Sentry Insurance v. Continental Casualty Co.

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Appellate Court Date: 2017.05.25
16:29:41 -05'00'
Sentry Insurance v. Continental Casualty Co., 2017 IL App (1st) 161785
Appellate Court SENTRY INSURANCE, a Mutual Company, Plaintiff and
Caption Counterdefendant, v. CONTINENTAL CASUALTY COMPANY;
NORTHWESTERN MEDICAL FACULTY FOUNDATION;
THEODORE FRANK; NICHOLAS HARRIS; JOE DOES 1-59;
JANE DOES 1-50; JOSEPH DOE; JAMES DOES 1-2; JANE DOE;
JAMES ANONYMOUS; JOHN ANONYMOUS; and JEFFREY
DOE, Defendants (Continental Casualty Company, Defendant and
Counterplaintiff-Appellant; Northwestern Medical Faculty
Foundation, Defendant and Counterdefendant-Appellee).
District & No. First District, Fifth Division
Docket No. 1-16-1785
Filed March 24, 2017
Decision Under Appeal from the Circuit Court of Cook County, No. 14-CH-16745; the
Review Hon. Kathleen Pantle, Judge, presiding.
Judgment Affirmed.
Counsel on Karen W. Howard and Dawn Gonzalez, of Colliau, Carluccio, Keener,
Appeal Morrow, Peterson & Parsons, of Chicago, for appellant.
Jill B. Berkeley, Seth D. Lamden, and Andrew G. May, of Neal,
Gerber & Eisenberg LLP, of Chicago, for appellee.
Panel PRESIDING JUSTICE GORDON delivered the judgment of the
court, with opinion.
Justices Hall and Lampkin concurred in the judgment and opinion.
OPINION
¶1 The instant interlocutory appeal concerns the trial court’s grant of a stay on the issue of
whether Continental Casualty Company (Continental) owes a duty to indemnify Northwestern
Medical Faculty Foundation (the Foundation) for any liability the Foundation incurs as a result
of a number of lawsuits filed against it based on the failure of the Foundation’s cryogenic
tanks, which had held semen and testicular tissue specimens that were rendered unusable.
Continental argues that the trial court erred in granting the stay because interpreting the two
applicable exclusions to insurance coverage would not have involved the determination of an
ultimate fact in the underlying litigation. Alternatively, Continental argues that if the trial court
stayed the analysis concerning the applicability of the policy’s exclusions, it should have also
stayed the litigation concerning whether there was a duty to defend the Foundation under the
policy. Continental also argues in the alternative that the trial court should have, at a minimum,
determined coverage issues concerning two lawsuits that had already been settled. For the
reasons that follow, we affirm.
¶2 BACKGROUND
¶3 On October 16, 2014, Sentry Insurance 1 (Sentry) filed a complaint for declaratory
judgment against the Foundation and Continental, alleging that Sentry had issued a
commercial general liability insurance policy to the Foundation and that the Foundation
claimed that Sentry owed it a duty to defend and indemnify for approximately 65 lawsuits in
which the Foundation had been named as a defendant (the underlying lawsuits) and which had
been consolidated for pretrial activities. Continental was named in the complaint as the
Foundation’s excess insurer. Sentry’s complaint alleged that its policy did not provide
coverage for the claims alleged against the Foundation and sought a declaratory judgment that
it owed no duty to defend or indemnify the Foundation and reimbursement of the amount spent
thus far in defending the underlying lawsuits.
¶4 According to Sentry’s complaint, the Foundation owned and operated a cryopreservation
and storage tank for semen and testicular tissue; certain Foundation patients, including the
plaintiffs in the underlying lawsuits (the underlying plaintiffs), provided semen or testicular
tissue to the Foundation for storage and safekeeping; and the Foundation received storage fees
for the cryopreservation of the semen and testicular tissue from the underlying plaintiffs.
Certain patients who had stored semen or testicular tissue with the Foundation between April
and June 2012, including the underlying plaintiffs, alleged that their samples had thawed and
were irreversibly damaged due to the failure of the Foundation’s cryopreservation tank. The
underlying plaintiffs accordingly filed the underlying lawsuits against the Foundation and
1
Sentry is not a party to the instant appeal, as it has settled its disputes with the Foundation.
However, its pleadings and the motions concerning Sentry are still set forth in our statement of facts, as
they are interrelated with the claims made by Continental.
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Northwestern Memorial Hospital (the Hospital), seeking damages relating to the allegedly
damaged semen and testicular tissue.
¶5 According to Sentry’s complaint, the Foundation admitted in the underlying lawsuits that it
owned and operated the cryopreservation tank for semen and testicular tissue, that certain
patients provided semen for storage and safekeeping with the Foundation, that the Foundation
accepted the semen supplied by certain patients for safekeeping, and that the Foundation
received storage fees for cryopreservation of the semen. Additionally, the Hospital denied in
the underlying lawsuits that it owned, operated, managed, or controlled the cryopreservation
tank for semen and testicular tissue; that certain patients provided semen for storage and
safekeeping with the Hospital; that the Hospital accepted the semen supplied by certain
patients for safekeeping; and that the Hospital received storage fees for cryopreservation of the
semen.
¶6 Sentry’s complaint alleges that the Foundation tendered the underlying lawsuits to Sentry,
seeking defense and indemnity pursuant to the Foundation’s insurance policy with Sentry, and
that Sentry accepted the Foundation’s tender of the defense under a reservation of rights.
¶7 According to Sentry’s complaint, John Anonymous,2 one of the underlying plaintiffs, filed
a motion for summary judgment against the Foundation, contending that the Foundation was
liable to him under a bailment theory. Sentry alleged that in order to prevail on a bailment
claim, it was necessary to establish (1) an express or implied agreement to create a bailment,
(2) delivery of the property in good condition, (3) the bailee’s acceptance of the property, and
(4) the bailee’s failure to return the property or the bailee’s redelivery of the property in a
damaged condition. Sentry’s complaint alleged that on March 12, 2014, the trial court in the
consolidated underlying lawsuits entered summary judgment in favor of John Anonymous
“relative to elements (1), (3) and (4), thereby establishing that a bailment was created and that
[the Foundation] had exclusive possession of the specimens.”
¶8 Sentry’s complaint set forth 15 “claims,” each serving as a basis for exclusion under its
policy, and requested a declaration that Sentry had no obligation to defend or indemnify the
Foundation against the claims asserted in the underlying lawsuits. Sentry also requested
reimbursement of the funds it had expended in defending the Foundation in the underlying
lawsuits.
¶9 The Sentry insurance policy, which was attached to Sentry’s complaint, contained two
exclusions that are relevant to the instant appeal: a “care, custody, or control” exclusion and a
“professional services” exclusion. The “care, custody, or control” exclusion provided that the
insurance did not apply to property damage to “[p]ersonal property in the care, custody or
control of the insured.” The “professional services” exclusion provided that “[t]his insurance
does not apply to ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ due to
the rendering of or failure to render any professional service.” The exclusion further defined
“professional services” as “all professional liability relating to health care medical malpractice,
druggist liability, to include accountants E & O as well as directors and officers liability.”
¶ 10 On November 20, 2014, Continental filed an answer and counterclaim. The counterclaim
contained substantially identical factual allegations as Sentry’s complaint regarding the
2
According to Sentry’s complaint, with the exception of two named individuals, the rest of the
underlying plaintiffs obtained judicial orders permitting them to proceed in the underlying lawsuits
with their legal names kept under seal.
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allegations of the underlying lawsuits. Continental’s counterclaim also alleged that (1) the
Foundation made a number of admissions in a third-party complaint that the Foundation had
filed in the underlying lawsuits, including that the Foundation provided storage in a cryogenic
tank located on the 20th floor of the Foundation for the semen and testicular tissue of the male
underlying plaintiffs; (2) the Foundation was a faculty medical practice at the hospital; (3) the
Foundation used an electronic controls system on the cryogenic tank that was designed to
cause a page to be sent to a Foundation lab technician when an alarm was triggered by the
control system; and (4) on the afternoon of April 23, 2012, a Foundation lab technician
discovered that the cryogenic tank at the Foundation had failed to maintain a proper
temperature.
