Illinois Insurance - Illinois Appellate Court Permits Liability Insurer To Recover Defense Costs Under A Restitution Theory
Steadfast Insurance Company v. Caremark Rx, Inc., 869 N.E.2d 910 (Ill. App. Ct. 1st Dist. 2007)
Although reaffirming the general rule that an insurer cannot recover defense costs paid pursuant to a reservation of rights, a recent Illinois appellate decision allowed a liability insurer to recover its defense costs when it was
erroneously ordered to provide a defense by a lower court.
Steadfast Insurance Company issued a managed care professional liability policy to Caremark Rx, Inc. Caremark was sued in federal court for breach of fiduciary duty under ERISA and tendered the defense of the federal actions to Steadfast.
Steadfast refused to defend or indemnify Caremark in the federal actions and filed a declaratory judgment lawsuit in state court. On cross-motions for summary judgment, the trial court held that Steadfast had a duty to defend and
ordered Steadfast to pay Caremark’s defense costs. Steadfast paid the defense costs and then filed a timely appeal.
The appellate court reversed and found that Steadfast had no duty to defend or indemnify Caremark in the federal actions. On remand, Steadfast filed a “motion for restitution,” seeking to recover the defense costs it
had been ordered to pay in the underlying federal actions while the appeal was pending. The trial court denied Steadfast’s motion, applying the general rule in Illinois that an insurer defending under a reservation rights
cannot recover the defense costs. See General Agents Ins. Co. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005). Steadfast appealed again.
On appeal the second time, the First District Appellate Court affirmed the general rule that, absent a provision in the policy, an insurer defending under a reservation of rights cannot recover defense costs paid pursuant to a reservation
of rights. However, the First District found that this general rule did not apply to Steadfast because Steadfast did not defend under reservation of rights but, rather, refused to defend and filed a declaratory judgment action. Under
Illinois law, a party who receives a benefit from an erroneous decree or judgment must, after reversal, make restitution. Since Steadfast paid Caremark’s defense cost pursuant to an erroneous court order, the Court stated
that Steadfast had a right to recover the defense costs under a restitution theory.
Although Steadfast had not originally pleaded a count for restitution, the First District remanded the case to allow Steadfast to amend its complaint for declaratory judgment to raise a restitution claim. Under this ruling, an insurance
company filing a declaratory judgment action in Illinois should include a count for restitution in order to recover any defense costs paid in the event of an erroneous order of the court. In addition, this decision provides implicit
authority for including a provision in the policy allowing for recovery of defense costs paid under a reservation of rights.