Illinois Supreme Court Holds Insurer Not Entitled to Recoup Defense Costs
Insurance Law Update
General Agents Ins. Co. of America, Inc. v. Midwest Sporting Goods Co.,
Illinois Supreme Court
In General Agents Ins. Co. of America, Inc. v. Midwest Sporting Goods Co., -- N.E.2d --, 2005 WL 674685 (Ill. March 24, 2005), the Illinois Supreme Court held, as a matter of first impression, that a liability insurer cannot employ a reservation of rights to unilaterally modify its contract and thereby provide for defense cost reimbursement. The court determined that an insurer can only recover defense costs if the insurance contract contains an express provision to that effect.
After Midwest Sporting Goods Co. ("Midwest") was sued for allegedly creating a "public nuisance" by selling guns to "inappropriate purchasers," it tendered the claim to its liability insurer, General Agents Insurance Company of America ("Gainsco"). Gainsco denied coverage. Midwest retendered the claim after an amended complaint was filed against Midwest. Gainsco then agreed to defend Midwest subject to a reservation of rights, including the right to recoup its defense costs in the event it was determined that Gainsco had no duty to defend.
Gainsco subsequently filed a declaratory judgment on its duty to defend. After the court granted Gainsco’s motion for summary judgment, Gainsco moved for entry of judgment in the amount of defense costs it had incurred for defending Midwest. The trial court granted Gainsco’s motion and the appellate court affirmed, relying on Buss v. Superior Court, 16 Cal.4th 35, 939 P.2d 766, 65 Cal. Rptr.2d 366 (1997), Grinnell Mutual Reinsurance Co. v. Shierk, 996 F.Supp. 836 (S.D. Ill. 1998), and Walbrook Ins. Co. v. Goshgarian & Goshgarian, 726 F.Supp. 777, 784 (C.D. Cal. 1989). See General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 328 Ill. App.3d 482, 765 N.E.2d 1152 (2002).
However, on appeal to the Illinois Supreme Court, Midwest argued that the insurance policy pursuant to which Gainsco paid the defense costs did not contain a provision for the recovery of such costs. The court refused to follow Buss and other cases holding that an insurer is entitled to reimbursement of defense costs where the insurer had no duty to defend, the insurer expressly and timely reserved its right to recoup defense costs, and the insured accepted the defense costs without objection.
The court concluded that a reservation of rights letter cannot relieve the insurer of its contractual obligation to provide a defense in the first instance. It further held that a reservation of rights letter does not create a binding contract between the parties.