¶ 11 In its counterclaim, Continental alleged that it issued to the Foundation a commercial
umbrella policy and that in order for the Foundation to obtain coverage from Continental’s
policy, “it must prove that it is entitled to coverage under the [Continental] Umbrella Policy
insuring provision, including all of [Continental’s] terms, definitions and conditions,” which it
could not do. First, Continental alleged that the Foundation could not establish that “bodily
injury” or “property damage” occurred during the policy period, as required under the policy.
Additionally, like Sentry’s policy, Continental’s policy included a “care, custody, or control”
exclusion and a “professional services” exclusion. The “care, custody, or control” exclusion
provided that the insurance coverage did not apply to property damage to “[p]ersonal property
in the care, custody or control of the insured.” The “professional services” exclusion provided:
“This insurance does not apply to any liability arising out of any act or omission, or
rendering of or failure to render professional services by you or any other person for
whose acts you are legally responsible, and arising out of the performance of
professional services for others in your capacity as a (an):
(Insert Profession of Service)
Professional Healthcare Services”
Continental’s counterclaim alleged that, even if the Foundation could establish that it complied
with all of the policy’s terms, conditions, and definitions, coverage in connection with the
underlying lawsuits would still be excluded by the “care, custody, or control” or “professional
services” exclusions. Accordingly, Continental sought a declaration that Continental owed no
coverage to the Foundation.
¶ 12 On January 12, 2015, the Foundation filed a combined motion under section 2-619.1 of the
Code of Civil Procedure (Code) (735 ILCS 5/2-619.1 (West 2014)) to dismiss Sentry’s
complaint or, alternatively, to stay the complaint. On the same day, the Foundation also filed a
section 2-619.1 motion to dismiss Continental’s counterclaim and expressly adopted its
arguments in support of its motion to dismiss Sentry’s complaint into its motion to dismiss
Continental’s counterclaim.
¶ 13 The Foundation argued that Sentry’s request for an adjudication of its duty to defend
should be dismissed under section 2-619 of the Code (735 ILCS 5/2-619 (West 2014)) because
the resolution of that issue required the adjudication of facts that overlapped with disputed
liability issues in the underlying lawsuits. The Foundation argued that Sentry’s arguments
concerning the care, custody, or control exclusion and the professional services exclusion were
premature “because it is not clear and free from doubt from the face of the allegations in any of
the underlying complaints that either of these policy exclusions precludes coverage and the
Court cannot make coverage determinations based on disputed liability facts at issue in the
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pending Underlying Actions.” Sentry argued that determining whether the exclusions applied
would require the trial court to determine “ultimate facts” in the underlying lawsuits, including
whether the Foundation had exclusive possessory control over the semen samples at the time
they were allegedly damaged and the responsibilities of the parties involved with the cryogenic
process. Sentry similarly argued that the determination of whether the underlying lawsuits
sought damaged for “bodily injury” or “property damage” would require an adjudication of
disputed liability issues in the underlying lawsuits.
¶ 14 The Foundation also argued that Sentry’s request for an adjudication that it owed no duty to
indemnify the Foundation should be dismissed under section 2-615 of the Code (735 ILCS
5/2-615 (West 2014)) because the Foundation had not yet incurred any liability in the
underlying lawsuits. With respect to Continental, the Foundation claimed that Continental was
not presently defending the Foundation and so its “request for a declaration concerning its duty
to defend is premature and should be dismissed for this reason alone.”
¶ 15 In the alternative, the Foundation argued that if dismissal was not the proper course, then
the declaratory judgment claims should be stayed because “[a] stay would conserve judicial
resources by reducing the discovery required in the coverage action, narrowing the scope of
disputed issues, and otherwise avoiding the duplication of effort that is inherent when litigation
proceeds on parallel tracks.”
¶ 16 In response, Continental argued that the issues in the declaratory judgment action would
not require the trial court to determine ultimate facts in the underlying lawsuits because the
court “will only need to apply undisputed facts to the pertinent policy language.” Continental
further argued that since there was no potential for coverage, the issues concerning both the
duty to defend and the duty to indemnify were ripe for adjudication. Continental also adopted
Sentry’s response to the motion to dismiss, which claimed that the grant of summary judgment
in John Anonymous’ favor against the Foundation established that the Foundation had
exclusive possession of the specimens, as did the Foundation’s answers to the pleadings in the
underlying lawsuits. Thus, determination of whether the care, custody, or control exception
applied would not require adjudication of an ultimate fact. Sentry’s response further argued
that the Foundation’s arguments concerning the litigation of the Foundation’s third-party
claims were not applicable, as the Foundation’s third-party claims concerned the tank that
allegedly failed and its component parts and did not concern possession of the specimens
themselves.
¶ 17 In supplemental briefing, Continental also argued that two of the plaintiffs in the
underlying lawsuits had voluntarily dismissed their complaints against the Foundation with
prejudice. Continental thus argued that even if the coverage litigation was not appropriate for
most of the cases, at the very least, coverage litigation should proceed with respect to the two
cases the Foundation had resolved. Continental further requested that, if a stay was entered, the
stay should only apply until each underlying lawsuit was resolved.
¶ 18 On May 19, 2016, the trial court granted in part and denied in part the Foundation’s
motion. In its order, it discussed Sentry’s arguments and noted that “[t]he arguments raised by
[Continental] in its counterclaim are substantially identical to those asserted by Sentry in its
complaint.” First, the court found that “[a]t this point, the appropriate action is to stay the
determination of the duty to indemnify until the duty to defend has been determined,” not to
dismiss it, as dismissal would result in a waste of judicial resources. Next, the court found that
the determination of whether the care, custody, or control exclusion applied would require the
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determination of an ultimate fact in the underlying litigation, since the court would need to
make a determination as to whether the Foundation had exclusive control, and one of the
ultimate facts in the underlying litigation was who had possession of the specimens. The court
thus found that “a stay is appropriate.” The court rejected Sentry’s reliance on the partial
summary judgment entered in the John Anonymous case, finding that the judge in that case had
not made any factual findings as to whether the Foundation had exclusive care, custody, or
control over the specimens at the time of the loss and that the issue in a bailment action was
possession at the beginning of the bailment, not at the time of the loss. The court also rejected
Sentry’s reliance on the Foundation’s discovery responses in the underlying lawsuits, noting
that the Foundation had never conceded that it exercised exclusive possession of the specimens
at the time of the tank’s failure.
¶ 19 The court also found that the professional services exclusions in the insurers’ policies were
not ripe for adjudication. The court found that the language of the exclusion in the Continental
policy differed from that in the Sentry policy but did not otherwise differentiate the two
policies. In analyzing a professional services exclusion, the court found that the question was
whether the activity “involves specialized knowledge, labor, or skill, and is predominantly
mental or intellectual as opposed to physical or manual.” The court found that “[i]t is not
apparent from the underlying complaints whether the maintenance of cryogenically preserved
sperm requires ‘specialization or expertise’, or is merely incidental to any professional services
[the Foundation] provides. The underlying complaints contain no description or detail as to
how sperm samples are cryogenically preserved, much less whether cryogenic preservation of
sperm is ‘predominantly mental or intellectual as opposed to physical or manual.’ ” The court
found that, to make that determination, “the Court would have to look at extrinsic evidence
(outside the pleadings) which the Court cannot do if it tends to determine an issue crucial to the
determination of the underlying lawsuit.” The court additionally found that “in order to
determine whether the professional services exclusion applied[,] the Court would have to find
that the underlying complaints assert claims for ‘health care malpractice’.[3] A trial court
presiding over an insurance coverage declaratory judgment action should not decide whether
an underlying defendant committed malpractice when that decision would bind the parties in
the underlying litigation.”
