2018 IL App (4th) 170548
Ill. App. Ct.2018Background
- Plaintiffs (remainder beneficiaries) sued trustee/attorney G. Timothy Leighton and his firm in D.C. Superior Court alleging he unlawfully "decanted" an earlier irrevocable trust into a new trust that (inter alia) added an in terrorem clause, removed a cotrustee requirement, and named Leighton as cotrustee.
- Plaintiffs alleged Leighton kept trust corpus and misinformed them, collected excessive fees, and "willfully" refused to distribute corpus to perpetuate a self-compensation scheme.
- ISBA (insurer) filed a declaratory-judgment action in Illinois state court seeking a determination it had no duty to defend Leighton under his professional liability policy because the underlying complaint alleged intentional/dishonest/fraudulent acts excluded by the policy.
- Leighton moved for judgment on the pleadings arguing the underlying allegations could be based on negligence and therefore the insurer had a duty to defend; ISBA cross-moved to deny the duty to defend.
- The trial court ruled for Leighton, holding the underlying complaint "in certain counts sounds in negligence" so a defense duty existed; ISBA appealed.
- The appellate court reversed, holding the underlying complaint’s allegations (use of phrases like "willfully," "scheme," and allegations of intentional decanting to benefit the trustee) sufficiently alleged intentional misconduct excluded from coverage, so ISBA had no duty to defend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether ISBA has a duty to defend Leighton against the underlying trust claims | ISBA: no duty because the underlying complaint alleges criminal/dishonest/fraudulent/intentional acts excluded by the policy | Leighton: underlying allegations could "potentially" be negligence, triggering a duty to defend | Held: No duty to defend — the complaint unambiguously alleges intentional misconduct excluded by the policy |
| How to construe the policy exclusion for "criminal, dishonest, fraudulent or intentional act or omission" | ISBA: exclusion applies to intentional misconduct causing the alleged harm | Leighton: "intentional" could mean mere intent to act, not intent to cause harm; ambiguity favors defense | Held: "Intentional act or omission" construed to mean intentional misconduct (intent to cause or substantially certain to cause harm) and excludes coverage |
| Whether phrases like "willfully," "scheme," "misinformed" convert claims to intentional acts | ISBA: such language indicates intentional conduct, not negligence | Leighton: such phrases do not foreclose negligent theories; duty to defend exists if any potential for coverage | Held: Such language is the "paradigm of intentional conduct," supporting exclusion rather than a potential negligence theory |
| Standard for resolving duty-to-defend on pleadings | ISBA: exclusion must be clear; insurer bears burden to show exclusion applies | Leighton: ambiguities should be resolved in insured’s favor to require defense | Held: Applying de novo review, the court found the exclusion clearly applies from the face of the underlying complaint and reversed trial court judgment for insured |
Key Cases Cited
- State Farm Fire & Casualty Co. v. Leverton, 314 Ill. App. 3d 1080 (Ill. App. 2000) (intentional-act exclusions apply where insured intended the act and specifically intended to harm a third party)
- Aetna Casualty & Surety Co. v. Freyer, 89 Ill. App. 3d 617 (Ill. App. 1980) ("intent" for exclusion denotes desire to cause the consequences or belief that consequences are substantially certain)
- Wilson v. Pekin Insurance Co., 237 Ill. 2d 446 (Ill. 2010) (insurer owes duty to defend if underlying allegations fall within or potentially within policy coverage)
- Steadfast Insurance Co. v. Caremark Rx, Inc., 359 Ill. App. 3d 749 (Ill. App. 2005) (terms like "mislead," "scheme," "intentionally" are paradigmatic of intentional, not negligent, conduct)