes an affidavit from the appropriate person at the insurer, usually someone in the underwriting department, that the attached copy accurately reflects the terms of the contract between the parties. It can, therefore, be used to support a summary judgment under 735 ILCS 5/2-1005. 2. [10.24] Defendants’ Answer to Complaint The answer to be filed by the defendants in declaratory judgment litigation could properly admit all allegations of the complaint and pray for reverse findings. In addition to the controversy as set forth in the complaint, the defendants may raise in their answer the failure of the plaintiff to comply with the requirements for reservation of rights that might result in estoppel or may raise other affirmative matters that suggests that coverage exists. 3. [10.25] Sample Complaint Seeking Liability Defense and Money Damages FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. 4. [10.26] Defendant’s Answer to Complaint Seeking Liability Defense The plaintiff’s complaint in §10.25 above for declaratory judgment seeking a liability defense and monetary damages requires the defendant to set forth the reasons for refusing the tender of defense. Unless the defendant insurance company sets forth the reasons the tender of defense was refused, there would be no controversy existing between the parties, and the plaintiff would be entitled to a judgment on the pleadings. When the plaintiff fails to set forth the contrary position of the defendant, the defendant must detail its position in its answer. The defendant’s answer should set forth its position with regard to the refusal to defend.



Moreover, if the defendant insurer is to benefit from its coverage position, it must bind all of the parties, including the injured John Doe, in the underlying action. Consequently, the defendant insurer must restate its position in a counterclaim and serve John Doe in the countersuit. A plaintiff’s complaint for declaratory judgment may properly include a prayer for monetary damages. Not only does the court have jurisdiction to render a declaratory judgment, but, when appropriate, it may also award monetary damages. Chester v. State Farm Mutual Automobile Insurance Co., 227 Ill.App.3d 320, 591 N.E.2d 488, 169 Ill.Dec. 315 (2d Dist. 1992); Burgard v. Mascoutah Lumber Co., 6 Ill.App.2d 210, 127 N.E.2d 464 (4th Dist. 1955). VI. DISCOVERY PRACTICE IN DECLARATORY JUDGMENT

PROCEEDINGS A. [10.27] Scope of Discovery Since the issues in declaratory judgment actions are generally narrow in scope, confined to disputes involving policy conditions and exclusions, discovery in these cases should be carefully tailored to further narrow and elucidate these issues. This will enable a quicker and clearer resolution of the proceeding, without unnecessary cost, and commonly leads to a summary disposition by means of a motion for summary judgment. Discovery practice in declaratory judgment proceedings is governed by the discovery provisions of the Illinois Code of Civil Procedure and the discovery rules of the Illinois Supreme Court, S.Ct. Rule 201, et seq. B. [10.28] Requests To Admit Requests for admission of facts or of genuineness of documents are governed by S.Ct. Rule 216. The request for admission of genuineness of documents is a particularly helpful tool to practitioners involved in insurance policy litigation. The genuineness of documentary evidence may be successfully tested by application of the rule. As a practical matter, all exhibits attached to the complaint for declaratory judgment can be assured admission into evidence either by the application of S.Ct. Rule 216 or by admission in the defendant’s answer. The schedule of insurance, the insuring booklet, notices of cancellation, tenders of defense, and refusals of coverage, if in writing, may all be tested for their evidentiary value by this rule. The failure to fully use S.Ct. Rule 216 may result in the practitioner being involved in long and costly testimony in order to lay an appropriate foundation for the admission of a document that should have been readily admitted. C. [10.29] Interrogatories Interrogatories provide the parties to a declaratory judgment proceeding with the ability to delineate the actual controversy. When the position of a plaintiff or defendant to a declaratory



judgment proceeding is not clear from the pleadings on file, proper interrogatories can reveal the precise policy conditions or interpretations on which the party relies. In a more general framework, written interrogatories to parties provide the insurance litigator with a means to discover witnesses to the factual dispute. The following interrogatories are generally all that are required to properly frame the issues in a declaratory judgment proceeding. FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. D. [10.30] Production of Documents Illinois S.Ct. Rule 214 provides for the inspecting, copying, reproducing, and photographing of specified documents, objects, or tangible things. This rule is the primary tool for gathering evidence in a declaratory judgment proceeding. Since declaratory judgment proceedings normally arise from written instruments, the majority of



