Universal Underwriters v. LKQ Smart Parts
963 N.E.2d 930
Ill. App. Ct.2011Background
- Universal filed a declaratory judgment action seeking to establish it had no duty to defend or indemnify LKQ or Farmers under the policy in connection with a spoliation of evidence claim.
- Gramacki, as independent administrator of Monika Gramacki’s estate, sued Nissan and Farmers for product liability and spoliation, alleging Farmers destroyed the Nissan Pathfinder and impairing evidence for Gramacki’s claims.
- Farmers, through a third-party complaint, alleged LKQ negligently destroyed the Pathfinder, and Nissan also sued LKQ; LKQ sought coverage under Universal’s policy.
- The Nissan Pathfinder was damaged and destroyed while in LKQ’s care, custody, or control, initially at a Wisconsin repair shop and later at LKQ’s salvage yard.
- The policy has an Auto Inventory Physical Damage part covering loss to a covered auto in LKQ’s care, custody or control, and a Garage part with a care, custody or control exclusion for autos; the circuit court held no coverage for either LKQ or Farmers, and LKQ appealed.
- The appellate court ultimately reversed, holding that the Auto Inventory part covers the Gramacki spoliation claim, and that exclusions and choice-of-law issues do not defeat coverage; the case is remanded for entry of summary judgment in LKQ’s favor on the duty to defend and indemnify.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the auto inventory policy part cover the Gramacki spoliation claim? | LKQ: coverage exists under auto inventory part since Nissan Pathfinder was LKQ’s 'covered auto' and Gramacki’s claim arises from that loss. | Universal: spoliation damages are not 'loss' to the vehicle or are intangible; Essex controls. | Yes; auto inventory part covers spoliation claim as 'loss' to a customer’s auto. |
| Does Exclusion O (depreciation or diminished value) defeat coverage for the spoliation claim? | Diminution in value of the underlying product liability claim is a covered consequential damage arising from covered property damage. | Exclusion O bars coverage for depreciation/diminished value, so the spoliation damages are excluded. | Exclusion O applies to bar coverage of the spoliation claim. |
| Is there a Wisconsin conflict-of-laws issue affecting interpretation of the policy? | Wisconsin law should apply if it governs spoliation; potentially no Illinois coverage. | There is no true conflict; Illinois law should apply as the forum; even under Wisconsin law, coverage would be similar. | No substantive conflict; Illinois law applies; policy covers the spoliation claim under Illinois interpretation. |
| What is the proper interpretation of 'loss' and 'resulting loss of use' in the policy with respect to spoliation? | Gramacki’s loss of use and destruction of the Pathfinder fall within 'loss' and are a basis for coverage. | Spoliation damages are to intangible value; Essex limits coverage for such damages. | The damages sought are 'loss' resulting from physical damage to the vehicle; coverage exists. |
| What are the duties to defend and indemnify given the underlying settlement and potential liability? | Universal is liable for defense costs and potentially indemnification for the covered loss once liability is established. | Under controlling authorities, the insurer’s duties attach when there is liability incurred under the underlying claim and the loss falls within policy terms; reasonableness of settlement may be considered on remand. | Universal must defend and indemnify LKQ for covered loss, with remand to determine settlement reasonableness and indemnification amount. |
Key Cases Cited
- Fremont Casualty Insurance Co. v. Ace-Chicago Great Dane Corp., 317 Ill.App.3d 67 (2000) (duty to defend and standard for summary judgment in insurance disputes)
- Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90 (1992) (broad duty to defend where allegations fall within policy coverage)
- Essex Insurance Co. v. Wright, 371 Ill.App.3d 437 (2007) (spoliation damages may be 'intangible' but not necessarily exclude coverage depending on policy language)
- Keeley & Sons, Inc. v. United Fire & Casualty Co., 381 Ill.App.3d 1119 (2008) (care, custody or control exclusion governs spoliation coverage; physical injury to tangible property rule)
- Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill.2d 278 (2001) (definition of property damage; economic losses arising from property damage)
- Penda Corp., 974 F.2d 823 (1992) (duty to defend when underlying allegations trigger policy coverage)