Sheckler v. Auto-Owners Ins. Co.

2022 IL 128012

215 N.E.3d 883

465 Ill.Dec. 678

Monroe SHECKLER et al., Appellees,

v.AUTO-OWNERS INSURANCE COMPANY, Appellant.

Docket No. 128012

Supreme Court of Illinois.

Filed November 28, 2022.

Krysta K. Gumbiner and Brian J. Talcott, of Dinsmore & Shohl LLP, of Chicago, and Kathryn W. Bayer, of Dinsmore & Shohl LLP, of Cincinnati, Ohio, for appellant.

Mark E. Wertz, of Law Office of Mark Wertz, P.C., of Pekin, and John Robertson, of Statham & Long, LLC, of Galesburg, for appellees.

JUSTICE HOLDER WHITE delivered the judgment of the court, with opinion.

¶ 1 The issue presented in this appeal is whether an insurer's duty to defend or indemnify extends to the tenants of an insured property against a third-party negligence contribution claim when the tenants are not identified as persons insured under the policy. The circuit court held that defendant, Auto-Owners Insurance Company (Auto-Owners), owed no duty to defend or indemnify plaintiffs, Monroe and Dorothy Sheckler, the tenants of the insured property, against a third-party contribution claim brought against them in Tazewell County case No. 17-L-49. The appellate court reversed and remanded, finding an equitable extension of Dix Mutual Insurance Co. v. LaFramboise , 149 Ill. 2d 314, 173 Ill.Dec. 648, 597 N.E.2d 622 (1992), under the facts of this case, required Auto-Owners to defend and, if appropriate, indemnify the Shecklers against the contribution claim. 2021 IL App (3d) 190500, ¶¶ 25, 454 Ill.Dec. 736, 190 N.E.3d 336, 41. Justice Holdridge specially concurred, writing separately to express his disagreement with Dix for the reasons set forth in Justice Heiple's dissent therein ( Dix , 149 Ill. 2d at 326-30, 173 Ill.Dec. 648, 597 N.E.2d 622 (Heiple, J., dissenting)) but recognized Dix as controlling authority. 2021 IL App (3d) 190500, ¶ 48, 454 Ill.Dec. 736, 190 N.E.3d 336 (Holdridge, J., specially concurring). Presiding Justice McDade dissented, concluding "an insurer's duty to defend [or indemnify] does not extend to the tenants of the insured property against a third-party negligence contribution claim when the tenants are not identified—or identifiable—as persons insured under the policy." Id. ¶ 63 (McDade, P.J., dissenting). For the following reasons, we reverse the appellate court's judgment and affirm the judgment of the circuit court.

¶ 2 I. BACKGROUND

¶ 3 A. Lease and Insurance Policy

¶ 4 On August 6, 2015, the Shecklers rented a residential property at 2205 Valentine Avenue in Pekin, Illinois, from Ronald McIntosh. McIntosh and the Shecklers entered into a lease agreement for the property that provided McIntosh "shall maintain fire and other hazard insurance on the premises only" and that the Shecklers "shall be responsible for any insurance they desire on their possessions contained in the leased premises." The lease also contained an indemnification clause, which further exculpated McIntosh from any damages or injury occurring on the premises.

¶ 5 In compliance with the lease, McIntosh obtained an insurance policy from Auto-Owners, which included (1) first-party dwelling coverage and (2) third-party landlord liability coverage. The first-party dwelling coverage provided, in relevant part, coverage for fire damage to the premises. The third-party landlord liability coverage provided coverage for claims brought by third parties that the insured "becomes legally obligated to pay as damages because of or arising out of bodily injury or property damage." The third-party landlord liability coverage also provided a duty to defend any claim or suit for damages covered by the policy. However, the third-party landlord liability coverage excluded from coverage "property damage to property occupied or used by an insured or rented to or in the care of, any insured." The policy declarations listed McIntosh and his wife as the only named insureds.

¶ 6 McIntosh stated he generally paid the property insurance for his multiple properties out of the rents received from the various renters. However, prior to renting the property to the Shecklers, McIntosh fully paid the annual premium on the insurance policy covering the property located at 2205 Valentine Avenue. McIntosh asserted no money received from the Shecklers was used to pay the annual premium on the insurance policy for the property located at 2205 Valentine Avenue.

¶ 7 B. Fire Incident

¶ 8 The rental property had a traditional gas stove and range. In late August 2015, the Shecklers notified McIntosh that the oven and burner on the gas stove were not working. McIntosh placed a service call with Wayne Workman, an appliance service technician. On August 26, 2015, Workman inspected the appliance and left the property to obtain a repair part. After Workman left, the Shecklers smelled gas. The Shecklers attempted to mask the odor by spraying a deodorizer before Monroe turned on the stove, which ignited, resulting in a fire that caused substantial property damage. As a result of the fire damage, McIntosh submitted a claim under the dwelling coverage provision of his insurance policy, and Auto-Owners paid McIntosh for damages incurred due to the fire and lost rental income.

