Record-A-Hit v. National Fire Insurance

• Court: Appellate Court of Illinois
• Decided: November 13, 2007
• Docket: 1-07-0684 Rel
• Status: Published

Opinion

SECOND DIVISION FILED: November 13, 2007

No. 1-07-0684

RECORD-A-HIT, INC., ) APPEAL FROM THE ) CIRCUIT COURT OF Plaintiff-Appellant, ) COOK COUNTY ) v. ) ) NATIONAL FIRE INSURANCE COMPANY OF ) HARTFORD, TRANSCONTINENTAL INSURANCE ) COMPANY, VALLEY FORGE INSURANCE COMPANY ) and TRI-STATE HOSE & FITTING, INC., ) HONORABLE ) STUART PALMER, Defendants-Appellees. ) JUDGE PRESIDING.

PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:

The plaintiff, Record-A-Hit, Inc., appeals from an order of

the circuit court, dismissing its declaratory judgment action for

failure to state a claim upon which relief might be granted. For

the reasons which follow, we reverse the judgment of the circuit

court and remand this matter for further proceedings.

The plaintiff filed the instant action seeking a judicial

declaration that National Fire Insurance Company of Hartford,

Transcontinental Insurance Company and Valley Forge Insurance

Company (hereinafter referred to collectively as the "Insurance

Company Defendants") owed a duty to defend and indemnify Tri-State

Hose and Fitting, Inc. (Tri-State) with respect to a class-action No. 1-07-0684

complaint that the plaintiff filed against Tri-State in the Circuit

Court of Cook County, asserting claims for violations of the

Telephone Consumer Protection Act (47 U.S.C. §227 (2000)) and the

Illinois Consumer Fraud and Deceptive Business Practices Act (815

ILCS 505/1 et seq. (West 2006)), and a claim for conversion

(hereinafter referred to as the "underlying action"). The

Insurance Company Defendants filed a hybrid motion to dismiss

brought pursuant to both section 2-615 and 2-619 of the Code of

Civil Procedure (Code) (735 ILCS 5/2-615, 619 (West 2006)). For

their section 2-615 grounds, they argued that the plaintiff’s

complaint constitutes an impermissible direct action against

liability insurance carriers and that it fails to allege the

requisite elements of a declaratory judgment action. For their

section 2-619 grounds, the Insurance Company Defendants asserted

that the plaintiff’s action should be dismissed pursuant to section

2-619(a)(3) (735 ILCS 5/2-619(a)(3)(West 2006)) by reason of

"Another Action Pending between the Same Parties for the Same

Cause" and pursuant to section 2-619(a)(9) (735 ILCS 5/2-

619(a)(9)(West 2006)) because the plaintiff lacks standing to

maintain the action. The circuit court granted the motion and

dismissed the instant action "pursuant to 735 ILCS 5/2-615." This

appeal followed.

Because this matter was disposed of at the trial level

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pursuant to section 2-615 of the Code, the only question before

this court is whether the plaintiff’s complaint states a cause of

action upon which relief might be granted. Burdinie v. Village of

Glendale Heights, 139 Ill. 2d 501, 504, 565 N.E.2d 654 (1990). The

issue presented is one of law; consequently, our review is de novo.

T & S Signs, Inc. v. Village of Wadsworth, 261 Ill. App. 3d 1080,

1084, 634 N.E.2d 306 (1994).

The plaintiff’s complaint alleges that it filed the underlying

action against Tri-State premised upon the sending of "junk

fax[es]" and sought, among other relief, recovery for property

damage. Attached to the complaint is a copy of the plaintiff's

complaint in the underlying action and copies of the insurance

policies issued by the Insurance Company Defendants which,

according to the complaint, provide for the defense and

indemnification of Tri-State for property damage and advertising

injury claims. The complaint asserts that Tri-State tendered the

defense of the underlying action to the Insurance Company

Defendants, and that they have refused to defend or indemnify Tri-

State with respect to that action. According to the complaint,

Tri-State has not commenced a declaratory judgment action with

respect to its rights under the policies of insurance issued by the

Insurance Company Defendants, and the plaintiff has not been named

in any action seeking a declaration of Tri-State’s rights under the

3 No. 1-07-0684

subject policies.

The Insurance Company Defendants make no claim in their brief

before this court that the plaintiff's action constitutes an

impermissible direct action against an insurance carrier. They do

argue, as they did before the circuit court, that the plaintiff’s

complaint is deficient because it fails to allege that they have

not filed a declaratory judgment action to determine coverage under

the subject policies. Based upon the following analysis, we reject

the argument and conclude that the plaintiff’s complaint alleges

sufficient facts to support an action for a declaratory judgment.