¶ 20 With respect to the issue of whether the underlying lawsuits sought damages for “bodily
injury” or “property damage” under the policies such that there was a duty to defend, the court
found that this issue was ripe for adjudication. The court found that, in determining whether
there was a duty to defend, it could decide whether the allegations of the underlying complaints
contained sufficient facts to show the potential for coverage and, accordingly, determined that
it would “proceed with litigating the duty to defend analysis.”
¶ 21 Finally, the trial court found that it could not adjudicate coverage issues in the two
underlying lawsuits that had settled, since a ruling concerning those cases could still have a
collateral estoppel effect on the remaining underlying plaintiffs. The court further noted that
the Foundation also had third-party complaints pending “which could be impacted by a ruling
by this Court.”
3
Although the trial court did not make the distinction in its order, we note that this language is
specific to the Sentry policy and does not appear in the Continental policy.
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¶ 22 On June 8, 2016, Sentry filed a notice of appeal, and on June 17, 2016, Continental joined
in Sentry’s notice of appeal and also filed its own notice of appeal. Sentry ultimately settled
with the Foundation and asked this court to dismiss its appeal, which we did on October 25,
2016, leaving only Continental’s appeal remaining.
¶ 23 ANALYSIS
¶ 24 On appeal, we are asked to consider whether the trial court properly entered a stay on
Continental’s insurance coverage issues. While our appellate jurisdiction is normally limited
to review of final judgments (see State Farm Mutual Automobile Insurance Co. v. Illinois
Farmers Insurance Co., 226 Ill. 2d 395, 415 (2007)), we have jurisdiction in the instant
interlocutory appeal pursuant to Illinois Supreme Court Rule 307(a)(1) (eff. Feb. 26, 2010),
which allows for appeals from interlocutory orders “granting, modifying, refusing, dissolving,
or refusing to dissolve or modify an injunction.” See, e.g., Blumenthal v. Brewer, 2016 IL
118781, ¶ 39 (“Under established Illinois law, the denial of a stay of trial court proceedings is
treated as a denial of a request for a preliminary injunction and is appealable as a matter of right
under Illinois Supreme Court Rule 307(a)(1) (eff. Feb. 26, 2010).”); Marzouki v.
Najar-Marzouki, 2014 IL App (1st) 132841, ¶ 8 (“This court has consistently held that a stay is
injunctive in nature and a stay order is immediately appealable under Rule 307(a)(1).”);
Cholipski v. Bovis Lend Lease, Inc., 2014 IL App (1st) 132842, ¶ 33 (noting that “the appellate
court has repeatedly held that Rule 307 permits the interlocutory appeal of a stay of court
proceedings”). We find that this appeal does not require us to consider the merits of the
coverage issues, which will be ultimately decided by the trial court but requires us only to
consider the question of when the coverage issues should be decided—now, or after the
resolution of the underlying lawsuits.
¶ 25 The trial court in the instant case found that what it called the “duty to defend analysis,”
namely, the question of whether the underlying lawsuits sought damages for “bodily injury” or
“property damage” as defined by the insurance policies, was a question that it could determine
prior to the resolution of the underlying lawsuits. However, it found that the applicability of the
“care, custody, or control” and “professional services” exclusions would require the
adjudication of ultimate facts in the underlying lawsuits and accordingly stayed consideration
of those exclusions. On appeal, Continental argues that the trial court erred in staying the
coverage litigation concerning the applicability of the two exclusions. In the alternative,
Continental argues that if litigation concerning the exclusions was stayed, then litigation
concerning the “duty to defend analysis” should likewise have been stayed. Also in the
alternative, Continental argues that if a stay was proper, the stay should not apply to the two
underlying cases that have been settled.
¶ 26 I. Standard of Review
¶ 27 As an initial matter, we must discuss the standard of review applicable to our analysis.
Continental argues that we should review the propriety of the trial court’s stay de novo, while
the Foundation argues that we should review it under an abuse of discretion standard. Our
courts have consistently found that “[t]he decision to grant or deny a motion to stay will not be
overturned unless the court abused its discretion.” Guarantee Trust Life Insurance Co. v.
Platinum Supplemental Insurance, Inc., 2016 IL App (1st) 161612, ¶ 35; Cholipski, 2014 IL
App (1st) 132842, ¶ 39. Continental recognizes that “Illinois courts have generally applied the
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abuse of discretion standard” in this type of situation. However, it argues that there is a “recent
trend” for courts to apply a de novo standard in a Rule 307(a)(1) appeal if the question
presented is purely legal, as it argues the instant case is. We agree with the Foundation that
Continental overstates the importance of this purported “recent trend” which, in fact, is not a
recent trend at all.
¶ 28 Over 20 years ago, our supreme court found that “in an interlocutory appeal, the scope of
review is normally limited to an examination of whether or not the trial court abused its
discretion in granting or refusing the requested interlocutory relief. [Citations.] However,
where the question presented is one of law, a reviewing court determines it independently of
the trial court’s judgment. [Citation.]” In re Lawrence M., 172 Ill. 2d 523, 526 (1996). While,
as noted, Continental acknowledges that the propriety of an order granting or denying a stay is
normally analyzed for an abuse of discretion, Continental argues that the cases applying an
abuse of discretion standard for stay orders issued in insurance coverage declaratory judgment
actions “have been called into question” by three cases: Coe v. BDO Seidman, L.L.P., 2015 IL
App (1st) 142215, Fuqua v. SVOX AG, 2014 IL App (1st) 131429, and Bovay v. Sears,
Roebuck & Co., 2013 IL App (1st) 120789. We do not find this argument persuasive.
¶ 29 First, as Continental acknowledges in its briefs on appeal, Fuqua applied an abuse of
discretion standard of review, so it does not support Continental’s argument in favor of the
application of a de novo standard of review. See Fuqua, 2014 IL App (1st) 131429, ¶ 15 (“this
court applies the abuse of discretion standard of review in evaluating this appeal”).
Additionally, as the Foundation points out, both Coe and Bovay involve motions to stay
litigation and compel arbitration, which is not the issue in the instant case. While Continental
argues that this distinction is irrelevant, we disagree.
¶ 30 “The circuit court may stay proceedings as part of its inherent authority to control the
disposition of cases before it. [Citation.] The court may consider factors such as the orderly
administration of justice and judicial economy in determining whether to stay proceedings.”
Philips Electronics, N.V. v. New Hampshire Insurance Co., 295 Ill. App. 3d 895, 901-02
(1998). For this reason, the trial court’s decision to grant a stay is reviewed under an abuse of
discretion standard. Philips Electronics, 295 Ill. App. 3d at 902. However, in both Coe and
Bovay, the motion to stay was filed in connection with arbitration proceedings. See Coe, 2015
IL App (1st) 142215, ¶ 10 (the motion at issue was “a motion to stay the action in favor of
arbitration”); Bovay, 2013 IL App (1st) 120789, ¶ 12 (the motion at issue was “a motion to
compel arbitration and stay the proceedings”). Both motions expressly stated that the stay was
sought pursuant to section 3 of the Federal Arbitration Act, which provides that, “[i]f any suit
or proceeding [is] brought in any of the courts of the United States upon any issue referable to
arbitration under an agreement in writing for such arbitration, the court in which such suit is
pending *** shall on application of one of the parties stay the trial of the action until such
arbitration has been had in accordance with the terms of the agreement.” 9 U.S.C. § 3 (1994);
see Coe, 2015 IL App (1st) 142215, ¶ 10; Bovay, 2013 IL App (1st) 120789, ¶ 12. Thus, in
these cases, the issue was whether the matter should be arbitrated, not whether the matter
should be stayed, because if the matter was to be arbitrated, it was required to be stayed under
the Federal Arbitration Act pending that arbitration. This distinguishes these cases from the
usual type of case in which a stay is a matter of the trial court’s discretion in controlling its
docket and in no way “call[s] into question” the general rule that stays are reviewed for an
abuse of discretion.