evidence offered in the trial or in a summary judgment proceeding is documentary in nature. The production of written documents sent or received concerning a particular liability insurance policy will provide the basic evidence regarding notice, cancellation, premium payment, and efforts to secure cooperation. When a party denies receipt of a cancellation notice, production of his or her written documents may reveal the existence of insurance agents, other liability insurance carriers, or correspondence relating to his or her attempt to find other insurance after the cancellation was allegedly effective. Moreover, lending institutions frequently hold land or chattel mortgages on the subject property that provide for notice of cancellation by the insurer. A subpoena directed to these lienholders may reveal that the cancellation notice was received by them or that the insured gave other evidence of insurance to them. When a notice for production of documents under S.Ct. Rule 214 is coupled with a request to admit under S.Ct. Rule 216, the time involved in policy litigation may be substantially reduced. E. [10.31] Depositions Discovery and evidence depositions are generally governed by S.Ct. Rule 201, et seq. Deposition practice can be particularly valuable in litigation on liability insurance policies. If issues have been adequately narrowed through pleadings, interrogatories, and requests to admit, the discovery deposition can adequately encompass all factual issues that are in dispute between the parties. The factual issues should be so narrow as to hinge on a single question, such as whether a notice of cancellation was received, whether notice of an occurrence was given, or whether a prohibited use of the insured object occurred. In discovery depositions, the interrogator should review both the insuring agreement and relevant caselaw before the deposition. Frequently, questions to the deponent can incorporate the precise language of the policy or controlling caselaw as part of the inquiry. Proper answers to questions that incorporate phrases of controlling caselaw or key portions of the policy render the entire dispute ready for immediate summary disposition. VII. MOTION PRACTICE IN DECLARATORY JUDGMENT PROCEEDINGS A. [10.32] Motions for Summary Judgment Motions for summary judgment (735 ILCS 5/2-1005) and motions for judgment on the pleadings (735 ILCS 5/2-615) have been specifically approved in declaratory judgment proceedings. Landmark American Insurance Co. v. NIP Group, Inc., 2011 IL App (1st) 101155, citing Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 620 N.E.2d 1073, 189 Ill.Dec. 756 (1998). Many, indeed most, declaratory judgment actions are subject to these motions since the pleadings and discovery should and frequently do narrow the factual disputes to be decided so that there are no genuine issues as to any material fact. All factual disputes except those surrounding the legal interpretation and application of a particular policy



provision can be eliminated, leaving only the legal issues appropriate for a summary disposition by the court. Illinois reviewing courts in insurance policy disputes seldom reverse trial court holdings in declaratory judgment proceedings on the basis of genuine issues of material fact that should have been decided at trial. In insurance cases, it is more probable that a reviewing court will accept the trial court record on the basis of discovery depositions and motions as an adequate factual record on which to make a determination. The complaint and/or answer and the discovery devices employed by the parties should focus on obtaining a final decision in the motion court. A motion for summary judgment involving policy language should quote the language in the body of the motion. The motion for summary judgment should also include an enumeration of the specifically relevant facts elicited in discovery, with the relevant documents attached. B. [10.33] Sample Motion for Summary Judgment FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. VIII. [10.34] DECLARATORY JUDGMENT TRIAL PRACTICE The trial of declaratory judgment lawsuits involving liability insurance policies is founded in the general principles of civil litigation in Illinois. Due to the narrow issues of fact generally found in the proceeding, many aspects of the conventional trial may be expedited or obviated. A. [10.35] Timing of the Trial — Enjoining Collateral Litigation Most liability insurance disputes concern the question of coverage of claims that are already the subject of their own litigation. The filing of the declaratory judgment action to construe the coverage of the liability policy almost always postdates the filing of a damage action by an injured party against the insured. However, the decision to be rendered in the liability insurance dispute is of paramount importance in the damage litigation. Without the proceeds of an insurance policy, interest in the damage litigation is reduced. Although the personal injury action is normally filed first, the parties to the case are interested in an early decision concerning liability coverage. There is some statutory authority for



obtaining an early hearing of the declaratory judgment action. The declaratory judgment section of the Code of Civil Procedure provides in part:

[I]f a declaration of rights is the only relief asked, the case may be set for early hearing as in the case of a motion. 735 ILCS 5/2-701(b).

