The trial court found in favor of Illinois Tool and the insurers appealed the decision.

Category of claim controls

The Illinois Appellate Court reviewed the relevant state law and said that because the duty to defend is broader than the duty to indemnify, an insurer’s refusal to defend an insured is justified only if it’s clear from the face of the underlying complaint that the allegations fail to state facts that bring the cause within or potentially within coverage. When the underlying complaint states claims within or potentially within the policy’s coverage, the insurer has a duty to defend—even if the allegations are “groundless, false or fraudulent.”

The court noted that Illinois Tool was unlikely to actually be found liable in the underlying suits; however, the question was whether the alleged facts in the toxic tort cases, if true, would potentially bring the claims within coverage. Under that standard, the court said, it’s clear that the insurers generally have a duty to defend.

The court also explained that the insurers’ duty to defend in this case depends on the category of the underlying suit. The court divided the claims into the following four categories, based on the allegations in the complaints.

• Direct liability with exposure dates during a policy period. In this category, the court held, the insurers clearly have a duty to defend the cases, even if the allegations are, in fact, groundless. The complaint, on its face, presents a claim potentially within the insurance policy’s coverage. Therefore, the insurers have the burden of defending Illinois Tool and raising the affirmative defense that the company was not in the business of manufacturing or distributing welding products before 1993 to prove that the company should not be liable for any injuries.
• Direct liability with unstated injury or exposure dates. In this category, the insurers also have a duty to defend under Illinois law. The court found that the “bare allegations of the underlying complaints” leave open the possibility that the injuries occurred during the policy periods, which would trigger coverage. The court explained that the insurers’ duty to defend this category of cases remains until the “factual ambiguities in the underlying complaints” are resolved in favor of the insurers.
• Pure successor-in-interest claims. In this group of cases, the underlying complaint claims that Illinois Tool is liable for the conduct of another company that was acquired after the policies expired. Illinois Tool conceded that it was not entitled to a defense in this category of cases, and the court agreed.
• A combination of direct liability and successor-in-interest claims. In these cases, because there is a possibility that Illinois Tool could be found liable for direct injuries and the loss could be covered, the insurers have a duty to defend. Under Illinois law, the court pointed out, because the insurers are required to provide a defense for the direct claims against Illinois Tool they’re also required to provide a defense for the claims based on successor liability.

As this case points out, the duty to defend is “litigation insurance” that protects an insured from the expense of defending suits brought against it. Illinois Tool probably should not have been named as a defendant in many of the underlying toxic tort cases. But the company was insured against being wrongly sued and the insurers are responsible for defending Illinois Tool, however groundless the claims.

When you review your policies with your insurer or broker, be sure you understand the coverage you have and the limits, if any, on your carrier’s duty to defend you as well as the law of the state that governs the insurance contract.