The Coverage Dispute Is Moving Slower Than the Lawsuit

A delivery company’s driver backs into a pedestrian at a customer’s loading dock, and the pedestrian sues. The company has its own commercial liability policy and is also an additional insured under a policy its subcontractor carries. It notifies both insurers, and each responds that the other should handle the defense. Meanwhile, the deadline to respond to the lawsuit is weeks away, and the lawyer defending the company needs to be paid. What now?

Each Insurer May Be Refusing Something Different

Insurer refusals come in different forms, and each calls for a different response. One insurer may deny coverage entirely, claiming the policy doesn’t apply. Another may accept that its policy applies but argue that it’s excess, meaning it pays only after the other policy is used up. A third may agree to defend under a reservation of rights while demanding that the other insurer share the cost.

The first step is getting each position in writing, with the specific policy provisions the insurer relies on. A refusal based on an exclusion requires a different answer than a dispute over which policy pays first.

The Duty to Defend Is Broad

Under Illinois law, an insurer generally must defend a lawsuit if the complaint’s allegations fall within, or potentially within, the policy’s coverage. The existence of another insurer doesn’t, by itself, excuse that obligation. Illinois courts have also held that an insurer with actual notice of a lawsuit against its insured can owe a defense even without a formal demand.

The Illinois Supreme Court reaffirmed how broad that duty is in Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087: even one potentially covered theory in a complaint can trigger a defense of the whole suit, so an insurer can’t necessarily refuse to defend just because some of the allegations fall outside the policy.

An insurer may still have a legitimate defense: the policy may truly be excess, an exclusion may apply, or the business may not qualify as an insured. For that reason, any response to the insurer should address the specific reason it gave, not just resend the complaint.

Allocation Is the Insurers’ Problem

When two insurers cover the same risk at the same level, the one that pays may be able to recover a share from the other through a claim called equitable contribution. That dispute, however, is between the insurers, and it shouldn’t leave the business without a defense while they sort it out.

A practical request is an interim arrangement, under which one insurer funds the defense now and pursues the other later. The business should confirm in writing who appoints and pays counsel, who approves invoices, and who handles upcoming deadlines. An acceptance letter that commits to nothing concrete doesn’t solve the immediate problem.

Illinois Lets the Policyholder Choose

Illinois gives policyholders a tool most states don’t. Under the targeted tender rule, adopted by the Illinois Supreme Court in John Burns Construction Co. v. Indiana Insurance Co., 189 Ill. 2d 570 (2000), an insured covered by more than one concurrent primary policy can choose which insurer will defend and indemnify it for a particular claim. The targeted insurer generally can’t then seek contribution from the insurer that was deselected.

The rule has limits, however: only the insured can invoke it, not the insurers. In addition, in Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 227 Ill. 2d 102 (2007), the court held that it doesn’t override the requirement that all primary coverage be exhausted before excess policies respond.

The choice can be worth real money. If your own policy carries a $250,000 self-insured retention and a subcontractor’s policy names you as an additional insured with no retention, targeting the subcontractor’s insurer may put the defense on its dime from the first dollar. That works only if you actually qualify, though: many additional insured endorsements cover only liability arising from the subcontractor’s work or require a written contract signed before the work began, and a certificate of insurance doesn’t prove either.

Used well, targeted tender can steer a claim away from a policy with a high deductible, a small remaining limit, or a premium that would rise after a loss. Used carelessly, it can give up coverage that might have been needed if the targeted insurer later refuses to pay. The choice deserves a review of both policies before it’s made.

Keeping the Lawsuit on Schedule

A coverage dispute should never cause a default in the underlying case. The business may need to retain counsel and file a response before the insurers resolve anything.

Legal fees incurred before an insurer receives notice, rates the insurer hasn’t approved, and work done without required consent can all be harder to recover. Engagement letters, invoices, and correspondence explaining why work had to happen immediately will matter later. If one insurer is already defending, replacing its lawyer or committing to a settlement without consulting it can create a new coverage problem.

When an Insurer Simply Refuses

An insurer that owes a defense and refuses to provide one takes real risks under Illinois law. An insurer that neither defends under a reservation of rights nor promptly asks a court to decide coverage can be barred from raising its coverage defenses later. Unreasonable conduct can also expose an insurer to fees and penalties under Section 155 of the Illinois Insurance Code. A focused tender, one that addresses the insurer’s stated reason with the relevant allegations and policy language, often resolves the dispute before it reaches court.

We help businesses address competing insurer positions, pursue defense funding, and assess recovery of legal expenses incurred during coverage disputes. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.