In Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., No., 09-C-7063, 2012 U.S. Dist. LEXIS 66595 (N.D. Ill. May 11, 2012), the court held that a provision in a title insurance policy stating that the insurer was only obligated to defend “stated causes of action alleging . . . matter insured against by this policy” did not relieve the insurer of providing a full defense to a multi-count complaint against its insured that alleged covered and uncovered counts because under Illinois law, an insurer with a duty to defend may not “contract around” its obligation to provide a complete defense to all counts in a complaint alleging a potentially covered claim.

The policy provided, in relevant part, that it insured “loss or damage . . . sustained or incurred by the insured [for] . . . defect in or lien or encumbrance on the title” and related reasons.  When the insured was sued in a lawsuit that alleged both covered and uncovered counts, the insurer agreed to “pay the reasonable and necessary costs of independent counsel” to defend the counts involving the mortgages, but declined to pay to defend the remaining counts. 

According to the court, the key issue in the case was “whether, having admitted a duty to defend [the insured] against one or more counts in the underlying complaints, [the insurer] had a duty under Illinois law to defend against the complaints in their entirety.”  The insurer argued that the general rule in Illinois which obligates an insurer to defend an entire lawsuit if the complaint alleges facts that potentially bring the case within coverage was inapplicable because the policy specified that its defense obligation applied only to specified causes of action.  The court disagreed, reversing an earlier interlocutory holding to the contrary and holding that an insurer cannot “contract around the duty to provide a complete defense when a particular claim gives rise to a potential obligation to indemnify.” 

In so ruling, the Philadelphia Indemnity court observed that the court in Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187 (1976)), which is one of the seminal Illinois duty to defend cases, “made no reference to the policy language” when it held that the duty to defend extends to uncovered claims if the complaint also alleges a potentially covered claim, which “strongly indicates that . . . Illinois courts impose the complete defense rule as a matter of law, turning to the policy language only to determine whether any facts in a complaint bring a case within the scope of coverage.” 

The ruling in Philadelphia Indemnity makes sense.  Allowing an insurer to defend only covered counts in a mixed action would “place upon the insured the burden of demonstrating in advance of the underlying litigation which of the competing theories of recovery against it was applicable for purposes of insurance, thereby frustrating one of the basic purposes of such a clause in the insurance contract[-] protection of the insured from the expenses of litigation.” Aetna Casualty & Surety Co. v. Coronet Insurance Co., 44 Ill. App. 3d 744 (1st Dist. 1976).  In fact, such a dispute was what gave rise to the Philadelphia Indemnity coverage litigation.  See Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., No., 09-C-7063, 2012 U.S. Dist. LEXIS 82751 (N.D. Ill. June 10, 2012).