It is arguable that the term “early hearing” as used in the statute means before judgment in the damage case. In Valente v. Maida, 24 Ill.App.2d 144, 164 N.E.2d 538 (1st Dist. 1960), the reviewing court considered an order in a declaratory judgment proceeding that enjoined further action in an earlier-filed personal injury case. Although the stay of personal injury proceedings was found improper, the opinion placed heavy emphasis on the fact that the insurer had an adequate remedy in garnishment. When actual prejudice may result, the Valente decision appears to allow a stay of the personal injury proceedings. There is some case authority for permitting the parties to the liability insurance litigation to obtain a declaration of their rights before incurring the cost, time, and expense of the personal injury or property damage action. In School District No. 46, Kane, Cook & DuPage Counties v. Del Bianco, 68 Ill.App.2d 145, 215 N.E.2d 25 (2d Dist. 1966), the court held that a consideration of equitable principles alone is sufficient reason to stay the common-law action pending the declaratory judgment decision. See also Johnson v. Cape Industries, Ltd., 91 Il1.App.3d 192, 414 N.E.2d 470, 46 Ill.Dec. 586 (4th Dist. 1980); Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677 (7th Cir. 1992). Because of the extreme importance of motion practice to the parties involved in the declaration of a liability insurance policy, early hearings are available if the proceedings are diligently prosecuted. When pleadings, requests to admit, interrogatories, and depositions are expeditiously put forward, the trial of the declaratory judgment action usually can be assured to take place before disposition of the underlying personal injury or property damage action. B. [10.36] Burden of Proof The positioning of parties in a liability insurance dispute is frequently a reversal of their conventional roles. It is not infrequent to find counsel who are normally associated with the representation of defendants as plaintiffs’ counsel in a declaratory judgment action that seeks to avoid or deny coverage to an insured. This reversal of roles is even more remarkable with regard to the conventional defendants in the declaratory judgment proceeding. The injured plaintiffs are joined as defendants in the liability policy dispute so that a finding may be res judicata with regard to their claim. These injured parties may have the greatest interest with regard to a finding of liability coverage for the insured. Consequently, their counsel, normally associated with the commencement of lawsuits, finds himself or herself as a defendant contesting the plaintiffs’ right to deny coverage to an insured. The burden of proof with regard to liability insurance disputes is on the party claiming the coverage under the policy. Consequently, when the plaintiff insurer has brought suit to declare



that there is no coverage available to an alleged insured, it may well be the burden of the defendant insured to prove that he or she falls within the definition of “insured” in the subject policy. In Continental National American Group v. Vaicunas, 26 Ill.App.3d 835, 325 N.E.2d 747, 749 (1st Dist. 1975), the insurer brought suit against its insured to contest the applicability of an automobile liability policy. The insurer contended that the automobile was “furnished for the regular use” of the insured and thus was defined as a nonowned automobile for which there was no coverage. In finding for the insurer, the reviewing court expressly held that the claimant under the automobile policy had the burden of proof, by a preponderance of the evidence, that he came within the policy definition of coverage. The general rules with regard to the burden of proof in liability coverage disputes focus on the relationship of the parties rather than their positions in the lawsuit as either plaintiff or defendant. The broadly stated rule is that the insured has the burden of proving policy coverage. Universal Casualty Co. v. Lopez, 376 Ill.App.3d 459, 876 N.E.2d 273, 315 Ill.Dec. 273 (1st Dist. 2007). The insurer, on the other hand, has the burden of proving the breach of policy conditions or the applicability of policy exclusions. Addison Insurance Co. v. Fay, 232 Ill.2d 446, 905 N.E.2d 747, 328 Ill.Dec. 858 (2009); United States Fidelity & Guaranty Co. v. State Farm Mutual Automobile Insurance Co., 152 Ill.App.3d 46, 504 N.E.2d 123, 105 Ill.Dec. 254 (1st Dist. 1987); M.F.A Mutual Insurance Co. v. Cheek, 66 Ill.2d 492, 363 N.E.2d 809, 6 Ill.Dec. 862 (1977). Thus, the person claiming coverage has the burden of proving that he or she comes within the definition of “insured,” whereas the insurer has the burden of proving late notice, noncooperation, or an exclusionary defense. When counsel in a liability insurance dispute perceives that it is the burden of the defendants to prove coverage, a trial brief should be submitted to the court. The conventional thinking that the plaintiff always has the burden of proof generally permeates the declaratory judgment trial on the liability policy. A short trial brief that notes which party properly has the burden of proof will provide for less confusion at the time of judgment. C. [10.37] Right to Jury It appears from the Illinois statutes on declaratory judgments that when the insurance policy controversy turns on an issue of fact, such as the cancellation of a policy, a receipt of a notice, a prohibited use, or an exclusion, the right to trial by jury is guaranteed. 735 ILCS 5/2-701. In Bituminous Casualty Corp. v. Wilson, 119 Ill.App.3d 454, 456 N.E.2d 696, 75 Ill.Dec. 13 (2d Dist. 1983), the court held that when a declaratory judgment proceeding requires the determination of issues of fact triable by a jury, such issues shall be tried and determined in the same manner as in other civil actions. D. [10.38] The Trial The trial of a declaratory judgment suit based on a liability insurance policy usually concerns the determination of narrow fact issues. The preparation and examination of witnesses, the issues



