Xtreme Protection Services, LLC v. Steadfast Insurance Co.
143 N.E.3d 128
Ill. App. Ct.2019Background
- Xtreme Protection Services (insured) was sued in underlying tort action alleging electronic eavesdropping, stalking, harassment, emotional distress, trespass, and seeking substantial compensatory and large punitive damages.
- Xtreme held an "armed security services" policy with Steadfast (insurer) with $1 million limits; the policy excluded coverage for intentional/malicious acts and for punitive damages and contained a cooperation clause.
- Xtreme tendered defense; Steadfast accepted and retained counsel but issued a reservation of rights specifically reserving the right to deny punitive damages (while later waiving other coverage defenses).
- Xtreme objected to insurer-appointed counsel because Steadfast reserved the right to deny punitive damages and sought a declaratory judgment that it could select independent counsel at Steadfast’s expense.
- Trial court granted judgment on the pleadings for Xtreme, finding a conflict of interest given the reservation as to punitive damages and the disproportionate punitive exposure; Steadfast appealed.
- On appeal the court affirmed, holding that where punitive damages form a substantial portion of potential liability and the insurer disclaims punitive coverage, the insured may obtain independent counsel paid by the insurer; Steadfast also failed to show substantial prejudice from any alleged breach of cooperation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a conflict of interest justified Xtreme selecting independent counsel at insurer expense | Reservation of rights as to punitive damages gives Steadfast an incentive to allow facts supporting punitive liability; Xtreme should control defense and be reimbursed for independent counsel | No conflict: Steadfast waived all coverage defenses except punitive damages so no real divergence of interests; insurer may control defense | Held for Xtreme: reservation re punitive damages created a conflict because punitive exposure was substantial and insurer would have less incentive to defend punitive claims vigorously |
| Whether Xtreme forfeited defense rights by refusing insurer-appointed counsel (breach of cooperation) | Xtreme’s refusal was reasonable given reservation of rights and exception applies; no substantial prejudice shown | Xtreme’s instruction to insurer’s counsel to "take no action" breached cooperation clause, prejudicing Steadfast and relieving it of obligations | Held for Xtreme: insurer failed to prove actual, substantial prejudice from Xtreme’s conduct; no forfeiture |
Key Cases Cited
- Gillen v. State Farm Mut. Auto. Ins. Co., 215 Ill. 2d 381 (2005) (standard for judgment on the pleadings)
- General Agents Ins. Co. of Am. v. Midwest Sporting Goods Co., 215 Ill. 2d 146 (2005) (insurer’s duty to defend arises if complaint alleges any potentially covered claim)
- Nandorf, Inc. v. CNA Ins. Cos., 134 Ill. App. 3d 134 (1985) (reservation of rights as to punitive damages can create conflict entitling insured to independent counsel)
- Maryland Cas. Co. v. Peppers, 64 Ill. 2d 187 (1976) (insurer’s interest may diverge when punitive damages are sought but uninsured)
- Mobil Oil Corp. v. Maryland Cas. Co., 288 Ill. App. 3d 743 (1997) (conflict where compensatory likely to exhaust limits but substantial punitive exposure remains)
- M.F.A. Mut. Ins. Co. v. Cheek, 66 Ill. 2d 492 (1977) (insurer must show actual substantial prejudice to avoid obligations for insured’s breach of cooperation)
- Loitz v. Remington Arms Co., 138 Ill. 2d 404 (1990) (purpose and standards for awarding punitive damages)