court rewrites insurance policy to create defense obligation in favor of “implicitly co-insured” tenant | Cozen O’Connor


Sheckler v. Automobile Owners Insurance Company, 2021 WL 493226, 2021 Ill. App. LEXIS 593 (October 23, 2021), a decision of the Illinois Court of Appeals, Third Judicial District, found that principles of fairness warrant rewriting liability coverage in a owner. The policy only specifically identified the landlord as an “insured” entitled to defense and compensation, but the court ruled that it should also extend an obligation to defend and compensate tenants whenever a claim is made. anybody [tenant] recover damage caused by fire to the [landlord’s] structure. “2021 WL 493226, 2021 Ill. App. LEXIS 593, * 19-20. Of the three judges of the Sheckler panel, one was dissenting and the other only agreed on the result, which means that the reasoning of the Sheckler decision is only that of a single lawyer.

the Sheckler The case arose in the context of a subrogation claim by Auto-Owners, the owner’s insurer, against a contractor (aptly named Workman) for Workman’s alleged role in the cause of a gas explosion and d ‘a fire in the insured premises, a single-family house rented to Sheckler. The circumstances suggest that Sheckler potentially bore significant responsibility in the fire. However, auto owners chose not to sue Sheckler directly, acknowledging that the “implicit coinsurance” doctrine adopted in Ten Mutual Insurance Company c. Raspberry, 149 Ill. 2nd 314, 597 NE 2d 622 (Ill. 1992) protected Sheckler from direct liability to automobile owners. As might be expected, Workman filed a claim with a third party asking for Sheckler’s contribution. Sheckler filed a separate declaratory action against the automobile owners, arguing that Sheckler was entitled to a defense and indemnity under the Automobile Owners Liability Coverage because Sheckler was, on the surface, a ” co-insured ”under the automobile owners’ insurance policy.

The trial court in the declaratory judgment action rendered summary judgment in favor of the automobile owners. While the appeal of that decision was pending, a jury in the underlying subrogation action reached a verdict in Workman’s favor. Thus, all that remained in the appeal of the declaratory judgment action was whether Auto-Owners was obligated to reimburse Sheckler’s defense costs. Embodying the idea that “bad business makes bad law,” the appeals court ruling overturned the trial court and ruled that auto owners were forced to provide Sheckler with a defense in the underlying subrogation lawsuit.

Coming to its conclusion, the Sheckler decision purported to be based on the doctrine of “implicit coinsurance” as articulated by the Supreme Court of Illinois in its 1992 decision in Ten Mutual. However, the Sheckler decision extends the implicit doctrine of coinsurance beyond recognition. The implicit doctrine of coinsurance, when it applies, serves only to immunize the lessee against property request for subrogation from the insurer. It does not follow logically, from the limited scope and object of the doctrine, that the insurer of the property of the owner would also be obliged to absorb the costs of defending the tenant against the demand for a contribution from a third party. . The implicit doctrine of coinsurance has been adopted, in various contexts and circumstances, by a number of jurisdictions across the country. None, before the Sheckler decision, attempted to extend its scope in the way Sheckler Is it that.

the Sheckler The decision is particularly problematic because the property insurance provisions of a landlord’s insurance policy do not provide a liability defense guarantee to the landlord, let alone the landlord’s tenant. Liability defense obligations, where they exist, arise from liability coverage and not from property coverage. As the dissenting judge stated in Sheckler:

[E]even if Ten announced a new and different general rule regarding tenant status vis à vis policies of their owners, the ruling expressly limited its application to the equitable right of subrogation. Ten, 149 Ill. 2d to 323, 173 Fig. Dec. 648, 597 NE2d 622. It offers no authority to apply such a rule in determining the duties of an insurer to defend or indemnify. The question of whether automobile owners have a duty to defend is the specific question here, and it presents a question of law, not equity, to be answered on the basis of the specific language. of the insurance contract, and not of the lease. Ten does not apply to inform this decision. In other words, Ten has nothing to do with this case.

2021 WL 4932296, 2021 Ill. App. LEXIS 593, * 25

In addition, liability policies generally include a provision excluding coverage for claims involving damage to the insured (the owner in this case). own property. These exclusions maintain the clear line between property coverage and liability coverage – a line that the author of the Sheckler decision failed to grasp, or even to recognize. The author of Sheckler The ruling acknowledged, but was not concerned that the ruling ruling directly contradicted the language of the owner’s policy and made no attempt to offer any explanation or justification for causing this contradiction. 2021 Ill. App. LEXIS 593 * 19.

The fundamental misunderstanding of the Sheckler The decision is further underscored by the fact that it is not at all uncommon for commercial property insurance coverage and liability insurance coverage for the same structure to be placed with different insurers under policies. different. This circumstance, which did not exist in the Sheckler case, would render inapplicable the obligations Sheckler This decision attempts to impose, because imposing such obligations on either insurer would be arbitrary and untenable. In the event that different insurers have assumed the obligations of property and liability insurance, it would, if applicable, be the property insurer whose policy, of course, does not contain any defense or indemnity provision, which should give the tenant the status of “implicit co-insured” under Ten Mutual. Thus, in the event that the perpetrator of an offense institutes a guarantee action against the tenant, which of the landlord’s insurers would have towards the tenant the defense and compensation obligations envisaged by Sheckler? Could it be the liability insurer, which has no connection to the tenant and almost certainly has an exclusion in its policy for claims relating to damage to the owner’s property, or does the Sheckler decision contemplate to to insert defense and indemnity obligations into a non-existent political property insurance policy, shaped entirely on so-called “fairness” considerations?

There would have been a much less clumsy and much more intellectually honest path for the author of Sheckler decision to have achieved the practical result that the decision apparently sought to achieve without rewriting the wording of the contract and without talking about defense and indemnification obligations out of thin air. While Illinois courts hold that tenants should also be exempt from collateral liability for subrogation claims by their homeowner insurers (a view that is not universally accepted). See, for example, Emery Waterhouse Company v. Lea, 467 A.2d 986 996-997 (Maine 1983); Firefighter Fund Ins. Co. v. New York Mechanical General, 712 F. Supp. 312 (WDNY 1989); Franzek v. Calspan, 434 NYS, 2d 288 (4th Dept. 1980), then this would have been more properly addressed in the underlying subrogation action. This could have been done by denying Workman’s contribution claim against Sheckler, based on the theory that Sheckler, as a tenant, cannot have any liability to Workman for the contribution if he has no direct liability. to automobile owners under Ten Mutual (the Sheckler the decision does not mention whether Sheckler has ever requested that Workman’s request for contribution in the underlying case be dismissed, and the docket entries in that case reveal that no such request was ever filed) . If, hypothetically, Auto-Owners had obtained a favorable verdict against Workman, Auto-Owners and Workman could then have argued over whether the proportional share of Sheckler’s fault should be taken into account and, if so, whether it was supposed to result in the reduction in the recovery of self-owners.


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