submitted to the finder of fact, and the judgment orders all revolve around limited issues. Consequently, the declaratory judgment trial usually proceeds in an orderly and predictable fashion. 1. [10.39] Opening Statements When the controversy concerning the liability policy is to be submitted to the judge for a legal and factual determination, opening statements may be waived, but it is the better practice to make opening statements whether or not the trial is by jury. The opening statement provides counsel with an opportunity to focus the issue for determination. Moreover, counsel will be able to identify proposed documentary evidence as it will be used in the trial. The liability policy insurance schedule, booklets, and various letters between the parties may be identified, with regard to their relationship to oral testimony, during the opening statement. If the opening statement in a declaratory judgment lawsuit has set the framework for the introduction of evidence and focused the issue, it has served much of its purpose. 2. [10.40] Preparation of Witnesses The preparation of witnesses by counsel for declaratory judgment litigation is similar to preparation in other lawsuits. The most important witness preparation point is to make the witness understand the manner in which his or her testimony fits into the determination of the issues to be decided. When a witness does not appreciate the relationship of his or her testimony to the ultimate issue to be decided, he or she may give unresponsive answers that confuse or are inconsistent with respect to the position taken in the opening statement. Witnesses must be taught to understand that insurance policies adopt terms used by ordinary laypersons as terms of art. Such frequently used terms as “use,” “household,” and “automobile business” have specific meanings in the trial of liability insurance cases. The witness who casually uses such terms may cause damage far beyond the value of his or her expected testimony. 3. [10.41] Direct and Cross-Examination of Witnesses The examination of witnesses, either direct or cross, is best conducted in insurance litigation when the questions are narrowed to the precise issue in question. Well-prepared direct or cross-examination should be based on research of the common law concerning the points in issue. Questions may be tailored to particular language or controlling caselaw. When opposing counsel fails to object to questions that go to the ultimate issue to be decided, responsive answers to these important questions quoting policy language or controlling caselaw ensure a favorable result.



4. [10.42] Special Interrogatories and Verdict Forms Controversies involving liability insurance policies may concern whether a particular contingency of an insurance policy has been complied with or whether a particular exclusion of an insurance policy is applicable. The jury issue is generally framed in the policy language in dispute or in the words of existing caselaw. The following special interrogatories are suggested: a. When the policy defense of late notice is involved: FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. b. When the issue in the case involves policy cancellation: FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. c. When the issue in dispute involves a policy exclusion: FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. The jury’s answers to the above questions enable the successful party to draft a declaratory judgment order for entry by the court that will include specific findings. When a jury is to decide the issue, special interrogatories, as suggested above, may be combined in a form for the jury to complete. It contains twelve signature blocks for the jury to sign to compose a special verdict. E. [10.43] Judgment Orders A declaratory judgment order is the final ruling by the court. From this order, appeals may be taken. Due to the precision with which declaratory judgment proceedings and trials may be prosecuted, the declaratory judgment order should reflect the findings of the court in addition to its conclusion on the question of law. A sample declaratory judgment order provides as follows: FORM(S) AVAILABLE BY PURCHASING HANDBOOK OR BY SUBSCRIBING TO THE IICLE® ONLINE LIBRARY. IX. [10.44] CONCLUSION In general, declaratory judgment actions are a very efficient method of receiving a judicial determination of a coverage dispute regarding a liability insurance policy. Properly drafted pleadings and properly conceived discovery, motions, and orders can result in clear and uncluttered rulings, which enable all of the parties — the injured claimant, the insured, and the



insurer — to determine whether policy benefits are available to defend the insured and/or satisfy an underlying claim. Moreover, depending on the context of the claim and the facts at issue, filing a declaratory judgment lawsuit may be a preferable alternative to defending the insured pursuant to a reservation of rights.

10 Declaratory Judgment Actions - IICLE · PDF fileA. [10.6] Statutory Basis of Declaratory...

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Transcript of 10 Declaratory Judgment Actions - IICLE · PDF fileA. [10.6] Statutory Basis of Declaratory...