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¶ 31 Furthermore, we find unpersuasive Continental’s claims that the instant case involves no
factual issues and requires only “a purely legal analysis” of the applicable law. As noted, and
as will be further discussed below, the trial court’s decision in the instant case turned on its
determination that the issues present in the coverage litigation would overlap with “ultimate
facts” at issue in the underlying lawsuits, therefore making a stay appropriate. The trial court
expressly rejected Continental’s arguments that the Foundation had already conceded the
relevant facts in its pleadings and answers to discovery in the underlying cases. Continental
uses those same arguments now to support its contention that there are no factual issues at play
and that the coverage litigation involves only legal issues. Continental’s argument is thus
putting the cart before the horse because only if we agree with its arguments concerning the
Foundation’s purported admissions could we find that there were no factual issues in dispute.
¶ 32 In the case at bar, therefore, we find that the appropriate standard of review is abuse of
discretion, not de novo. “The standard of ‘abuse of discretion’ is the most deferential standard
of review recognized by the law; a decision will be deemed an abuse of discretion only if the
decision is ‘unreasonable and arbitrary or where no reasonable person would take the view
adopted by the circuit court.’ ” Pekin Insurance Co. v. St. Paul Lutheran Church, 2016 IL App
(4th) 150966, ¶ 69 (quoting Gulino v. Zurawski, 2015 IL App (1st) 131587, ¶ 64).
¶ 33 II. Stay of Exclusions
¶ 34 Continental’s primary argument on appeal is that the trial court erred in staying the
consideration of whether its “care, custody, or control” and “professional services” exclusions
apply to preclude coverage under the Continental insurance policy.
¶ 35 A. Duties to Defend and Indemnify
¶ 36 We begin our analysis by setting forth the applicable law concerning an insurer’s duties to
defend and indemnify an insured. In Illinois, the duties to defend and to indemnify are not
coextensive, with the obligation to defend being broader than the obligation to pay.
International Minerals & Chemical Corp. v. Liberty Mutual Insurance Co., 168 Ill. App. 3d
361, 366 (1988). In determining whether an insurer has a duty to defend its insured, a court
looks to the allegations in the underlying complaint and compares them to the relevant
provisions of the insurance policy. Outboard Marine Corp. v. Liberty Mutual Insurance Co.,
154 Ill. 2d 90, 107-08 (1992). “If the facts alleged in the underlying complaint fall within, or
potentially within, the policy’s coverage, the insurer’s duty to defend arises.” Outboard
Marine, 154 Ill. 2d at 108. However, if it is clear from the face of the complaint that the
allegations fail to state facts that bring the case within, or potentially within, the policy’s
coverage, an insurer may properly refuse to defend. United States Fidelity & Guaranty Co. v.
Wilkin Insulation Co., 144 Ill. 2d 64, 73 (1991) (quoting State Farm Fire & Casualty Co. v.
Hatherley, 250 Ill. App. 3d 333, 336 (1993)).
¶ 37 Additionally, “a circuit court may, under certain circumstances, look beyond the
underlying complaint in order to determine an insurer’s duty to defend.” Pekin Insurance Co.
v. Wilson, 237 Ill. 2d 446, 459 (2010). “ ‘It is certainly true that the duty to defend flows in the
first instance from the allegations in the underlying complaint; this is the concern at the initial
stage of the proceedings when an insurance company encounters the primary decision of
whether to defend its insured. However, if an insurer opts to file a declaratory proceeding, we
believe that it may properly challenge the existence of such a duty by offering evidence to
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prove that the insured’s actions fell within the limitations of one of the policy’s exclusions.
[Citations.] The only time such evidence should not be permitted is when it tends to determine
an issue crucial to the determination of the underlying lawsuit [citations] ***.’ ” Wilson, 237
Ill. 2d at 461 (quoting Fidelity & Casualty Co. of New York v. Envirodyne Engineers, Inc., 122
Ill. App. 3d 301, 304-05 (1983)). Thus, if there is no concern that a crucial issue will be
determined, the trial court may consider evidence that would otherwise be appropriate at that
stage of the proceedings. See Wilson, 237 Ill. 2d at 462 (noting that Envirodyne Engineers
involved evidence available in summary judgment proceedings, while Wilson involved
evidence available in a grant of judgment on the pleadings).
¶ 38 “[W]here an exclusionary clause is relied upon to deny coverage, its applicability must be
clear and free from doubt because any doubts as to coverage will be resolved in favor of the
insured.” International Minerals & Chemical Corp., 168 Ill. App. 3d at 367; see also Wilson,
237 Ill. 2d at 456 (“ ‘provisions that limit or exclude coverage will be interpreted liberally in
favor of the insured and against the insurer’ ” (quoting American States Insurance Co. v.
Koloms, 177 Ill. 2d 473, 479 (1997))). “[W]here the language of an insurance policy is clear
and unambiguous, it will be applied as written.” Hatherley, 250 Ill. App. 3d at 337. The
construction of an insurance policy presents a question of law that is reviewed de novo.
Outboard Marine, 154 Ill. 2d at 108. De novo consideration means we perform the same
analysis that a trial judge would perform. Erie Insurance Exchange v. Compeve Corp., 2015 IL
App (1st) 142508, ¶ 14.
¶ 39 An insurer’s duty to indemnify is narrower than its duty to defend its insured. Outboard
Marine, 154 Ill. 2d at 127. “[T]he question of whether the insurer has a duty to indemnify the
insured for a particular liability is only ripe for [adjudication] if the insured has already
incurred liability *** against it.” Outboard Marine, 154 Ill. 2d at 127. “If so, the duty to
indemnify arises if the insured’s activity and the resulting loss or damage actually fall within
the *** policy’s coverage.” (Emphasis in original.) Outboard Marine, 154 Ill. 2d at 128.
However, if a court determines that the insurer has no duty to defend, “it may simultaneously
determine that the insurer has no duty to indemnify.” Abrams v. State Farm Fire & Casualty
Co., 306 Ill. App. 3d 545, 549 (1999). “In cases *** where no duty to defend exists and the
facts alleged do not even fall potentially within the insurance coverage, such facts alleged
could obviously never actually fall within the scope of coverage. Under no scenario could a
duty to indemnify arise. Clearly, where there is no duty to defend, there will be no duty to
indemnify ***.” (Emphases in original.) Crum & Forster Managers Corp. v. Resolution Trust
Corp., 156 Ill. 2d 384, 398 (1993). In the case at bar, although only the duty to indemnify is at
issue with respect to Continental’s policy, Continental claims that the issue is ripe for
adjudication because there was no duty to defend.
¶ 40 B. Peppers Doctrine
¶ 41 In the case at bar, the trial court determined that it was premature to consider whether the
“care, custody, or control” and “professional services” exclusions applied to deny coverage to
the Foundation and instead decided to stay the coverage litigation on this question. The court’s
decision to stay the determination of these coverage issues was based on its application of the
“Peppers doctrine,” which was set forth by our supreme court in Maryland Casualty Co. v.
Peppers, 64 Ill. 2d 187 (1976).
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¶ 42 In the declaratory judgment action at issue in Peppers, the trial court was asked to
determine whether an insurer owed a duty to defend its insured in a personal injury action that
alleged intentional, negligent, and willful and wanton conduct; the insurance policy at issue
specifically excluded coverage for intentionally inflicted injuries. Peppers, 64 Ill. 2d at 190,
193. After a bench trial, the trial court found that the insured’s actions were intentional, and
therefore, there was no coverage under the policy. Peppers, 64 Ill. 2d at 191. Our supreme
court, however, found that “[b]y virtue of the interrelation of the various issues involved in the
litigation between [the underlying plaintiff] and [the insured] and between [the insured] and
[the insurer] we must conclude that this finding by the trial court constituted an abuse of the
discretion vested in it” under the Civil Practice Act (Ill. Rev. Stat. 1975, ch. 110, ¶ 57.1).
Peppers, 64 Ill. 2d at 196. The supreme court found that under the principle of collateral
estoppel, the finding in the declaratory judgment action that the injury was intentionally
inflicted “could possibly establish the allegations of the assault count in the complaint and
might preclude [the underlying plaintiff’s] right to recover under the other theories alleged.”
