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How Insurers Can Avoid Estoppel in Insurance Coverage Cases

How Insurers Can Avoid Estoppel in Insurance Coverage Cases

In Illinois insurance coverage actions, an insurer can be estopped from asserting any policy defenses to coverage if the insurance company fails to take proper action. The general rule of estoppel provides that an insurer taking the position that a complaint potentially alleging coverage under a policy that includes a duty to defend may not simply refuse to defend the insured by declaring it not to be covered under the policy. Rather, the insurer has two options: (1) defend the suit under a reservation of rights or (2) seek a declaratory judgment that coverage does not exist. If the insurer fails to take either of these steps and is later found to have wrongfully denied coverage, the insurer is estopped from raising policy defenses to coverage. Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127, 150 (1999).

The estoppel doctrine has deep roots in Illinois jurisprudence. It arose out of the recognition that an insurer’s duty to defend under a liability insurance policy is so fundamental an obligation that a breach of that duty constitutes a repudiation of the contract. Although the doctrine also has roots in the principle of equitable estoppel, a review of the case law reveals that it has since developed into a distinct doctrine that stands on its own. Id. at 151.

The doctrine of estoppel applies only where an insurer has breached its duty to defend. Therefore, a court inquires whether the insurer had a duty to defend and whether it breached that duty. Application of the estoppel doctrine is not appropriate if the insurer had no duty to defend or if the insurer’s duty to defend was not properly triggered. These circumstances include where the insurer was given no opportunity to defend; where there was no insurance policy in existence; and where, when the policy and the compliant are compared, there clearly was no coverage or potential for coverage. Id.

Once the insurer has breached its duty to defend, however, the estoppel doctrine has broad application and operates to bar the insurer from raising policy defenses to coverage. This would include those defenses that may have been successful had the insurer not breached its duty to defend. Id. at 152.

It is very important under Illinois insurance coverage law for insurers not to refuse to defend an insured when the insurer believes there is no coverage. Otherwise, the insurer could later be estopped from any policy defenses to coverage. If there is no insurance coverage for a claim, then the insurer must either defend under a reservation of rights or deny coverage and file a declaratory judgment action to avoid being estopped from asserting policy defenses to insurance coverage.

Insurance carriers and their litigation defense attorneys must be mindful of estoppel and plan their defense strategies accordingly. For more information on this and other topics related to insurance defense, contact Kelly Purkey at McKenna Storer.

Categories Insurance Litigation Defense

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