"The essential elements of a declaratory judgment action are:

(1) a plaintiff with a legal tangible interest; (2) a defendant

having an opposing interest; and (3) an actual controversy between

the parties concerning such interests." Beahringer v. Page, 204

Ill. 2d 363, 372, 789 N.E.2d 1216 (2003). In the context of a

declaratory judgment action arising from an insurance coverage

dispute, an actual controversy exists when "all determinative facts

giving rise to the potential policy coverage dispute have occurred

prior to the initial demand upon the insurance company" and the

insurer "is called upon to either pay or defend a claim on behalf

of its insured under the terms of the policy in question."

Gibraltar Insurance Co. v. Varkalis, 46 Ill. 2d 481, 485, 263

N.E.2d 823 (1970); see also Flashner Medical Partnership v.

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Marketing Management, Inc., 189 Ill. App. 3d 45, 50, 545 N.E.2d 177

(1989). A tort-claimant in an underlying action has a substantial

right in the viability of a policy of insurance that might be the

source of funds available to satisfy the tort claim, and such a

claimant possesses rights in the insurance contract which vest at

the time of the occurrence giving rise to the underlying claim.

Chandler v. Doherty, 299 Ill. App. 3d 797, 805, 702 N.E.2d 634

(1998); Society of Mount Carmel v. National Ben Franklin Insurance

Co. of Ill.; 268 Ill. App. 3d 655, 661, 643 N.E.2d 1280 (1994);

Flashner Medical Partnership, 189 Ill. App. 3d at 54.

In this case, the plaintiff has alleged: its status as a tort-

claimant in the underlying action; that the Insurance Company

Defendants have issued policies of liability insurance which afford

Tri-State coverage for the claims asserted in the underlying action

and which obligate the Insurance Company Defendants to undertake

Tri-State’s defense; and that the Insurance Company Defendants have

rejected Tri-State’s tender of its defense in the underlying action

and refuse to defend or indemnify Tri-State with respect the claims

asserted in that action. These allegations, when taken as true for

the purposes of a section 2-615 motion (see Ziemba v. Mierzwa, 142

Ill. 2d 42, 47, 566 N.E.2d 1365 (1991)), establish the legal

interests of the plaintiff and the defendants in the viability of

the subject insurance policies and an actual controversy between

5 No. 1-07-0684

the parties concerning such interests. See Reagor v. Travelers

Insurance Co., 92 Ill. App. 3d 99, 102-03, 415 N.E.2d 512 (1980).

Further, the plaintiff’s action is in no way premature as the

complaint alleges that the Insurance Company Defendants have

rejected Tri-State’s tender of the defense of the underlying action

and have declined coverage under their respective policies.

Nevertheless, the Insurance Company Defendants, relying upon the

holding in Dial Corp. v. Marine Office of America, 318 Ill. App. 3d

1056, 743 N.E.2d 621 (2001) (hereinafter referred to as Dial),

argue that the plaintiff has failed to allege an essential element

of a declaratory judgment action brought by a tort-claimant;

namely, that the insurers have not commenced a declaratory judgment

action to resolve the coverage dispute. We, however, find that no

such allegation is necessary in order to adequately plead a

declaratory judgment action.

In Reagor, the court held that, "[i]n order to maintain a

declaratory judgment action, there must be an actual controversy

between parties capable of being affected by a determination of the

controversy." Reagor, 92 Ill. App. 3d at 102. Under circumstances

where the defendant-insurer challenged the tort-claimants’ standing

to seek a declaratory judgment as to the coverage afforded to the

tortfeasor under the defendant’s policy of insurance, the Reagor

Court concluded that the tort-claimants acquired rights under the

6 No. 1-07-0684

tortfeasor’s policy of insurance at the time of the occurrence

giving rise to their underlying action and that an actual

controversy concerning coverage under the policy arose between the

tort-claimants and the defendant-insurer at the time that the

defendant-insurer withdrew its representation of the tortfeasor in

the underlying action. Reagor, 92 Ill. App. 3d at 102-03. The

Reagor Court concluded that there was a sufficient relationship

between the tort-claimants and the defendant-insurer to enable the

tort-claimants to litigate the question of coverage under the

policy. Reagor, 92 Ill. App. 3d at 102-03. Although it appears

that at the time that the tort-claimants filed the declaratory

judgment action in Reagor neither the tortfeasor nor the defendant-

insurer had filed an action to resolve the coverage issue (see

Reagor, 92 Ill. App. 3d at 101-02), the Reagor Court never held

that such a circumstance is a necessary predicate to a tort-

claimant’s right to initiate a declaratory judgment action (see

Reagor, 92 Ill. App. 3d at 102-03).

In Dial, the court was again faced with a circumstance in

which a tort-claimant brought a declaratory judgment action to

determine the tortfeasor’s coverage under an insurance policy which

might be the source of funds to satisfy the underlying claim.