Peppers, 64 Ill. 2d at 197. The supreme court cited with approval an appellate court case
finding that such a judgment under similar circumstances was premature and found that “[t]he
finding of the trial court in our case that the injury was intentional was not proper in this
declaratory judgment action. This issue was one of the ultimate facts upon which recovery is
predicated in the *** personal injury action against [the insured], which had been filed
considerably before the declaratory judgment action had been instituted.” Peppers, 64 Ill. 2d at
197. This ruling has come to be known as the “Peppers doctrine.” TIG Insurance Co. v. Canel,
389 Ill. App. 3d 366, 373 (2009).
¶ 43 “Under the Peppers doctrine, ‘it is generally inappropriate for a court considering a
declaratory judgment action to decide issues of ultimate fact that could bind the parties to the
underlying litigation.’ ” Landmark American Insurance Co. v. NIP Group, Inc., 2011 IL App
(1st) 101155, ¶ 59 (quoting Allstate Insurance Co. v. Kovar, 363 Ill. App. 3d 493, 501 (2006)).
“This proscription specifically precludes determination of any ultimate facts upon which
liability or recovery might be predicated in the underlying case.” NIP Group, 2011 IL App
(1st) 101155, ¶ 59. Thus, it is an abuse of discretion for a trial court in a declaratory judgment
action to make such a determination. Peppers, 64 Ill. 2d at 196; Empire Fire & Marine
Insurance Co. v. Clarendon Insurance Co., 267 Ill. App. 3d 1022, 1027 (1994).
¶ 44 Our supreme court in Peppers did not define the term “ultimate fact” and has subsequently
used other terms to stand for the same proposition. In Thornton v. Paul, our supreme court,
relying on Peppers, found that “it would not be appropriate, under the facts of this case, for the
insurer to seek a declaratory judgment that the insured’s conduct constituted a battery and was
thus beyond the coverage of the insurance policy. In such a proceeding, an issue crucial to the
insured’s liability in the personal injury action and also one on which punitive damages could
ultimately be assessed would be determined in a purely ancillary proceeding with the plaintiff
and defendant in the personal injury action both aligned on the same side as defendants in the
declaratory judgment action.” (Emphasis added.) Thornton v. Paul, 74 Ill. 2d 132, 159 (1978),
overruled in part on other grounds by American Family Mutual Insurance Co. v. Savickas, 193
Ill. 2d 378 (2000). In Savickas, the supreme court reaffirmed the “rule” relied on by the
Thornton court “that it is inappropriate to resolve a declaratory judgment action in such a
manner as would bind the parties in the underlying litigation on any issues therein.”
(Emphasis added.) Savickas, 193 Ill. 2d at 387. Thus, in applying the Peppers doctrine, courts
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have had to determine whether the facts to be decided in the declaratory judgment action would
be considered “ultimate facts” such that the coverage litigation was premature.
¶ 45 For instance, in Envirodyne Engineers, the appellate court began its analysis by attempting
to define “ultimate fact.” The court noted:
“Both Peppers and Thornton are instructive as to what matters cannot be
determined in a declaratory judgment proceeding prior to the completion of the
underlying action. Peppers states that an ultimate fact upon which recovery is
predicated in the underlying case may not be addressed. The court’s language suggests
that an ultimate fact is one which would estop the plaintiff in the underlying case from
pursuing one of his theories of recovery. Thornton implies that an ultimate fact is one in
which ‘an issue crucial to the insured’s liability’ in the underlying case is determined.
Apparently only then would the inequities surface in regard to alignment of the parties
and the order and burden of proof, because those matters necessarily arise in any
declaratory judgment proceeding brought before completion of the underlying lawsuit.
Thus, in examining the facts in the instant case, we must decide whether the plaintiff in
the underlying lawsuit would be estopped from raising a theory of recovery or if the
trial court decided an issue crucial to the insured’s liability in the underlying case.”
Envirodyne Engineers, 122 Ill. App. 3d at 307.
Applying this standard, the Envirodyne Engineers court noted that the sole issue determined by
the trial court in the declaratory judgment proceeding was the nature of the services provided
by the insured at a construction site, namely, that the insured was acting as a consulting
engineer. Envirodyne Engineers, 122 Ill. App. 3d at 307. The court found that this
determination in no way “estops the underlying plaintiff from raising a theory of recovery or
decides any issue crucial to the underlying litigation.” Envirodyne Engineers, 122 Ill. App. 3d
at 308. The court noted that the allegations in the underlying complaint were for violations of
the Structural Work Act and for negligence and found that “[a] finding that [the insured]
performed as a consulting engineer in no way diminishes either theory of recovery advanced
by the underlying plaintiff.” Envirodyne Engineers, 122 Ill. App. 3d at 308. The court further
found that the fact that the insured was acting as a consulting engineer was not an issue crucial
to its liability in the underlying case because “the ultimate, or crucial, queries in this case
revolve around whether [the insured] ‘willfully’ violated the Structural Work Act or whether
[the insured] acted negligently. None of these questions hinges upon whether [the insured] did
or did not serve in the capacity of consulting engineer for the construction project.” Envirodyne
Engineers, 122 Ill. App. 3d at 308. Accordingly, the court found that the nature of the insured’s
services was not an issue of ultimate fact. Envirodyne Engineers, 122 Ill. App. 3d at 308.
¶ 46 In the case at bar, the trial court determined that a finding concerning the applicability of
the “care, custody, or control” and “professional services” exclusions would require it to
determine ultimate facts in the underlying lawsuits. We consider each exclusion in turn,
bearing in mind that, “[i]n determining whether to stay proceedings, the circuit court has
discretion to consider factors such as the ‘orderly administration of justice and judicial
economy,’ as well as its inherent authority to control the disposition of the cases before it.” TIG
Insurance Co. v. Canel, 389 Ill. App. 3d 366, 375 (2009) (quoting Estate of Bass v. Katten, 375
Ill. App. 3d 62, 68 (2007)).
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¶ 47 C. Care, Custody, or Control Exclusion
¶ 48 Continental’s insurance policy contained a “care, custody, or control” exclusion that
provided that the insurance did not apply to property damage to “[p]ersonal property in the
care, custody or control of the insured.” “For this common exclusion, Illinois courts ‘employ a
two-part test. If the property damaged is within the possessory control of the insured at the time
of the loss and is a necessary element of the work performed, the property is considered to be in
the care, custody, or control of the insured.’ ” Liberty Mutual Insurance Co. v. Zurich
Insurance Co., 402 Ill. App. 3d 37, 40 (2010) (quoting Caisson Corp. v. Home Indemnity
Corp., 151 Ill. App. 3d 130, 133 (1986)). “With respect to whether an insured [has] possessory
control of the property at the time of the loss, it has been noted that, ‘[w]hile the control
exercised by the insured must be exclusive, it need not be continuous, and if the insured has
possessory control at the time the property is damaged, the exclusion clause will apply.’ ”
Bolanowski v. McKinney, 220 Ill. App. 3d 910, 914 (1991) (quoting Country Mutual Insurance
Co. v. Waldman Mercantile Co., 103 Ill. App. 3d 39, 42 (1981)); Essex Insurance Co. v.
Wright, 371 Ill. App. 3d 437, 441 (2007); Caisson Corp., 151 Ill. App. 3d at 133. Thus, in order
for the trial court in the declaratory judgment action to determine that the “care, custody, or
control” exclusion applied in the instant case, it would need to determine that the Foundation
exercised exclusive control over the specimens at the time they were damaged.
¶ 49 Continental argues that this determination would not require the resolution of an ultimate
fact in the underlying lawsuits. First, Continental argues that exclusive possessory control of
the specimens at the time they were damaged is not necessary for either a bailment or
negligence claim. While Continental correctly states that, in theory, neither a cause of action
for bailment nor a cause of action for negligence requires exclusive possession at the time of
the damage, Continental fails to consider the actual factual allegations in the underlying
lawsuits.
