2016 IL App (4th) 150550
Ill. App. Ct.2016Background
- RTA sued the City of Genoa alleging a tax "kickback" scheme with a retailer (Boncosky/PetroLiance) that improperly claimed sales situs in Genoa, depriving RTA of sales tax revenue.
- RTA pleaded two counts: (1) statutory remedies under 65 ILCS 5/8-11-21 for lost tax revenue and related statutory relief; (2) equitable relief under Hartney theory seeking damages for taxes RTA claims should have been collected.
- Illinois Municipal League Risk Management Association (the insurer/Association) filed a declaratory-judgment action seeking a ruling it had no duty to defend or indemnify the City in RTA’s suit.
- The Association moved for judgment on the pleadings, arguing the underlying complaint did not allege an insured "loss" (alleged remedy is disgorgement/uninsurable restitution or fines) and that policy Exclusion 12 bars coverage for issuance/collection/management/repayment of taxes.
- The trial court granted judgment for the Association, concluding RTA sought disgorgement and that Exclusion 12 applied; the City appealed.
Issues
| Issue | Plaintiff's Argument (Association) | Defendant's Argument (City) | Held |
|---|---|---|---|
| Whether the underlying complaint alleges a covered "loss" under the policy | The complaint seeks disgorgement/restoration of ill-gotten tax receipts or statutory penalties, which are uninsurable and not a "loss" under the policy | RTA seeks compensatory damages for taxes never collected on sales that should have benefitted RTA; City would suffer a loss if required to pay those amounts | Court: Complaint potentially alleges a covered loss (possibility of recovery is enough); underlying counts seek taxes never collected, not restitution of City-held funds, so duty to defend exists |
| Whether policy Exclusion 12 (issuance/collection/management/repayment of taxes) bars coverage | Exclusion 12 applies because dispute concerns collection/repayment of tax proceeds | Exclusion 12 does not apply because RTA seeks taxes never collected by anyone (Company misreported situs); City did not issue/collect/manage or repay the taxes at issue | Court: Exclusion 12 does not apply on these pleadings because the City did not issue/collect/manage or repay the contested tax proceeds |
| Whether statutory penalties under 65 ILCS 5/8-11-21 make the claim uninsurable as fines/penalties | Statutory remedies/penalties could be fines or penalties and thus excluded from "loss" | City did not press this point; parties did not fully litigate whether statutory penalties are noncovered fines | Court: Declined to decide whether statutory penalties constitute noncovered fines/penalties because resolution not necessary to ruling |
| Standard for insurer's duty to defend given complaint allegations | Association argued complaint does not bring claim within potential indemnity coverage | City argued complaint must be read liberally to find potential coverage | Court: Applied established rule that duty to defend is determined by complaint allegations and is broad — possibility of coverage suffices; reversed trial court and remanded |
Key Cases Cited
- Zurich Ins. Co. v. Raymark Indus., 118 Ill. 2d 23 (explains duty to defend broader than duty to indemnify)
- Pekin Ins. Co. v. Wilson, 237 Ill. 2d 446 (coverage should not turn on plaintiff’s pleading artifice)
- Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (equitable theory regarding situs of sales and tax obligations)
- Precision Dose, Inc. v. Pekin Ins. Co., 968 N.E.2d 664 (appellate decision recognizing that a complaint need only present a possibility of recovery to trigger duty to defend)