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Keywords

damagesliabilitytrialpunitive damagesdeclaratory judgment
damageslitigationtrialpunitive damagesdeclaratory judgment

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Nandorf, Inc. v. CNA Ins. Companies, 134 Ill.App.3d 134, 479 N.E.2d 988, 88 Ill.Dec. 968

Facts

Nandorf, Inc. was sued by Delores Scott and others for false imprisonment, with claims for both compensatory and punitive damages. CNA Insurance Companies provided a defense under a reservation of rights, stating that punitive damages would not be covered. Nandorf retained independent counsel to monitor the defense due to concerns over the conflict of interest arising from CNA's reservation of rights. When CNA refused to reimburse Nandorf for the independent counsel's fees, Nandorf filed a declaratory judgment action.

This controversy arose out of a complaint filed on May 5, 1983, by Delores Scott and others against Unique Thrift Shop, a retail shop owned and operated by Nandorf.

Issue

Did a conflict of interest exist between Nandorf and CNA Insurance Companies that entitled Nandorf to independent counsel paid for by CNA?

Nandorf now contends that a conflict of interest existed which entitled it to retain independent counsel paid for by CNA.

Rule

An insurer must defend an action against an insured when the allegations in the complaint potentially fall within the coverage of the insurance policy. If a conflict of interest arises, the insured may be entitled to independent counsel at the insurer's expense.

In Illinois an insurer is obligated to defend an action against an insured when the complaint in that action sets forth allegations which bring the claim potentially within the coverage of the insurance policy.

Analysis

The court found that CNA's reservation of rights created a conflict of interest because it had a vested interest in minimizing its liability, which could lead to a less vigorous defense of Nandorf. The court noted that while both parties shared an interest in avoiding liability, their interests diverged significantly regarding punitive damages, justifying Nandorf's need for independent counsel.

Because CNA's reservation of rights placed the insurer and insured at cross purposes with respect to allegations in the Scott complaint, we find that an actual conflict of interests existed between Nandorf and CNA which rendered it improper for CNA to retain control of the litigation.

Conclusion

The Appellate Court reversed the trial court's dismissal of Nandorf's declaratory judgment action and remanded the case with directions to grant the relief sought.

Accordingly, the trial court's judgment and order dismissing Nandorf's declaratory judgment action is reversed and the cause is remanded with instructions to grant the relief sought in the complaint to the extent herein indicated.

Who won?

Nandorf, Inc. prevailed in the case because the court recognized the conflict of interest that warranted the payment of independent counsel by CNA.

Nandorf could have been substantially prejudiced if it had been forced to dispute coverage with CNA while burdened with an adverse final judgment imposing punitive damages.

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