¶ 50 The underlying lawsuits name both the Foundation and the Hospital as defendants and
allege causes of action for bailment and negligence against both. With respect to the
negligence claim against the Hospital, the underlying complaints allege4 that, at the time the
cryogenic tanks failed, the Hospital “had the duty to exercise ordinary care in the storage and
preservation of the semen/testicular specimens” of the underlying plaintiffs and was negligent
in, inter alia, “[f]ail[ing] to adequately maintain the semen/testicular tissue specimens in its
possession”; “[f]ail[ing] to adequately store the semen/testicular tissue specimens in its
possession”; and “[f]ail[ing] to adequately preserve the semen/testicular tissue specimens in its
possession.” Thus, the allegations of the underlying complaints expressly allege that the
Hospital exercised possessory control over the specimens at the time they were damaged.
Similarly, with respect to the bailment claim against the Hospital, the underlying complaints
allege that the semen or testicular tissue specimens of the underlying plaintiffs “were damaged
without [the underlying plaintiffs’] knowledge or consent while under the care of” the
Hospital. Thus, the bailment claims allege that the specimens were under the Hospital’s care at
the time they were damaged.
¶ 51 As we have previously noted, in order for the trial court in the declaratory judgment action
to determine that the “care, custody, or control” exclusion applied in the instant case, it would
4
The underlying complaints, all of which were attached to Continental’s counterclaim, are
substantively identical.
- 13 -
need to determine that the Foundation exercised exclusive control over the specimens at the
time they were damaged. However, this would contradict the allegations in the underlying
complaint that allege that the Hospital exercised control over the specimens at that same time
and would effectively preclude the underlying plaintiffs from proving their claims against the
Hospital. This is exactly the type of factual determination that the Peppers doctrine prohibits.
¶ 52 We are not persuaded by Continental’s arguments that the Foundation has already admitted
that it retained exclusive control in its pleadings and answers to discovery such that the trial
court’s determination in the instant case would have no effect on the underlying lawsuits.
Continental’s arguments are based on the answer filed by the Foundation and the Hospital to
the John Anonymous complaint, as well as the third-party complaint jointly filed by the
Foundation and the Hospital. With respect to the answer filed in the John Anonymous
complaint, that complaint did not state its allegations against the Foundation and the Hospital
in separate paragraphs but discussed them together; for instance, paragraph 2 of the complaint
alleged that “[i]n 2008, [the Hospital] and [the Foundation] owned, operated, managed, and
controlled a cryopreservation storage tank for semen/testicular tissue located at their outpatient
urology facility in the Galter Pavilion of [the Hospital].” The answer to that allegation, filed
jointly by the Foundation and the Hospital, was: “[The Foundation] admits that it owned and
operated a cryopreservation storage tank for semen/testicular tissue and denies the remaining
allegations of paragraph 2. Further answering, defendant [the Hospital] denies owning,
operating, managing, or controlling the cryopreservation storage tank for semen/testicular
tissue located at [the Foundation]’s urology facility in the Galter Pavilion.” Continental reads
this answer, along with the Foundation’s other answers, as the Foundation “fully conceding”
that the Foundation had exclusive possessory control over the specimens at the time they were
damaged. Continental’s argument rests on the assumption that a denial in an answer operates
as a concession that the corollary of that allegation is true; that is, under Continental’s view, the
Foundation’s denial in the above-quoted answer operates as a concession that the Hospital did
not own, operate, manage, or control the cryopreservation storage tank.
¶ 53 However, that is the opposite of the way in which answers to complaints operate. An
answer is required to contain an explicit admission or denial of each allegation of the pleading
to which it relates. 735 ILCS 5/2-610(a) (West 2014). “Every allegation *** not explicitly
denied is admitted ***.” 735 ILCS 5/2-610(b) (West 2014). In the case at bar, then, using the
above-quoted answer as an example, the Foundation admitted only that it owned and operated
a cryopreservation storage tank for semen/testicular tissue because it denied the remaining
allegations of the paragraph, which related to the Hospital. Continental’s position would
require the court to interpret the Foundation’s denial as a concession that the Hospital did not
own, operate, manage, or control the cryopreservation storage tank, in effect conceding that the
Foundation exercised exclusive possession over the tank. Continental provides no authority for
this novel way of interpreting the Code of Civil Procedure, and we do not find its attempt to
fashion an admission out of a denial to be persuasive. The Foundation’s answers at most admit
that it had control over the specimens and do not speak to whether that control was exclusive.
¶ 54 Similarly, the third-party complaint is silent as to exclusive control. Continental points to
paragraph 13 of the third-party complaint, which alleges that “[a]t all relevant times, [the
Foundation] provided storage for plaintiffs’ semen and/or testicular tissue in a cryogenic
freezer designed and manufactured by Horizon, Harsco and Taylor-Wharton. The freezer was
located on the 20th Floor of [the Foundation].” Again, this allegation at most demonstrates that
- 14 -
the Foundation had control over the specimens, but says nothing about whether that control
was exclusive. Thus, we do not find that the Foundation has conceded its exclusive possession
of the specimens such that the trial court’s decision in the instant insurance coverage litigation
would not run afoul of the Peppers doctrine should it also make such a determination.
¶ 55 We are similarly unpersuaded by Continental’s argument that the trial court’s entry of
partial summary judgment in the John Anonymous case necessarily resolved the issue of
exclusive possession. The trial court in that case entered summary judgment on John
Anonymous’ bailment count “on elements 1, 3 & 4.” The first element referred to by the trial
court is “an express or implied agreement to establish a bailment.” Longo Realty v. Menard,
Inc., 2016 IL App (1st) 151231, ¶ 21. Continental argues that the Foundation did not dispute
that it entered into a bailment and, thus, conceded that it had exclusive possession. However, as
the trial court pointed out, a bailment is created at the time of the delivery of the property, while
the “care, custody, or control” exclusion concerns possession of the property at the time of the
loss. See Wausau Insurance Co. v. All Chicagoland Moving & Storage Co., 333 Ill. App. 3d
1116, 1121 (2002) (“A bailment is the delivery of property for some purpose upon a contract,
express or implied, that after the purpose has been fulfilled, the property shall be redelivered to
the bailor, or otherwise dealt with according to his directions, or kept until he reclaims it.”
(Internal quotation marks omitted.)); Bolanowski, 220 Ill. App. 3d at 914 (“if the insured has
possessory control at the time the property is damaged, the exclusion clause will apply”
(internal quotation marks omitted)). Thus, a finding that a bailment was created is not relevant
to the issue of whether the Foundation exercised exclusive control over the specimens at the
time the tank failed.
¶ 56 As a final matter concerning the “care, custody, or control” exclusion, Continental appears
to believe it is “irrelevant” whether potential claims remain against the Hospital. However, by
making this argument, Continental appears to miss the point of the Peppers doctrine. As our
supreme court noted in that case, under the principle of collateral estoppel, the finding in the
declaratory judgment action that the injury was intentionally inflicted “could possibly establish
the allegations of the assault count in the complaint and might preclude [the underlying
plaintiff’s] right to recover under the other theories alleged.” Peppers, 64 Ill. 2d at 197. The
supreme court thus found that such a determination was an abuse of the trial court’s discretion.
Peppers, 64 Ill. 2d at 196. Similarly, here, a finding that the Foundation had exclusive
possessory control over the specimens at the time of the damage could preclude the underlying
plaintiffs’ right to recover under the bailment and negligence theories they alleged in their
complaints against the Hospital. Contrary to Continental’s contention, this is the heart of the
problem and is not “irrelevant.” We thus cannot find that the trial court abused its discretion in
deciding to stay the litigation concerning the “care, custody, or control” exclusion.
