U.S. Court of Appeals Finds That Insurance Policy Provided for a Defense When a Third-Party Claim Arose Against the Insured

The United States Court of Appeals for the Seventh Circuit in Chicago has affirmed in part and reversed in part the district court’s decision regarding a third-party lawsuit.

Sam Chee was driving with his wife, Toni Chee, in August 2010 when their car slammed into a tree. Toni was seriously injured and taken to a hospital where she died within a week. The estate of Toni Chee filed two lawsuits. One was against Sam Chee for negligent driving and another was against the hospital and the attending physicians claiming medical negligence was a cause of Toni’s death.

The defendants in the medical malpractice claim filed a third-party action against Sam Chee, seeking contribution or other compensation from him should the medical defendants be held liable to the estate.

State Farm Mutual Automobile Insurance Co. was defending Sam Chee’s interests in both lawsuits. State Farm’s policy promised indemnity coverage of $250,000 per person (and $500,000 total) for automobile accidents.

The Chees had an excess insurance policy with a limit of $5 million that was issued by Cincinnati Insurance Co. Cincinnati denied Chee’s request for a defense and indemnity. Cincinnati filed suit, seeking declaratory judgment that its insurance policy did not apply. The U.S. District Court found in favor of Sam Chee on this coverage issue. Cincinnati appealed.

Cincinnati, on appeal, argued that the operative policy of insurance contained a clause requiring timely notice to it for claims to be covered. The policy required that Cincinnati be notified as soon as practicable of an occurrence that may result in a lawsuit of claim.

The incident underlying this matter occurred in August 2010, but Chee did not notify Cincinnati until 26 months later, though Toni’s estate alerted Cincinnati 16 months after the crash incident.

The appeals panel stated that 16 months is not remotely as soon as practicable after Toni’s death. However, the panel noted that the notification requirement was found in a sub-paragraph in a longer provision that specifies the consequences of noncompliance with a list of duties.

In that paragraph, the policy provided that Cincinnati had no duty to provide coverage under the policy if the insured’s failure to comply with the following duties is prejudicial. The panel stated that Cincinnati had failed to identify any concrete prejudice and therefore, found that the delay did not affect Cincinnati’s duties.

Next, Cincinnati argued that it issued an excess policy and State Farm was still defending Chee. Cincinnati maintained that it was entitled not to defend Chee until State Farm wrote a check paying its portion. The panel disagreed. The court of appeals stated that the policy required that the Chees carry another insurance policy of at least $250,000 per person and $500,000 per occurrence coverage, which they did with the State Farm policy.

The appeals panel concluded that the insurance policy did not excuse Cincinnati from supplying a defense or from paying any liability in excess of the amount of State Farm’s limits.

Cincinnati argued that this policy did not apply because the Chees were the insureds. An exclusion in the policy provided that the insurance did not apply to any bodily injury or personal injury to any insured.

However, the exclusion has an exception that is triggered when a third-party acquires a right of contribution against the insured or any relative. The panel stated that because the hospital and some physicians were seeking contribution against Sam Chee, this exception overrode the exclusion.

Finally, the court of appeals concluded that Cincinnati’s insurance covered the second lawsuit (medical negligence claim) where there was a third-party claim against Sam Chee and not the first lawsuit where the sole claim was made by Toni’s estate against Sam.

Cincinnati Insurance Co. v. Estate of Toni Chee, et al., No. 15-3243, U.S. 7^th Cir. Court of Appeals (June 13, 2016).

Kreisman Law Offices has been handling wrongful death cases, medical malpractice lawsuits, catastrophic injury cases, automobile crash cases, truck accident cases, motorcycle injury cases, bicycle injury cases and nursing home abuse cases for individuals and families who have been injured or killed by the negligence of another for more than 40 years, in and around Chicago, Cook County and its surrounding areas, including Calumet City, Hoffman Estates, Hillside, Romeoville, Schaumburg, Schiller Park, Elmhurst, Glenview, Glen Ellyn, Orland Park, Elmwood Park, Northfield, Northbrook, Highland Park, Gurnee, Round Lake Beach, Barrington and Chicago Heights, Ill.