Court Rewrites Insurance Policy To Create Defense Obligation In Favor Of "Implied Coinsured" Tenant

• Published date: 07 January 2022
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: Cozen O'Connor
• Author: Mr Daniel Harrington

Sheckler v. Auto-Owners Insurance Company, 2021 WL 493226, 2021 Ill. App. LEXIS 593 (Oct. 23, 2021), a decision of the Appellate Court of Illinois, Third Judicial District, concluded that principles of equity justified rewriting the liability coverage in a landlord's insurance policy. The policy specifically identified only the landlord as an 'insured' entitled to defense and indemnity but the court determined it should also extend a defense and indemnity obligation to tenants whenever someone other than the landlord 'sues the [tenant] to recover for fire damage to the [landlord's] structure.' 2021 WL 493226, 2021 Ill. App. LEXIS 593, *19-20. Of the three justices on the Sheckler panel, one dissented and another concurred only in the result, meaning that the reasoning of the Sheckler decision is only that of a single jurist.

The Sheckler case arose in the context of a subrogation claim by Auto-Owners, the landlord's insurer, against a contractor (aptly named Workman) for Workman's alleged role in causing a gas explosion and fire at the insured premises, a single family home leased to Sheckler. The circumstances suggest that Sheckler potentially bore substantial responsibility for the fire. However, Auto-Owners chose not to sue Sheckler directly, acknowledging that the 'implied coinsured' doctrine adopted in Dix Mutual Insurance Co. v. LaFramboise, 149 Ill. 2nd 314, 597 N.E. 2d 622 (Ill. 1992) protected Sheckler from direct liability to Auto-Owners. Predictably, Workman filed a third-party claim seeking contribution from Sheckler. Sheckler filed a separate declaratory judgment action against Auto-Owners, arguing that Sheckler was entitled to defense and indemnity under Auto-Owners' liability coverage because Sheckler was, ostensibly, a 'coinsured' under the Auto-Owners policy.

The trial court in the declaratory judgment action entered summary judgment in favor of Auto-Owners. While the appeal of that ruling was pending, |a jury in the underlying subrogation action returned a verdict in favor of Workman. Thus, all that remained at stake in the appeal of the declaratory judgment action was whether Auto-Owners was obligated to reimburse Sheckler's defense costs. Epitomizing the bromide that 'bad cases make bad law,' the appellate court's decision reversed the trial court and held that Auto-Owners had been obligated to provide Sheckler with a defense in the underlying subrogation lawsuit.

In reaching its conclusion, the Sheckler decision purported to rely upon...