¶ 57 D. Professional Services Exclusion
¶ 58 Continental also argues that the trial court could have determined the applicability of its
“professional services” exclusion without determining any ultimate facts in the underlying
litigation. The “professional services” exclusion contained in the policy provided:
“This insurance does not apply to any liability arising out of any act or omission, or
rendering of or failure to render professional services by you or any other person for
whose acts you are legally responsible, and arising out of the performance of
professional services for others in your capacity as a (an):
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(Insert Profession of Service)
Professional Healthcare Services”
¶ 59 In construing “professional services” exclusions, “courts have adopted an expansive
definition of the term ‘professional service.’ The term is not limited to services performed by
persons who must be licensed by a governmental authority in order to practice their
professions. Rather, it refers to any business activity conducted by the insured which involves
specialized knowledge, labor, or skill, and is predominantly mental or intellectual as opposed
to physical or manual in nature.” State Street Bank & Trust Co. of Quincy, Illinois v. INA
Insurance Co. of Illinois, 207 Ill. App. 3d 961, 967 (1991); see also Pekin Insurance Co. v. L.J.
Shaw & Co., 291 Ill. App. 3d 888 (1997).
¶ 60 In the case at bar, the trial court found that “[i]t is not apparent from the underlying
complaints whether the maintenance of cryogenically preserved sperm requires ‘specialization
or expertise’, or is merely incidental to any professional services [the Foundation] provides.
The underlying complaints contain no description or detail as to how sperm samples are
cryogenically preserved, much less whether cryogenic preservation of sperm is
‘predominantly mental or intellectual as opposed to physical or manual.’ ” The court found
that, to make that determination, “the Court would have to look at extrinsic evidence (outside
the pleadings) which the Court cannot do if it tends to determine an issue crucial to the
determination of the underlying lawsuit.”
¶ 61 Continental argues that “[a]ll of the alleged actions or omissions of [the Foundation] in the
Cryogenic Tank Claims relate to [the Foundation]’s means and methods for preserving its
patients’ semen/testicular tissue specimens through a cryopreservation system within a
cryogenic tank. [Citation.] Such cryogenic related activities clearly require specialized
knowledge, labor or skill and are predominantly mental or intellectual.” Thus, it argues that the
allegations of the underlying complaints are sufficient to determine whether the Foundation’s
actions constitute “professional services” under the policy and that such a determination does
not involve the resolution of any ultimate facts.
¶ 62 By contrast, the Foundation argues that the underlying complaints do not contain any detail
as to how frozen sperm samples are maintained or what specialized knowledge or skill is
required in maintaining them. Thus, the Foundation argues that the complaints alone are
insufficient to answer this question. Furthermore, the Foundation argues that “the question of
what [the Foundation] did—or did not do—as part of its cryopreservation program is what the
Underlying Actions are all about. The claims against [the Foundation] turn on whether [the
Foundation] was negligent in its efforts to maintain, store and preserve the samples, and what
actions it took to monitor the tank or to safeguard the plaintiffs’ samples. The evidence bearing
on these critical issues is the same type of evidence that would inform whether the professional
services exclusion applies.” (Emphasis in original.)
¶ 63 Continental is correct that courts in other cases have considered the nature of an insured’s
work without running afoul of the Peppers doctrine. See, e.g., Bonnie Owen Realty, Inc. v.
Cincinnati Insurance Co., 283 Ill. App. 3d 812, 817 (1996) (finding that the trial court properly
determined that “[n]one of the allegations of negligence involve any specialized knowledge,
labor, or skill, nor do they involve conduct which is predominantly mental or intellectual as
opposed to physical of manual in nature”); Envirodyne Engineers, 122 Ill. App. 3d at 307-08
(noting that “[t]he sole issue determined by the trial court in the declaratory proceeding was the
nature of the services performed by [the insured] at the job site,” which did not estop the
- 16 -
underlying plaintiff from raising a theory of recovery or decide any issue crucial to the
underlying litigation). However, the fact that other courts chose to decide the issue does not
mean that the trial court in the instant action was required to do the same.
¶ 64 In the case at bar, the trial court found that it could not determine whether the Foundation’s
conduct constituted professional services by looking at the underlying complaints, and to make
that determination, “the Court would have to look at extrinsic evidence (outside the pleadings)
which the Court cannot do if it tends to determine an issue crucial to the determination of the
underlying lawsuit.” This latter statement by the trial court implies that it believed that
determining the nature of the Foundation’s conduct would require it to determine an issue
crucial to the underlying lawsuits.
¶ 65 As noted, “[t]he decision to grant or deny a motion to stay will not be overturned unless the
court abused its discretion.” Guarantee Trust Life Insurance, 2016 IL App (1st) 161612, ¶ 35;
Cholipski, 2014 IL App (1st) 132842, ¶ 39. Furthermore, “[i]n determining whether to stay
proceedings, the circuit court has discretion to consider factors such as the ‘orderly
administration of justice and judicial economy,’ as well as its inherent authority to control the
disposition of the cases before it.” Canel, 389 Ill. App. 3d at 375 (quoting Estate of Bass, 375
Ill. App. 3d at 68).
¶ 66 In the case at bar, we cannot find that the trial court abused its discretion in taking the more
cautious approach and choosing not to decide an issue that it believed had the potential to
affect the underlying lawsuits. Certainly, as the Foundation points out, the nature of the
Foundation’s conduct could touch on its liability for negligence and the liability of the
third-party defendants. While Continental argues that the trial court did not need to determine
whether the Foundation acted appropriately but only needed to determine whether the
Foundation’s conduct involved “specialized knowledge,” we cannot find that the trial court’s
decision to stay that determination was so “ ‘unreasonable and arbitrary’ ” (St. Paul Lutheran
Church, 2016 IL App (4th) 150966, ¶ 69 (quoting Gulino, 2015 IL App (1st) 131587, ¶ 64))
such that it constituted an abuse of discretion.
¶ 67 As a final matter on this issue, Continental argues that even if the allegations of the
underlying complaints were insufficient to resolve this issue, the trial court could examine
extrinsic evidence to determine the nature of the Foundation’s activities. It claims that “[a]s in
Envirodyne, evaluating extrinsic facts beyond the allegations in the complaints, as to the
specifics of how [the Foundation] cryogenically preserved its patients’ tissue in the cryogenic
tank, will provide additional information to confirm that [the Foundation]’s actions involved
special knowledge and training to support the application of the professional services
exclusion.” While we have already determined that the trial court appropriately stayed the
consideration of this issue, we must caution that Continental takes an overly expansive view of
what extrinsic evidence may be considered by the trial court.
¶ 68 As we have discussed earlier, “a circuit court may, under certain circumstances, look
beyond the underlying complaint in order to determine an insurer’s duty to defend” (Wilson,
237 Ill. 2d at 459), and an insurer may offer extrinsic evidence to prove that an exclusion
applies unless “ ‘it tends to determine an issue crucial to the determination of the underlying
lawsuit’ ” (Wilson, 237 Ill. 2d at 461 (quoting Envirodyne Engineers, 122 Ill. App. 3d at
304-05)). However, even if there is no concern that a crucial issue will be determined, the trial
court may only consider evidence that would otherwise be appropriate at that stage of the
proceedings. See Wilson, 237 Ill. 2d at 462 (noting that Envirodyne Engineers involved
- 17 -
evidence available in summary judgment proceedings, while Wilson involved evidence
available in a grant of judgment on the pleadings). The Wilson court specifically cautioned that
Envirodyne Engineers, which is cited by Continental in support of this argument, involved a
summary judgment proceeding, which explained why that court was permitted to consider the
evidence it did. See Wilson, 237 Ill. 2d at 462. By contrast, in Wilson, which was decided on
the pleadings, our supreme court noted that it was limited by examining the pleadings alone.
Wilson, 237 Ill. 2d at 462. Thus, Envirodyne Engineers does not stand for the proposition that
all extrinsic evidence may be considered but only that the court in the declaratory judgment
action may consider extrinsic evidence that would otherwise be appropriate at that stage of the
proceedings and that does not determine a crucial issue in the underlying litigation.