Dial, 318 Ill. App. 3d at 1058. Although the Dial Court relied

upon the reasoning in Reagor and concluded that the tort-claimant

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had a right to bring the action, the court specifically limited the

holding in Reagor to those cases where "neither the insured nor the

insurer has filed a declaratory judgment action to determine the

scope of the insurer’s policy." Dial, 318 Ill. App. 3d at 1062-63.

In support of its restrictive application of the holding in Reagor,

the Dial Court relied upon a sentence from the supreme court’s

decision in Zurich Insurance Co. v. Baxter International, Inc., 173

Ill. 2d 235, 670 N.E.2d 664 (1996) which provides in part that the

interests of underlying tort-claimants in how insurance coverage

issues are resolved "is best protected by having the claimants

participate directly in litigation between the insurance carrier

and the insured, rather than by allowing the claimants to sue the

carrier independently." Zurich Insurance Co., 173 Ill. 2d at 246.

We, however, do not believe that this isolated passage from the

decision in Zurich, when viewed in context, supports the Dial

Court’s limitation on the holding in Reagor.

The issue before the supreme court in Zurich was whether the

circuit court abused its discretion when it stayed Zurich Insurance

Company’s Illinois action seeking a judicial declaration of rights

under various insurance policies pending the outcome of a second

declaratory judgment action involving the same issues filed by the

insured in California. Zurich Insurance Co., 173 Ill. 2d at 237-

38. The matter had come before the circuit court pursuant to a

8 No. 1-07-0684

section 2-619(a)(3) motion (see Zurich Insurance Co., 173 Ill. 2d

at 237), which permits a defendant to move for a dismissal or stay

whenever there is "another action pending between the same parties

for the same cause" (735 ILCS 5/2-619(a)(3) (West 2006)). The

parties to the California action were the insurers and the insured.

The Illinois action included not only those parties, but also the

claimants from the underlying tort actions that gave rise to the

insurance coverage dispute. Zurich Insurance Co., 173 Ill. 2d at

246. The supreme court affirmed the appellate court’s reversal of

the stay entered by the circuit court, finding that the California

action was less comprehensive than the Illinois action. Zurich

Insurance Co., 173 Ill. 2d at 246-47. The court’s holding rests in

large measure upon the fact that, in Illinois, claimants in

underlying tort actions are necessary parties that must be joined

in any declaratory judgment action brought to resolve insurance

coverage disputes involving policies that might be the source of

funds to satisfy their claims; whereas, in California, the

underlying tort-claimants are not necessary parties to any such

declaratory judgment action between the insured-tortfeasor and the

insurer. Zurich Insurance Co., 173 Ill. 2d at 245. It was in this

factual context that the supreme court acknowledged the argument

that the interests of tort-claimants in how insurance coverage

issues are resolved is best served by having those claimants

9 No. 1-07-0684

participate directly in litigation between the insurance carrier

and the insured-tortfeasor. Zurich Insurance Co., 173 Ill. 2d at

246. This passage from the opinion in Zurich is addressing the

comprehensive nature of the Illinois procedure as compared to the

procedure employed in California; it has nothing whatever to do

with the allegations necessary to adequately plead a declaratory

judgment action.

Additionally, we note that the portion of the Dial opinion

which the Insurance Company Defendants relied upon in seeking the

dismissal of the instant action pursuant to section 2-615 of the

Code addresses the question of standing (see Dial, 318 Ill. App. 3d

at 1062), not the question of whether Dial Corporation had

adequately pled a declaratory judgment action. Lack of standing is

an affirmative defense which is raised in a section 2-619(a)(9)

motion, not a motion to dismiss brought pursuant to section 2-615

of the Code.

In Pratt v. Protective Insurance Co., 250 Ill. App. 3d 612,

621 N.E.2d 187 (1993), the court relied upon the reasoning in

Reagor when it concluded that claimants in tort actions "may always

bring a declaratory judgment action to determine a tortfeasor’s

coverage under an insurance policy." Pratt, 250 Ill. App. 3d at

618. We believe that, in cases where an actual controversy exists

between a tort-claimant and the tortfeasor’s insurance carrier, the

10 No. 1-07-0684

holding in Pratt represents an accurate statement of the law

without the limitation imposed by the Dial court. Whether a prior

filed action involving the same issues instituted by either the

insured-tortfeasor or the insurer might form the basis of a

dismissal or stay of the claimant’s action is a matter to be

resolved pursuant to section 2-619(a)(3) of the Code, not section

2-615.

In summary, we hold that a tort-claimant need not allege that

neither the insured-tortfeasor nor the insurance carrier has filed

a declaratory judgment action in order to adequately plead a

declaratory judgment action to determine the scope of coverage

afforded to the tortfeasor under a policy of insurance. For this

reason, we find that the circuit court erred in dismissing the

plaintiff’s action pursuant to section 2-615 of the Code. We

reverse the judgment of the circuit court and remand this cause for

further proceedings.

Reversed and remanded.

SOUTH and KARNEZIS, JJ., concur.