Insurer Accused of Having Ace Up its Sleeve: Insurer Estopped from Relying on Sublimit Due to Defense Counsel’s Failure to Supplement Discovery Responses in Tort Lawsuit

In Harwell v. Fireman’s Fund Insurance Co. of Ohio, 2016 IL App (1st) 152036, the Illinois Appellate Court refused to allow Fireman’s Fund Insurance Company to assert a policy sublimit because defense counsel retained by Fireman’s Fund to represent its insured in the underlying tort lawsuit failed to inform the tort claimant that the sublimit, and not the full limit, applied.

As background, Brian Harwell was injured while working at a construction project supervised by Kipling Development Corporation as a general contractor. Harwell sued Kipling, alleging it negligently failed to properly supervise and direct the construction site and failed to ensure a safe workplace. Kipling tendered the lawsuit to Fireman’s Fund, which agreed to defend Kipling under a reservation of rights. Fireman’s Fund retained defense counsel for Kipling.

In answering Harwell’s interrogatories in September 2007, Kipling, through its retained defense counsel, stated it maintained a Fireman’s Fund policy with a maximum limit of $1 million. Fireman’s Fund then sent a series of coverage position letters to Kipling beginning in 2008 that said a $50,000 sublimit applied because Kipling had failed to obtain certificates of insurance and hold harmless agreements from its subcontractors, as required by a policy endorsement. However, Kipling never supplemented its answers or otherwise notified Harwell that a sublimit might apply.

After a jury awarded Harwell more than $200,000, and Kipling declared that it had no assets to satisfy the judgment, other than the Fireman’s Fund insurance policy, Harwell brought this declaratory judgment against Fireman’s Fund. Fireman’s Fund countered that its liability was limited to the $50,000 sublimit. The parties filed cross-motions for summary judgment, and the trial court granted summary judgment in favor of Fireman’s Fund.

The Appellate Court reversed. It keyed in on Illinois Supreme Court Rule 213(i), which requires a party to a lawsuit to seasonably supplement its answers when new information becomes known. The Appellate Court found defense counsel violated the rule. It essentially held Fireman’s Fund responsible. The Appellate Court noted that had Harwell known that coverage under the Fireman’s Fund policy was limited to $50,000, Harwell could have sought to settle with Kipling or changed his trial strategy. The Appellate Court also explained, “It does Fireman’s Fund no good to argue that it owed its duty to disclose only to Kipling, its insured; Harwell was the opposing party in the original lawsuit, Fireman’s Fund was controlling Kipling’s defense, and Fireman’s Fund therefore had a duty to be forthcoming under supreme court rules.” The Appellate Court went on to accuse Fireman’s Fund of “sandbagging” and consequently, refused to honor the sublimit. Based upon the “broad principles of equity,” the Appellate Court held Fireman’s Fund was estopped from relying on the sublimit.

This decision is perplexing. The Appellate Court, without citing to any authority, held a non-party insurer may be responsible for its retained counsel’s violation of Supreme Court Rule 213(i). There can be no dispute that defense counsel and Kipling had a duty to be forthcoming, but why did Fireman’s Fund? Absent proof of intent by Fireman’s Fund to withhold from Harwell information about the sublimit, it seems unjust to deprive Fireman’s Fund of its right to enforce a bargained-for policy limitation after its insured failed to honor the requirements that would otherwise limit Fireman’s Fund’s exposure.

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