¶ 69 III. Duty to Defend
¶ 70 Continental next argues that, if the trial court properly stayed litigation of whether the
exclusions applied, it should have also stayed litigation on whether the underlying lawsuits
alleged “bodily injury” or “property damage” such that there was a duty to defend under the
language of its policy.5 In the case at bar, with respect to the issue of whether the underlying
lawsuits sought damages for “bodily injury” or “property damage” under the policies such that
there was a duty to defend, the court found that this issue was ripe for adjudication. The court
found that, in determining whether there was a duty to defend, it could decide whether the
allegations of the underlying complaints contained sufficient facts to show the potential for
coverage and, accordingly, determined that it would “proceed with litigating the duty to defend
analysis.” We cannot find that the trial court abused its discretion by proceeding to consider
whether the allegations of the underlying complaints fall potentially within the policies’
coverage such that there was a duty to defend.
¶ 71 As we have noted, in determining whether an insurer has a duty to defend its insured, a
court looks to the allegations in the underlying complaint and compares them to the relevant
provisions of the insurance policy. Outboard Marine, 154 Ill. 2d at 107-08. “If the facts alleged
in the underlying complaint fall within, or potentially within, the policy’s coverage, the
insurer’s duty to defend arises.” Outboard Marine, 154 Ill. 2d at 108. However, if it is clear
from the face of the complaint that the allegations fail to state facts that bring the case within,
or potentially within, the policy’s coverage, an insurer may properly refuse to defend. Wilkin
Insulation, 144 Ill. 2d at 73 (citing Hatherley, 250 Ill. App. 3d at 336).
¶ 72 “The insurer bears the burden of establishing that it has no duty to defend.” Skolnik v.
Allied Property & Casualty Insurance Co., 2015 IL App (1st) 142438, ¶ 26. “This burden
includes affirmatively demonstrating the applicability of an exclusion.” Skolnik, 2015 IL App
(1st) 142438, ¶ 26. “[W]here an exclusionary clause is relied upon to deny coverage, its
applicability must be clear and free from doubt because any doubts as to coverage will be
resolved in favor of the insured.” International Minerals & Chemical Corp., 168 Ill. App. 3d at
367; see also Wilson, 237 Ill. 2d at 456 (“ ‘provisions that limit or exclude coverage will be
5
We note that only Sentry’s complaint alleges a duty to defend. However, Continental’s arguments
are based on the theory that if there is no duty to defend, there can be no duty to indemnify. As both
policies contain identical language concerning “bodily injury” and “property damage,” the duty to
defend arguments would equally apply to both insurers.
- 18 -
interpreted liberally in favor of the insured and against the insurer’ ” (quoting Koloms, 177 Ill.
2d at 479)).
¶ 73 In the case at bar, as we have discussed above, the trial court properly concluded that there
is no way to determine whether the Continental policy’s exclusions apply without determining
ultimate facts in the underlying lawsuits, thereby running afoul of the Peppers doctrine. Thus,
at this stage of the proceedings, Continental is unable to “affirmatively demonstrat[e] the
applicability of an exclusion” (Skolnik, 2015 IL App (1st) 142438, ¶ 26) and therefore cannot
rely on the exclusions to establish that it has no duty to defend the Foundation because the
applicability of the exclusions is not “clear and free from doubt,” and we must resolve any
doubts as to coverage in favor of the foundation. International Minerals & Chemical Corp.,
168 Ill. App. 3d at 367.
¶ 74 However, in considering the rest of the policy, which provides coverage for “bodily injury”
and “property damage,” the trial court is required to consider whether “the facts alleged in the
underlying complaint fall within, or potentially within, the policy’s coverage.” Outboard
Marine, 154 Ill. 2d at 108. This is something the trial court can do without deciding any
ultimate facts in the underlying litigation. Accordingly, the trial court did not abuse its
discretion in finding that it did not need to stay consideration of the duty to defend and may
properly proceed to consider whether the allegations of the underlying complaints show the
potential for coverage.
¶ 75 We emphasize that the duty to indemnify arises only “if the insured’s activity and the
resulting loss or damage actually fall within the *** policy’s coverage.” (Emphasis in
original.) Outboard Marine, 154 Ill. 2d at 128. Thus, once the underlying facts required for
consideration of the applicability of the exclusions are decided, the trial court will be able to
determine whether the foundation’s activity actually fell within the policy’s coverage such that
there is a duty to indemnify. However, for purposes of a duty to defend, since Continental is
unable to “affirmatively demonstrat[e] the applicability of an exclusion” (Skolnik, 2015 IL
App (1st) 142438, ¶ 26) at this point, the trial court could properly proceed to consider the rest
of the policy’s language to determine if a duty to defend arose.
¶ 76 IV. Settled Lawsuits
¶ 77 Finally, Continental argues that if the matter was properly stayed, then the stay should not
extend to those underlying lawsuits that have already been resolved. Continental points to two
lawsuits that have been settled and argues that the coverage litigation should proceed with
respect to these suits. We do not find this argument persuasive.
¶ 78 The basis for Continental’s argument on appeal is the citation of a number of other cases in
which coverage litigation for certain lawsuits has proceeded while other lawsuits remain
pending. However, in at least one of the cases it cites, there was no dispute between the parties
as to whether litigation on some claims could proceed while others remained pending, as there
is in the instant case. See, e.g., United States Gypsum Co. v. Admiral Insurance Co., 268 Ill.
App. 3d 598, 607 (1994) (“By agreement among the parties, this coverage trial was limited to
eight specific underlying cases” that had been resolved, while approximately 200 remained
pending.). In some of the other cases, the courts were considering section 2-619(a)(3) of the
Code, which involves duplicative litigation and is not at issue here. See Zurich Insurance Co.
v. Baxter International, Inc., 173 Ill. 2d 235, 243 (1996); John Crane Inc. v. Admiral Insurance
Co., 391 Ill. App. 3d 693, 698 (2009).
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¶ 79 Additionally, the mere fact that other courts have chosen to proceed in this manner does not
mean that proceeding to consider coverage issues in the settled lawsuits here is required. As
noted, “[t]he decision to grant or deny a motion to stay will not be overturned unless the court
abused its discretion.” Guarantee Trust Life Insurance, 2016 IL App (1st) 161612, ¶ 35;
Cholipski, 2014 IL App (1st) 132842, ¶ 39. “The circuit court may stay proceedings as part of
its inherent authority to control the disposition of cases before it. [Citation.] The court may
consider factors such as the orderly administration of justice and judicial economy in
determining whether to stay proceedings.” Philips Electronics, 295 Ill. App. 3d at 901-02.
¶ 80 In the case at bar, the court found that it could not adjudicate coverage issues in the two
underlying lawsuits that had settled, since a ruling concerning those cases could still have a
collateral estoppel effect on the remaining underlying plaintiffs. The court further noted that
the Foundation also had third-party complaints pending “which could be impacted by a ruling
by this Court.” We cannot find that the trial court’s decision to take the more cautious route and
wait until the resolution of all of the underlying lawsuits constituted an abuse of discretion.
¶ 81 Continental argues that staying the coverage litigation for the settled cases would unduly
prejudice the insurer by delaying resolution of the litigation. However, proceeding with the
litigation would prejudice the underlying plaintiffs and the Foundation by impacting their
ability to litigate the underlying lawsuits and the third-party complaint. We thus cannot find
that the trial court’s decision in the instant case to favor the interests of the underlying litigants
constituted an abuse of discretion merely because it would delay resolution of Continental’s
claims.
¶ 82 CONCLUSION
¶ 83 For the reasons set forth above, the trial court did not abuse its discretion in staying
consideration of coverage issues where its factual determinations in the coverage litigation
could have an effect on the ultimate facts at issue in the underlying lawsuits. The trial court
also did not abuse its discretion in proceeding to consider whether the allegations of the
underlying complaints set forth facts that arguably fell within the policies’ coverage such that
it gave rise to a duty to defend. Finally, the trial court did not abuse its discretion in declining to
adjudicate coverage issues on the two underlying lawsuits that had settled.
¶ 84 Affirmed.
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