¶ 9 C. Procedural History

¶ 10 After Auto-Owners paid McIntosh's claim, Auto-Owners filed a subrogation action in McIntosh's name against Workman in Tazewell County case No. 17-L-49, to recoup payment for the fire damage. Auto-Owners alleged Workman's repair work was the proximate cause of the fire. In response, Workman filed a third-party complaint for contribution against the Shecklers. The Shecklers tendered their defense against the contribution claim to Auto-Owners. In letters dated January 26, 2018, and April 30, 2018, Auto-Owners declined to defend the Shecklers against the third-party contribution claim.

¶ 11 In July 2018, the Shecklers filed an amended complaint for declaratory judgment against Auto-Owners, McIntosh, and Workman in this case, Tazewell County case No. 18-MR-149, seeking a declaration of their rights under McIntosh's insurance policy and asserting Auto-Owners had a duty to defend and indemnify them against the third-party contribution claim in Tazewell County case No. 17-L-49. Workman filed an answer and a counterclaim against Auto-Owners seeking coverage for the Shecklers.

¶ 12 In January and April 2019, the parties filed cross-motions for summary judgment. Both Workman and the Shecklers cited this court's decision in Dix , 149 Ill. 2d 314, 173 Ill.Dec. 648, 597 N.E.2d 622, to assert the Shecklers were coinsured under the Auto-Owners insurance policy for liability claims arising from the damages to the insured rental property.

Workman and the Shecklers therefore argued Auto-Owners had a duty to defend the Shecklers against the third-party contribution claim in Tazewell County case No. 17-L-49. Auto-Owners argued the Shecklers were not insured under the insurance policy and thus Auto-Owners did not have a duty to defend or indemnify the Shecklers against the third-party contribution claim in Tazewell County case No. 17-L-49. In May 2019, the circuit court held a hearing on the cross-motions for summary judgment.

¶ 13 On August 2, 2019, the circuit court found, under a careful reading of Dix as it applied to this case, "Auto[-]Owners does not owe a duty to defend Sheckler. Sheckler is not being subrogated against. Sheckler is essentially being sued by the third party for negligence." In an August 7, 2019, written order, the court entered summary judgment in favor of Auto-Owners and denied summary judgment for Workman and the Shecklers. The court stated, "Auto-Owners has no duty to defend or indemnify the Shecklers for the claims brought against the Shecklers in Tazewell County [c]ase [No.] 17-L-49."

¶ 14 The Shecklers and Workman filed separate notices of appeal, which the appellate court consolidated. While this case was pending in the appellate court, a jury in Tazewell County case No. 17-L-49 returned a verdict for Workman in Auto-Owners’ subrogation action against him. Workman subsequently filed a motion to voluntarily dismiss his appeal in this case, which the appellate court granted.

¶ 15 On the Shecklers’ appeal, the Third District reversed and remanded. 2021 IL App (3d) 190500, 454 Ill.Dec. 736, 190 N.E.3d 336. The court found that, under Dix and based on the facts in this case, the Shecklers were coinsured under Auto-Owners’ fire policy regardless of the policy language. Id. ¶ 24. The court based its finding on the fact that the Shecklers paid rent to McIntosh and reasoned that, as a practical reality, the rent amount accounted for the amount paid for insurance and served as reimbursement for the landlord. Id. Further, the court noted the lease stated McIntosh would obtain fire insurance on the premises while exculpating himself from liability for damage to the tenants personal property. Id. Accordingly, the court determined, based on Dix , Auto-Owners could not sustain a subrogation action against the Shecklers. Id. ¶ 25.

¶ 16 While the appellate court determined Auto-Owners could not sustain a subrogation action against the Shecklers, it stated, "the question presented here though is whether an equitable extension of Dix under these particular facts requires Auto-Owners to defend the Shecklers against the contribution claim." Id. The court answered the question in the affirmative, finding Auto-Owners owed the Shecklers a duty to defend in this case. Id.

¶ 17 The appellate court determined this case involved a "subrogation action grounded in equity" and, absent Auto-Owners’ subrogation action, the Shecklers would not face the contribution claim, which was also equitable in nature. Id. ¶ 27. The court reasoned, "[i]n light of Dix and the terms of the lease, it would be an absurd outcome if the Shecklers are held liable for fire damage to the premises based on a claim grounded in equity to recover payments under a policy that they are coinsured." Id. ¶ 29. Further, the court observed the Shecklers had to pay costs and...